American Automotive Industry Gears Up for a Rebirth

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Researched by Industrial Info Resources (Sugar Land, Texas)--There is little doubt that anyone who has access to television, a newspaper or, most importantly, the Internet has followed the recent trials and tribulations surrounding the American automotive industry. Whether they have followed these events closely or just in passing, what has happened to the automotive landscape in the United States in recent months hardly has been behind closed doors. But to truly understand what has happened--not only to General Motors Corporation or The Chrysler Group LLC, formerly Chrysler LLC, but to the balance of the industry as well--one must understand what has occurred during the last several years within the industry.

The sub-prime mortgage fiasco started the ball rolling. While there is no direct link between mortgages and the automotive industry, there is a link between financing a home loan and financing a vehicle purchase. When the sub-prime mess exploded, lenders tightened the credit lines on homes, which forced consumers to pay closer attention to where they were spending their hard-earned money on a monthly basis. Consumers have always valued owning a home more than owning a new car; thus, vehicle sales began to decline as consumers put more focus on the purchase of homes, or tried to hang on to their homes if they were on the bad side of the sub-prime situation.

The next factor to hit the automakers was the fluctuating oil prices. Even as automotive sales continued to decline into the summer of 2008, oil prices began to creep ever higher. Gas prices topped $4 per gallon in most states, prompting people to drive less and purchase fewer vehicles. The toll at the pump, combined with the credit problems that had moved from being exclusively mortgage issues into all other credit avenues, such as credit cards and equity loans, added up to even slower automotive sales. The only vehicles that were selling were fuel-efficient hybrids; however, Americans have not taken to the hybrid as much as other countries have, especially given that the best and most fuel-efficient of them are small vehicles--and we all know how dearly Americans love their big vehicles.

After the summer of 2008, gas process began to decline, but sales in the automotive industry did not increase. Consumers were concerned about spending too much, especially because of the credit crisis. While the situation was bad, it was not really hopeless until late in 2008, when Wall Street began to suffer. In a matter of weeks, half of the best-known financial institutions in the U.S. had collapsed, had been forced into bankruptcy or were sold, further shaking the already fragile consumer confidence.

Now began the complete collapse of the American automotive industry. With credit virtually eliminated across the board, consumer confidence at an all-time low and the financial markets in the dumps, Americans were not looking for vehicle deals. Despite all the gimmicks that Detroit tried to attract new buyers, the fact is that if you cannot finance them, they cannot buy. At this point, the federal government was forced to step in. After bailing out Wall Street, the automakers demanded their piece of the pie.

Citing the millions of jobs that would be lost if Detroit's "Big Three" were forced out of business, the automakers received billions in federal aid, all of which went into the coffers of GM and Chrysler. Ford Motor Company (NYSE:F) (Dearborn, Michigan), in late 2006 and early 2007, had arranged for approximately $23 billion in loans and lines of credit before the financial markets collapsed, enabling them to push through the crisis without taxpayer aid. GM and Chrysler, however, were nowhere near as fortunate. Facing bankruptcy and a presidential mandate to restructure for profitability, both GM and Chrysler submitted plans to the government detailing how they would pay back the taxpayer loans.

These plans were rejected, and both companies were essentially forced into bankruptcy by President Obama. Chrysler succumbed first and, after a 42-day bankruptcy period, emerged as a new company. Fiat SpA (OTC:FIATY) (Torino, Italy) now runs the Chrysler operations, while the United Auto Workers (UAW) union is the primary shareholder. The U.S. and Canadian governments also have stakes in the company. GM entered bankruptcy shortly thereafter and emerged 40 days later--the fastest major bankruptcy in U.S. history--as a new company. In the case of GM, the federal government is the primary shareholder with UAW, while the Canadian government and major bond holders of the "old" GM own the balance of the shares.

Ford, although unaffected by the bankruptcy proceedings of its major U.S. competitors, has managed to rumble right along this whole time, attempting to snatch as much of the market share as possible while GM and Chrysler languished in the courts. Meanwhile, foreign automakers have essentially taken a "wait and see" attitude in America, after years of chipping away at the "Big Three's" market share and building new assembly plants in the southern U.S. Foreign automakers have watched their sales slide as well and have felt the pinch of the economic problems facing the U.S.

Now the rebuilding of these two automotive giants will begin in earnest. Both GM and Chrysler are taking long, hard looks at vehicle lineups to determine what cuts can and need to be made. GM is already in the process of discontinuing the Pontiac brand and has tentative agreements in place to sell the Saab, Saturn and Hummer brands. The real question for GM will be how many additional models it will cut back or eliminate in the brands the company is keeping: Chevrolet, GMC, Cadillac and Buick. Chrysler has a similar problem, although not on as grand a scale. Chrysler currently assembles 30 models under the Chrysler, Dodge and Jeep brand names. The company really should cut this number in half if it is going to be able to compete nationally again.

Thousands of dealerships already have been closed across the country as part of the GM and Chrysler bankruptcy proceedings, and additional dealership closures may be needed in the future, once automakers determine what models they will eliminate or replace. A number of plant closures already have occurred or are scheduled to occur in the next 18 months. This has resulted in thousands of job cuts, both in blue- and white-collar areas of the companies. Additional plant closures and job cuts may be required, but probably not until 2010, once things settle down.

The chief problem for the three American automakers, but especially for GM and Chrysler since they both went bankrupt, is that they have to rebuild consumer confidence in the companies. Right now, the average consumer is confused. Two of the three largest manufacturers in the U.S. have been forced to go through bankruptcy and restructure themselves--who can you trust to be around in five years if you purchase a new vehicle? Right now, the odds are that all three will survive, as long as they continue to evolve.

Part of the reason for the bankruptcies was that much of the management style of both GM and Chrysler was archaic. Many in the upper management team had been with the companies for decades and were stuck in an old-school mentality about the automotive business in the U.S. While that attitude did manage to survive for a long time, it is now obvious that the automakers are going to have to adjust themselves to modern times and the rapid ways things change. Purchasing vehicles and, even more importantly, comparing various automakers' vehicles against one another, is easier now than at any other point in history. For the first time, mainly thanks to the Internet, the consumer has the ability to be almost as knowledgeable, arguably more knowledgeable, than the folks trying to sell them the vehicles. The automakers have to change with the times.

What does the future hold for the American automotive industry? This is the billion-dollar question. First, as mentioned above, automakers have to rebuild the shattered consumer confidence. In conjunction with this, automakers must rebrand themselves, reinventing themselves as newer versions of the old business model. Then they must improve sales, which is probably the key to everything. Without boosting sales to acceptable levels, they will not have much chance to survive.

One of the biggest challenges facing both GM and Chrysler is that they have to pay back the billions in government loans they received while showing they have turned over a new leaf and can make a profit. This is going to be very difficult to achieve, but it is certainly possible. Of course, it would help a great deal if the recession, which began in December 2007, would wind down and the economy would revert to some semblance of normalcy, but that takes time. In the meantime, the automakers will be concentrating on making those sales while reinventing their own images.

Once the automakers prove they are capable of turning a modest profit while paying off their respective loans, they will have to embrace new technology, such as electric vehicles. Electric- and hydrogen-powered vehicles appear to be the future of the automotive industry, if automakers can solve the power storage problems, which can certainly be done. They also will have to assist with developing an infrastructure geared to refueling these new vehicles across the U.S., or no one will buy them, simply because they cannot refuel them.

Nothing that the "Big Three" need to accomplish is beyond their respective capabilities. They have the tools and now appear to have the drive, thanks to the bankruptcies, to make the push for the next generation of vehicle while rebuilding themselves. It is going to take time and a lot of money to make the changes necessary to the industry, and it is not something that we can expect to see happen overnight. But the future is wide open for the automotive industry--all they have to do is reach out, grab for control and do what is necessary to lead themselves into a new future.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy related markets. For more than 26 years, Industrial Info has provided plant and project opportunity databases, market forecasts, high resolution maps, and daily industry news.