Thursday, June 11, 2009

The New Car Business - Count Five New Car Companies

June 10, 2009. I guess the benefit of blogs is that they can travel at the speed of light. Light-speed is what we need these days to keep up with the auto industry. At today’s scoreboard, I count five new car companies in Detroit (or maybe four in Detroit and one in Canada): the New Chrysler (sposato con la Fiat, courtesy of the Supreme Court), the new GM (with new chairman), the new Opel (Magna and Russians), the new Saturn (with Penske at the wheel), and the new Hummer (Szechuan style). Here are a few of my takes:

What chapter are we on? The first take I have is that I would have never believed that GM and Chrysler would both go bankrupt. Even more unbelievable is how fast Chrysler went “un-bankrupt”. I suppose when you have the President (of the United States, not your company) announcing your bankruptcy and calling your shots, things happen fast. There must be some new chapter of the bankruptcy code, like chapter 1.1, where the government does what it wants and everybody goes along, whether they like it or not.

New Chrysler. The New Chrysler will have a new partner, Fiat. The definition of ‘fiat’ is “a legally binding command or decision entered on the court record”, which I suppose is appropriate in this case, given the actions of the Supreme Court. Fiat is basically getting a free car company out of the deal and now has the opportunity to make itself into a car giant. On the surface, this could be a nice marriage, Fiat gets Jeep and a truck line, plus some American cars. Chrysler gets small cars and engineering and design (though I actually think Chrysler’s designers are pretty good except for whoever made the Durango out of a minivan and a truck). Uncle Sam gets the tiny cars it wants (never mind most Americans don’t want them). Detroit gets a new car company and no liquidation. Fiat is a worldwide company, with a presence in India. It could work.

New GM. The new GM will probably be a little less speedily created than the new Chrysler, but everything looks on track, including the new Chairman of the board, appointed today, Ed Whitacre. Whitacre did a very good job at AT&T (taking Southwest Bell from one of the babies split off from AT&T and eventually re-acquiring the parent company). The Board of GM will be further shuffled (an action long overdue), and Henderson will now answer to a boss (besides the government). New GM is going to be different from New Chrysler: it will be a standalone new company with virtually no debt, no laggard brands, and lower costs. No outside buyer is buying GM; GM is shedding its old problems and re-emerging. If the government actually keeps its hands out of the pile, this could be a very good thing. I am curious how the new chairman will react to tight CAFÉ standards, or how the UAW contracts are negotiated in light of the fact that the UAW is the second-largest shareholder. But, new company, almost no debt, reduced labor costs, good brands, new board. Could be good.

Opel. Hey, it looks like Canada will now have a car company (besides the Bricklin). Magna, with some deep pockets from OAO Sherbank, a Russian lender, will probably own Opel. Magna has been on an acquisition tear and is Canada’s largest part manufacturer. Magna has some very interesting technology, access to cash, and probably more importantly, some guts. Could be a new variation on the theme of small getting big. With one little tiny exception: the German government. German labor laws and rules make building anything there difficult at best. At least the beer will be good. Between German beer and Canadian beer.

Saturn. Roger Penske could be called Roger Midas. It seems like anything he does, from Penske Automotive to the Super Bowl, works. Penske is basically getting Saturn for next to free from GM. He ends up with a dealer network (who’s glad to still be in business, much less with him), some production and a nice product line of small energy efficient American cars, that people actually buy. Penske will be the distributor of the Aura, Vue and Outlook cross-over SUVs. Penske already distributes the Smart car (that little dinky one made by Daimler). Penske seems to be in the midst of working out a deal with Renault Samsung to make Saturns in 2011 (GM quits making them in 2011), and also is rumored to be working up a Chinese car to be sold at Saturn dealers (Geeley and Chery are rumored). Roger picked up a money machine. Could be a big one.

Hummer. Hummer was sold to Sichuan Tengzhong Heavy Industrial Machinery Company (you remember them? I don’t either). This one baffles me. The company is not well known, Hummers don’t sell well here, and may not sell as well with a Chinese owner. Gas prices seem on an upward trend, and hummers are gas-guzzlers. As far as I know, the Hummer is built on a GMC large drive train. Good luck!

New Ford. A quiet riot in this whole series is Ford. Ford is in a good, but strange, position. Ford’s plan to fix itself for a shrinking market and rising gas prices turned out to be a very good fix for how to get out of the worst recession since the 30s. Ford benefits collaterally from any UAW concession and supplier concession, and benefits collaterally from the stigma of bankruptcy on Chrysler and GM. That’s not why I really think Ford will do well. Ford will do well because their products rock. Chrysler hasn’t really put out a new product for 3 years. GM is stuck in the too many brand position. Ford has some great mid-size cars, including the best mid-size hybrid. They have great trucks, and yes, people will still drive trucks, including me. Ford has hot rods like the Mustang, and luxury like the Lincolns. They even have weird but cool cars like the Flex. To be sure, Ford is going to have to contend with two relatively debtless competitors, but I would vastly rather have my majority owner being a guy who’s name is Ford, than have my majority owner the US Government. Ford will be a winner.

Other players. Toyota, Honda, BMW, and Mercedes are facing the same problems as the domestic players, but aren’t getting any ‘get out of jail free’ cards from bankruptcy, or having the pre-problem planning of Ford. I think Toyota will do fine: they’re a well run company with a very good product. But Toyota and Honda now have to live in a new landscape, with a very different set of opponents. It’s going to be interesting.

Watch 2010-11. What everyone seems to ignore is that this whole new car business is based on 10M units of cars being sold, or about 60% of what was sold in 2007. As far as I see, the population didn’t decline by 40%, nor did GDP. What will happen when unemployment goes down (it will) and people start buying cars (they will)? What happens in a 12M unit year, or a 14M unit year? As they say in China; we live in interesting times.

Here’s to new Detroit muscle,

Leon LaBrecque