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What is the future of Detroit?                                                                                    

Posted at: Apr/02/2009 : Posted by: mel

Related Category: Economics,

Predicting the future has never been a science. For those who know me, you know that I like to look to the lessons of the past to speculate on the path for the future. But the predicament that our American auto industry is in is pretty much uncharted territory. In stead of expressing an opinion I will try to pull together everything I think I know and we’ll have to see how things unfold in a month, two months, and a year from now.

Chrysler Motor Company is most likely the easiest place to start. The White House want Chrysler to create a partnership with Fiat. It is true that Fiat appears to be looking for a way to aggressively re-enter the American market. It is also true that a partnership with Fiat would create an instant line of compact cars that Chrysler is missing from its inventory. A partnership with Fiat would also potentially provide Chrysler with a means to become more global in marketing their products as Ford and GM already do.

Partnerships don’t happen overnight and the 30 day notice by the Obama administration is pretty restrictive. Additionally, partnering with Fiat is not a guarantee for success. Fiat was in the US market decades ago and suffered for quality issues. Bringing Fiat cars to Chrysler dealerships is not likely to generate rapid sales. Partnering with Fiat will do nothing to resolve the overwhelming financial burdens Chrysler has with respect to unions, pensions, medical plans, dealership obligations, and bond holders. Chrysler’s own product quality has left them out of the top 10 and with a suffering image for years. Consumers don’t change their mind about going to a brand they have previously suffered for overnight. Hyundai spent more than a decade rebuilding their image after the late 1980’s.

Mergers are like marriages, they don’t always work. Chrysler just ended a failed partnership/merger with Daimler that began with very high expectations. While I feel that Chrysler has dominated the innovation side with the Dodge Ram pickup, the Viper, the PT Cruiser, overall poor quality and timing has been too big an anchor even with the Jeep line and their ever popular mini-van to bring them into the black.

GM is a different challenge from Chrysler. On the plus side, GM already has a very strong international operation. On the down side, GM is also burdened with overwhelming union obligations, pensions, medical costs, dealership contracts, and bond holders who don’t want to give anything back. GM also has too many brands. Not that different brands are bad, but over the years, drive for common parts has created many GM models that are fundamentally the same car except for the model name and the color scheme. While shrinking the product line is an internal issue and will ultimately have to happen, many of GM’s other challenges can only be nibbled at on the fringes without forced intervention. There has been a lot of talk recently about some form of a structured, or pre-negotiated bankruptcy. Many of the fiscal obligations tying down GM date from 40-50 years ago and no one want to give up their slice of the GM pie easily. I foresee that while a GM bankruptcy would be painful for many, in 5-6 years GM would rise from their own ashes, much like the legendary phoenix to be a profitable and dominate player in the world automotive market.

What about Ford? The good news is that Ford has yet to accept any economic stimulus funds or TARP money. They accomplished this by mortgaging many of their plants and other resources to avoid the obligations of accepting federal money. Despite having negotiated some union and bond holder concessions, Ford is still loaded down with many of the same financial burdens as GM and Chrysler. By not accepting TARP funds initially the Ford image shined just a little brighter than their peers. I too, thought this was a good move on their part. The question now is more about long term competitiveness. When GM accepted TARP funds they effectively handed the corporate reins over to the Federal Government and their Automotive Task Force. GM will most likely end out in a government supervised bankruptcy from which they emerge leaner and meaner. This presumed path would ultimately leave Ford at a disadvantage. Ford needs all the same financial restructuring that GM does. Without having accepted TARP funds they are unfortunately not now in a position for government help on the same scale at a restructuring.

What does the future hold, I really don’t know. I am unsure if Chrysler will exist in 2 years. In 5-6 years GM could be a lean, mean, automotive giant. Ford took the high ground at the beginning and was admired for it, now their path forward, and the competitive margin is unclear. Much like a TV serial, we’ll just have to pay attention to see how the characters evolve and the plot unfolds.

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