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Automotive Industry: Better Days Ahead?

As U.S. automakers actively restructure their companies - under the guidance of the federal government - expect, and be ready for, an automotive rebound in the months ahead.

Steve Stackhouse-Kaelble (Apr/May 09)
We've grown quite accustomed to bad news from the automotive industry lately. How about a note of optimism?

"There's a lot of work to do, but it's going to get done," says David Cole, chairman of the Center for Automotive Research in Michigan. As a follower of the auto industry, he takes some comfort in moves by the federal government: "The president said that failure of this industry is unacceptable, and they're not going to let it happen."

"The current administration understands the importance of this industry to the health of the economy," says Bruce Belzowski, assistant research scientist at the University of Michigan's Transportation Research Institute. "Even though these companies are going to have to be shrinking, the administration is expecting them to become viable."

And shrinking they are. In late April, General Motors (GM) announced plans to eliminate some 23,000 U.S. jobs by 2011 and to idle plants for much of the summer. It's closing the book on its Pontiac brand, ending Hummer production, and seeking a buyer for Saturn. GM is taking the ax to its dealer network, too, slashing it by 40 percent. The idea is to create a company that can be viable even if industrywide U.S. sales drop to 10 million.

Chrysler, meanwhile, has spent the spring trying to position itself for a merger with Italian automaker Fiat. That has meant wrestling concessions from the United Auto Workers, seeking forgiveness of many of its loans, and getting Daimler AG to give up its remaining stake in the company. Chrysler's goal has been to avoid bankruptcy, though Fiat has said that would not necessarily torpedo the deal.

Ford, meanwhile, has taken to counting its blessings by observing that things certainly could be worse. Unlike its Detroit counterparts, it's operating without federal bailout loans, and though it ran through $3.7 billion of its cash reserves in the first quarter of 2009, that's a slower burn rate than recorded in the previous quarter and the company still has more than $20 billion left. Ford posted a $1.4 billion loss in the first quarter of 2009.

There are many underlying problems, but the basic issue is a frightening drop-off in sales that has translated into a shrinking of production. North American light vehicle production fell from 15.0 million in 2007 to 12.6 million in 2008, according to statistics from Wardsauto.com and the Economic Policy Institute. Production by the Detroit Three fell by more than 20 percent, and other manufacturers operating in North America saw their production drop by about 8 percent.

But Cole believes capacity isn't likely to keep plummeting endlessly. "The industry is getting pretty close to what it needs to be," he says. "If capacity gets too low, we're not going to be able to meet the demand when things improve. As the market strengthens, that capacity will come back fairly quickly."

Still, it's not shaping up to be business as usual. When the economy perks back up, there will be cause to build more cars, but will do that building remains very much up in the air. "Clearly, we're looking at a fundamentally altered automotive industry," says Peter de Lorenzo, publisher of AutoExtremist.com and author of The United States of Toyota. "I don't think anyone really knows what the final outcome is going to be."

If GM comes through this downturn alive, expect it to be a little less than half of its original size, de Lorenzo says, adding that he doesn't see Chrysler surviving at all. Cole concurs. "For Chrysler, we all know that it's not survivable as an independent company. They have to have a merger."

Clearly, lots of eyes are carefully watching the fates of GM and Chrysler, and there's a high level of anxiety in the many communities where the two automakers operate. As Tracy Handler, market analyst for IHS Global Insight, points out, GM has promised to close a number of plants, with specific announcements due soon. "That will change the economy in those areas," she says.

It'll also change the outlook for GM's 1,500 or so parts suppliers, which already are nervous about getting by during the two months that GM plants will be idled this summer. "Tier 1, Tier 2, and Tier 3 suppliers are going to be in real trouble," says Handler, "and I'm not sure how some of the suppliers are going to survive." says. Any supplier demise will have an impact on other automakers, too, including the international transplants assembling in the United States. Already, Toyota's North American plants are stocking up on key parts, building up reserves so that they can keep on assembling in the event that a supplier goes belly-up.

Interest in the American Market
"The center of the automotive industry has now shifted away from North America," says de Lorenzo. "The most important market is China, and that's going to be a fundamental adjustment for the American automotive industry, and truly, the American psyche."

On the other hand, Belzowski points out that even today's smaller American market is too big to ignore. "Foreign manufacturers came to the U.S. because it was the largest market in the world," he says. "Right now it's not, but they haven't given up." In fact, he views the Chrysler-Fiat talks as more than just a mechanism for saving Chrysler jobs - it also represents a newfound interest in the American market by a foreign automaker that hasn't been particularly active here for a while.

"As sales return, all of the foreign manufacturers will continue to build vehicles in the United States," says Belzowski. "But when will the other foreign manufacturers - the Indian and Chinese - come to the U.S.?" Probably not in the near term, but Belzowski expects that they'll be knocking on American economic development doors at some point in the future.

Belzowski believes the potential GM spinoff of Saturn presents a real opportunity for a foreign automaker. Whether or not a buyer would want the brand itself, Saturn offers a tremendous distribution network. "It's one of the better distribution networks in the U.S. because it's newer, was designed to be more up-to-date and is a standalone," he says.


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