The Ugly Road Ahead

Posted by: David Welch on June 23, 2008

A week after Ford said it would slow down truck production, General Motors followed with a similar move. This time, GM is slowing down production at seven truck and suv plants. That pretty much says that the gas-guzzlin’ suv business is wheezing its last breath. With it goes Detroit’s profit center. The only thing that mitigates the damage from the loss in suv sales is that GM said that the company is adding shifts at some passenger car plants to meet growing demand as consumers trade down to smaller vehicles. GM also said it would slap 0% financing on most 2008 models to spark sales. That’s sure to hit profits.

Wall Street is holding its collective nose. GM’s stock dropped 6% to a close of $12.91 a share today. At that price, GM is worth $7.3 billion, or, a little more than Toyota makes in six months. Ford’s stock dropped to $5.28 a share, giving the company a market cap of $11.8 billion. Only the the courageous value players are in at this point.

That makes sense. These days, Detroit’s carmakers can’t catch any kind of break. Sooner or later, fuel prices were likely to undercut the suv business. But the national housing slump has also hammered the pickup truck business, Detroit’s other cash cow. Then there is the spike in steel and oil prices. That adds hundreds of dollars in cost to every vehicles every carmaker builds. Remember, oil prices not only shift sales from big sticker suv to lower-priced cars, they add to the cost of plastic materials used inside. GM will try to recoup some of that with price increases for the 2009 model year. But the Big Three will also have to take write-downs on all of those suvs coming off lease that will be tough to resell. As if that list of troubles isn’t long enough, there is the overall health of the economy that is keeping buyers out of showrooms.

On one hand, Detroit’s executives have themselves to blame. They didn’t invest enough in fuel-saving technologies and their passenger car lines during the suv boom. Foreign carmakers did. On the other hand, Ford, GM and Chrysler are taking just about every body blow possible right now. No one could have foreseen the confluence of problems they are facing. The year ahead will be very rough. They may have to come up with something radical to get through it.

Reader Comments

dave l

June 24, 2008 7:25 AM

Just recently GM introduced 2 popular vehicles; the Malibu and a trio of midsize crossovers. Guess which plants the UAW decided to strike? It's a shame that these unions have destroyed the US based automotive industry.

Enver Buys

June 24, 2008 8:45 AM

The warning signs has been making the rounds for the last decade but the glorified executives at GM,Ford and Chrysler was not willing to change their business model. The ugly road ahead has very little to with 'green issues', it's all about the use of out dated business models in a price competitive global market.

CR

June 24, 2008 8:47 AM

I agree that the domestics are in trouble. However, your assertion that they didn't invest in fuel saving technology is not true.
GM, in particular, has a mature fuel cell technology and over 100 vehicles running it in the field. It has a two-mode hybrid system that many consider superior to Toyota's hybrid system, and is being sold on many varieties of large SUVs and pickups. In addition, it sells a mild hybrid system available on their midcars.

BL

June 24, 2008 10:01 AM

How can you read an article like this and then blame their troubles on the UAW? Detroit management has made 2 decades worth of crappy business decisions to reach the current crisis. For instance, the only Ford car in hot demand is the Escape hybrid and dealers don't have any of them available, their lots are full of gas guzzlers that nobody wants to buy. You can bet Honda & Toyota will have what they want though. And the management will still get their huge bonuses this year. The shareholders deserve their crappy stock price.

Squeezebox

June 24, 2008 11:14 AM

One thing carmakers should do is cancel the '09 model year and yank the discounts on the trucks. Don't make another truck or SUV until the existing inventory is sold, at the prices the company wants. It may take a year to sell them all, but at least the companies won't be paying variable expenses (with the labor contracts calling for idling payments, labor can be assumed to be a fixed cost).

Clyde

June 24, 2008 11:48 AM

The Big Three has become the little three due to not realizing that the only thing that is constant in the auto business is change. They refused to change to nonunion labor, drop the V8 image, be First to market what folks want and need, stop blowing smoke into consumers eyes with maketing buzz crap and start delivering quality at a reasonable price.

Jan R. Smith

June 24, 2008 12:07 PM

My company owns several Chevy Silverado 1500 pickups. they will deliver 20 mph/highway. I own a Honda Element, a much smaller vehicle. It also will deliver 20 mpg City. Very disapointing.

QUO VADIS

June 24, 2008 12:40 PM

There is plenty of blame to go around and will not belabor this point. It has been a fact for several decades that large manufacturers have their collective heads in the sand when it comes to innovation and taking heed of warnings. Yes, there is "Global Warming" but that is cyclical every few thousand years. Yes, there is a better way to extract oil if only there was a political will to do so. Yes, sugar cane ethanol has about seven times the energy of corn ethanol...all of this means that it is past time to do what is right and not pander to political and corporate interests. They have been able to get away with running their own game for over a century and in part because "We the People" have been co-opted and made impotent.

David

June 24, 2008 12:49 PM

I just bought the new Pontiac G8GT and I love it. It is more car than the one it replaced (2005 BMW 545i). I cannot say how happy I am with my purchase.

Dickson

June 24, 2008 12:55 PM

Why can't Ford & GM move people working on trucks and SUVs into the assembly line for sedans and compact cars?

Rich

June 24, 2008 1:28 PM

How could the automakers not see this coming and prepare strategicaly for this? The Mideast has been unstable and the rising cost of fuel three years ago should have been an indication that they needed to change their ways. GM at least has a lot of products that get great gas mileage but for Ford to continue to count on SUV's and pick ups stinks of an addiction to fat profits from vehicles that the public doesn't want or need anymore

JOE

June 24, 2008 4:58 PM

Detroit had decades to (yes) copy what Tokyo was doing with great success. The managers and money-managers put us in this hole.

Walter

June 24, 2008 11:01 PM

dave l
June 24, 2008 07:25 AM

Just recently GM introduced 2 popular vehicles; the Malibu and a trio of midsize crossovers. Guess which plants the UAW decided to strike? It's a shame that these unions have destroyed the US based automotive industry.

33333333333333333333333333333333333333333

What a dumb comment. They are the most productive workers in America moron. Stick with facts. Bad management ruined
the industry.

amdsoo

June 25, 2008 8:23 PM

When you think that Renault has a 22 Billions $ market capitalization, 4 times GM ,it says a little to where GM stands.

American Cars are 20 years behind in technology compared to European Cars. This is a fact.

James

June 26, 2008 11:33 AM

If you want someone to blame for this, it sure as hell isn't the unions - it is the people who CONTROL the company. Ask anyone who works at GM, and you'll learn that the upper-management is filled with overpaid ass-kissing yes-men, who pre-approve bad idea after bad idea to advance their own personal careers at the cost of their company.
Clear out the entire lot of these overpaid white collar clowns, and replace them with performance-based pay, and you'll see a change.

Bill

June 26, 2008 11:49 AM

Ask any engineer at GM who the REAL problem is, and they will all tell you "upper management". Lowly workers on assembly lines or even engineers do not make the big decisions regarding the direction of the company, but these people do.....and the problem is they are suffering from rampant cronyism and yes-men who care only to advance their own careers more than save their company.

alan reubel

June 26, 2008 5:47 PM

seemingly, there's old-fashioned, wave-the-flag support for detroit...and those critical of management. the bottom line : amazing corporate stasis, unimagineable lack of a long term view of their businesses that will destroy at least two domestic carmakers.

bill just said it in his comment. a shame this historical american industry will sink itself.

Carl J.

July 3, 2008 1:47 PM

I love all of these "Anything made in America sucks donkey-#$%&" comments. We might as well pack our bags, jump on the boat and move straight to Asia while we still have the chance.

Glenn

July 4, 2008 2:15 PM

Both are correct its the mgmt at the big 3, the idiots in Washington, and the unions that have destroyed the car companies. Remember the tax rebate if you bought a 5,000 lb SUV gas guzzler that the fools in Washington had endorsed. Unions have had their fair share of over paid workers with a high school education making 35 an hour. I'm blue collar also. Then the idiots that run the big 3 said "lets put cheap ass crap in our cars to save money". Thus big 3 autos were born. What a shame all of the kiss ass management have destroyed the mid-west.

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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