‘Interesting times’ for the US auto industry

‘Interesting times’ for the US auto industry

By Louis Rumao:

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 more, many more challenges

The Chinese saying “May you live in interesting times” is entirely fitting for the American auto industry for the current decade. Since the great economic downturn of 2009, when General Motors, one of the world’s largest corporation 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 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 more, 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 to transform into a “mobility” industry. Auto executives tasked with 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 pickups, 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 pickups, 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 an $11 billion restructuring. It expected the bulk of the costs connected to the reorganization 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 United States. 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 characterized 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 44 billion euros ($50 billion) on developing electric cars, autonomous driving and new mobility services by 2023, while exploring areas of cooperation with U.S. 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 being closed in Mexico & 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. 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,” said Rich Rankin, director of United Auto Workers (UAW).
“Corporations, like GM, have revealed time and time 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 working families in the United States to go back to the table and make this stronger, tighter and enforceable.”

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 JV’s 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 folks” 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?

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