Goodbye, 2009 and Good Riddance: An Analysis.

24 Dec 2009 | 1,746 views | No Comment
The cheering you will hear on New Year’s will be loudest in Detroit. That is because the year that the auto industry—and the rest of us---will love to forget will finally be over. It was an absolutely horrendous one for Detroit, that’s for sure.  Two of its biggest companies, General Motors and Chrysler both went into bankruptcy. Sales, if Edmunds.Com is right, will barely total 10.4 million—a Depression level figure, thanks to non-existent credit, a poor economy, closed dealers and fear brought about by the bankruptcies. Consider: in many years during the last decade, sales routinely hit 14 million to 16 million  annually. But of course, it was the bankruptcies that were the biggest news. In April, Chrysler filed for Chapter 11 bankruptcy protection in New York City after a group of creditors defied government pressure to wipe out Chrysler’s debt. The government shortly thereafter approved a plan to allow Italian automaker Fiat SpA to become the majority owner of the company.  In return, the federal government agreed to give Chrysler up to $8 billion in additional aid and to back its warranties. Then, in June, GM followed suit, filing  bankruptcy in June in New York City. GM entered bankruptcy  protection with roughly $94.7 billion in debt, thus unable to continue to operate without government help. But since that time, there’s been a dramatic reversal of fortune for both companies. GM  emerged from bankruptcy with only $17 billion, not $94.7 billion, in debt, including $6.7 billion that it owed to the U.S. government. The government gave GM a total of $52 billion, including $45.3 billion in exchange for a 61 percent equity stake in GM. GM is in the process of staging a quick recovery, and they have announced that in the third quarter, they had generated $3.3 billion in cash in the third quarter. As of now, repayments would start early on $6.7 billion in federal loans. Thanks to a terrific lineup of new products, GM is giving every indication that it will have a decent 2010. In addition to mainstays like the Chevy Malibu, Cadillac CTS Sportwagon, Cadillac STS,  Buick LaCrosse and Chevy Camaro, we will see the all-new Chevy Cruze, the new Chevy Aveo and Chevy Spark, Buick Regal GS, and a Cadillac CTS-V Coupe.  And oh yes—the Chevy Volt. In more good news, all GM has to do is for the  auto industry to have a roughly 10 million unit sales year in 2010 and  they will, at the least break even and probably make some profit.  That’s the upside of the bankruptcy at work: Lower debt means you don’t need as much profit to survive, and it also means more money for new models, new technology, and more money in which to takes more potentially profitable risks with product portfolio. And since the labor contracts have been renegotiated for the Big Three, and they don’t have the huge retirement “legacy” costs to deal with, they should be able to price their cars more competitively with the Hondas and Toyotas of the world. Chrysler, while starting to turn a corner, took, is a different story. Chrysler’s biggest pressing problem is a lack of new products to entice buyers. New paint colors, trim, and a refreshened grille don’t “get it” in this market, so you can expect Chrysler to struggle mightily to stay afloat in 2010.  I don’t think an all-new Chrysler 300, Jeep Grand Cherokee and Dodge Charger will hurt, of course, but the segments in which those products compete are not the segments that are likely to be hot next year: Intermediates, small crossovers, hybrids and  compacts and subcompacts. The other issue for Chrysler, in my view, is this: How in the heck is the company to carry that five year plan out for Dodge and Chrysler and survive until new products finally arrive? Will the buying public forgive having the same old models on the sales floor in the meantime?  Time will tell. I also have reservations about specific visions outlined for the Chrysler and Dodge brands. For those of us of a certain age, Dodge has always meant performance, at least if you grew up in  the muscle car era. Practical was a word to describe Dodge only before about 1963. But under a new “vision” for Dodge, it’s suddenly going to become both practical and fun to drive. But unless I’m missing something, the image I get with the current Dodge lineup, save for the Grand Caravan and the pitiable Avenger, is not practicality, but performance—all American performance loud and clear. And that’s great. Bring it on. But Dodge doesn’t have anything in its lineup that could even remotely fit the  new vision outlined. And it won’t have anything new until 2013! The Chrysler brand will be even more challenging. Chrysler has, unfortunately become a “not quite luxury” car that is neither fish nor fowl. It doesn’t have the image of a family sedan, and it doesn’t have the image of a luxury car. The current 300 is a nice, good-looking car. But it is nowhere near competitive with Lincoln, Cadillac and the  premium European  and Japanese makes. I understand the new 300 is a big improvement, but I still don’t think it has quite the heft, the drama,  the fabulous features and interior to make the leap in to the luxury market, based on what I’ve seen so far. Maybe they’ve made changes since Fiat took over. Let’s hope so. Chrysler is paying the price for having slashed its product development budget so deeply, and no wonder. Instead of a five year cycle, the auto industry is quickly moving to a three or four year cycle. You introduce an all new model the first year, make modest changes the second, do a big refresh the third year and come out with a whole new version in the fourth year. If you can’t do all this with  limited resources, you will be hamstrung and consumers will flock to the newest, shiniest metal. The earliest that new models that are coming to Chrysler and Dodge are slated for 2013—a lifetime away in the auto industry. The current lineup is already tired and familiar looking to people, except for Dodge’s Challenger. On the brighter side, Chrysler, like GM seems to be getting better financially. Chrysler CEO Sergio Marchionne said the company has $5.7 billion in cash and added $1.7 billion since it left bankruptcy June 10. The third-largest U.S. automaker was profitable on an operating basis in September because of cost controls, Mr. Marchionne told analysts and journalists at the presentation. Bankruptcies and the aftermath aside,  2009 did bring some successes. Through the first 11 months of 2009, for instance,  Hyundai’s market share was 4.3 percent. Compare that to a year ago for them when the market share was 3.1 percent. The Kia brand market share was up to 3.0 versus 2.1 percent. Subaru market share jumped from 1.4 percent for the first 11 months of 2008 to 2.1 percent for this year, and Volkswagen market share went from 1.7 percent last year in the first 11 months to 2.1 percent. The answer to their success can be seen in what I mentioned earlier: Product, product, product. Hyundai had the Genesis Coupe and Sedan. Volkswagen had the new CC sedan and the diesel Jetta, and a relatively new Tiguan and Eos convertible. Subaru had the Legacy Sedan, the Outback Wagon and the all-new Forester. And Kia? Take a look at the new Soul and the Forte. But success can certainly be measured in a number of ways. If you look at image, there were at least two big winners in that department for 2010: Buick and Ford. By virtue of the glamorous, graceful LaCrosse, Buick has managed to turn its image around from frumpy to style leader, and all the car buff mags and auto writers know that. They’ve all raved about the new LaCrosse and  the car is now a candidate for the North American Car of the Year. Over at Ford, quality control ratings have skyrocketed, and Consumer Reports now says that the Ford. Lineup is now at least equal to or better than Honda or Toyota’s product portfolio. Consumers also loved Ford because it did not borrow taxpayer money and go into bankruptcy as did GM and Chrysler. Sales jumped and Ford models hit the best seller chart in many market segments, most importantly in the intermediate segment where its Ford Fusion became one of  the top two or three selling intermediates. But that wasn’t the only reason why Ford had such good fortune in 2009. A decision Ford Motor Co. CEO Alan Mulally made during his first months on the job proved to be a momentous one for the company, and may pay dividends down the road. In 2006, Mr. Mulally arrived from Boeing and he decided to  gamble on the company’s future. He wanted at least $17 billion to design and build smaller, more fuel efficient cars, and focus only on the Ford, Mercury and Lincoln brands. So he went to 40 banks and raised $23.5 billion, putting up all of Ford’s buildings, stock, intellectual property, stakes in foreign automakers and even its trademark blue logo as collateral. So when GM and Chrysler were awash in red ink and struggling to stay out of bankruptcy, Ford prospered. But Ford didn’t have the opportunity to get rid of as much of its debt as did Chrysler and GM and that may make 2010 more challenging for Ford than it ought to be. So let’s raise a glass—many glasses-- to 2010, and may we never see  a year like 2009  again  any time soon.

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