‘Interesting Times’ For US Auto Industry

By Louis Rumao:

The Chinese saying, “May you live in interesting times,” is entirely fitting for the American automotive industry of the current decade. Since the great economic downturn of 2009, when General Motors, one of the world’s largest corporations, and Chrysler went bankrupt and Ford was not far behind, this industry is living in ‘interesting’ times!
Annual US car sales have risen slowly from the depth of about 10 million units in 2009 to 18.3 million in 2017. But sales are trending lower, as analysts are projecting that new car sales in US will slow to 16.6 million units in 2019 and 16.5 million units in 2020. The industry is also faced with how to respond to the slowing US demand as higher interest rates bite into new car sales while more used vehicles are also entering the market.
Unfortunately for the automakers, potential decline in unit sales is not the only challenge ahead. In less than a decade, more changes are being forced upon them than they have faced in a century. The challenges of emissions, fuel economy, safety and global competition could be managed on an ongoing basis. But there are many more challenges. Educated consumers demand the best value, while tariffs, trade wars and geopolitical concerns are much more difficult to plan for and manage. Add rapidly evolving technologies for electrification and autonomous drivability to all other challenges as the auto industry is being driven into a ‘mobility’ industry. Auto executives are tasked with the future needs of ‘mobility’ with emissions-free vehicles, smart transportation systems and cars that drive themselves.
But building autonomous vehicles is expected to require billions of dollars in new investment, and the industry is struggling to cope through various initiatives. The shifting product-mix, from sedans to pick-ups, SUVs and other large models is another complicating factor. Lower petrol price has accelerated the trend from sedans to cross-over and sport utility vehicles. Drivers like the higher ride height which gives them more confidence on the road; bigger vehicles offer more storage space and a greater feeling of safety; and more-efficient powertrains have reduced the miles-per-gallon (mpg) delta between cars and SUVs.
Ford is phasing out a series of cars such as the Focus, Fusion and Taurus, while steering funds to pick-ups, SUVs and other large models, as well as new technology investments. “These traditional sedans destroy value,” Ford Chief Executive James Hackett recently told analysts and announced plans for $11 billion restructuring. It expected the bulk of the costs connected to the reorganisation to come outside of North America, along with a headcount reduction over time in its global salaried staff. “We know there’s more to come,” said one Michigan-based industry analyst, alluding to Ford.
GM plans to shutter seven plants worldwide, including five in North America that build sedans that have not been selling well in the US. The company did not release an estimate of the total potential employment hit, but some news reports have put it at 14,000 workers or more. GM Chief Executive Mary Barra characterised the move, intended to save an estimated $6 billion, as part of an effort “to be highly agile, resilient and profitable, while giving us the flexibility to invest in the future.”
Volkswagen announced earlier this month it would spend almost Euro 44 billion ($50 billion) on developing electric cars, autonomous driving and new mobility services by 2023, while exploring areas of cooperation with the US automaker Ford Motor Company. “The market timing actually is quite perfect,” Keogh, President of VW North America, said at the Los Angeles auto show. “You need to have this intersection of -Can you get costs down enough that you can produce a car at that price point, make enough money, have the technology capabilities that this is a car that we would want to put in the marketplace, and have market acceptance?” he said. “And when all these things intersect that’s ideally when you want to throw the dart.”

The Fallout

GM’s announced plan for plant closures and headcount reduction has drawn sharp criticism from President Trump, legislators and the union. “Nothing is being closed in Mexico and China. The US saved General Motors, and this is the THANKS we get,” Trump tweeted. He also threatened to cut all of the company’s federal subsidies. The US lawmakers are considering a bill in the Congress – the American Cars, American Jobs Act – to give vehicle buyers a $3,500 discount for purchasing an American car, and thus to discourage American OEM’s from building plants overseas. The United Auto Workers Union — which pledged this week to fight GM’s restructuring moves — has supported this legislation. The bill “takes important steps to level the playing field for the Ohio auto industry,” Rich Rankin, Director of United Auto Workers (UAW), said.
“Corporations, like GM, have revealed time and again that they will continue to play by their own rules at the expense of workers, even after raking in record profits,” Gary Jones, UAW President, said. “Our elected leaders owe it to the working families in the US to go back to the table and make this stronger, tighter and enforceable.”

The Bottom Line

To become major players in autonomous driving and other newer technologies, an objective that will demand billions of dollars in new investments, industry consolidation is unavoidable, analysts say, and joint ventures with other firms are being announced almost daily. Ford has unveiled strategic alliances with India’s Mahindra and Germany’s Volkswagen. GM-led Cruise autonomous vehicle venture has received $2.75 billion in funds from Honda as well as $2.25 billion from Japanese conglomerate Softbank, just to mention a few!
Still, the question for us ‘common folk’ remains: why the extraordinarily-talented and highly-compensated management teams cannot execute right-sizing of the company in an ongoing and gentle manner, rather than in a sudden draconian step that makes everybody – employees, suppliers, regulators – very unhappy?

NB: Photos are representational.

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