The Wonderful Shrinking Automotive Industry - Now You See it, Now You Don’t

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Researched by Industrialinfo.com (Industrial Info Resources; Houston, Texas). As the U.S. automotive industry reels from the shock of its massive losses in the last few years (200,000 jobs lost, or 15% of its workforce), the nation was recently shocked by the news that 66,000 Big Three auto workers will be laid off in the next few years, and a number of plants will be closed. And that is only the tip of the iceberg – we have yet to hear from their numerous suppliers, many of whom have already sought Chapter 11 bankruptcy protection, or are very near doing so. Those insightful few who have managed to pull most of their dependency away from the Big Three and replace it with business from transplant OEMs may yet escape the worst of it. A few, such as Johnson Controls (NYSE:JCI) (Milwaukee, Wisconsin), have managed to diversify into other areas unrelated to automotive.

We’ve heard the litany ad nauseam: pension and healthcare legacies are killing us. Foreign automakers are stealing our market share. In large part, those arguments are true, but there’s much more under the surface. Nobody would be foolish enough to deny that the unions have had a large part in strangling the automotive industry, but on the other hand, they’ve been instrumental in midwifing a prosperous middle class, many of whom earn six-figure salaries, that has stoked the economy for several generations.

Nobody wants to talk about the bad decisions management, particularly at General Motors, has made over the last two decades - the ill-considered acquisitions, the irresponsible management of corporate resources by top executives, alleged accounting irregularities, the overwhelming number of models, which serve more to confuse the public than to fulfill real needs, the seeming inability, in spite of employing some of the best design engineers in the world, to give the American public what it wants at a reasonable cost and reasonable reliability, and the cavalier manner in which they have become accustomed to treating their public… the list goes on and on. But discussed they must be, because they are all factors.

We’ve all heard the union-generated mantra, "If you drive a foreign car, you’re part of the problem." Well, let’s see... what, exactly, is a foreign car? No one yet has managed to define that term to this writer’s satisfaction. Is it a car assembled in the U.S. from 70-80% substandard Chinese-made parts and components? Or is it a car built by a foreign owner in a U.S. plant that hires U.S. workers and pays U.S. taxes? It’s almost amusing to ponder what the unions will say when General Motors begins importing its Chinese-made vehicles for sale in this country in the near future. Now THERE’s a foreign car for you.

While we were all asleep, the world’s automakers, almost without exception, have been feverishly building plants in China, and requiring their suppliers to do the same – all in the name of globalism. It saves them lots of money (well, that’s the popular mythology, anyway)… It must be the industry’s best-kept secret that the savings go right into the manufacturers’ pockets, but are not passed on to the customers. C’est la vie, mon ami.

Now, back to the bad news. General Motors recently announced that it lost $8.6 billion in 2005 ($1.5 billion in the fourth quarter of 2005 alone), and it is contemplating the astounding fact that half of its 105,000 U.S. employees will be eligible for retirement in 2007. GM’s market share in the U.S. fell to 26.2% in 2005, down from 27.5 in 2004.

Utilization of GM’s production capacity was only 87% last year (it takes 90% utililization to maintain profitability). All these factors and more, including the recently declared bankruptcy of major GM supplier, Delphi Corporation (OTC:DPI) (Troy, Michigan), with the laying off of 24,000 workers, have convinced GM that it needed to close plants and pare employment levels.

U.S. automakers on average spend more than $1,200 a vehicle on healthcare costs - more per vehicle than is spent on the steel to make it. Total legacy costs per vehicle, according to a report in Time Magazine, come to $2,200. The further down their market share goes, the higher the legacy costs per vehicle. Their transplant competitors average about $450 a car made in their U.S. plants, the difference reflecting a much younger workforce. On the matter of pensions, the traditional Big Three support about 800,000 retirees, while their transplant competitors underwrite fewer than 1,000 from their U.S. operations.

General Motors has announced the closing or line or shift cancellation of a number of plants (see attached "Plant Closings chart), as well as parts distribution centers in Portland, Oregon, Saint Louis, Missouri, Ypsilanti, Michigan, and one as-yet-unnamed city. The company will reduce its North American workforce by 30,000, or 22%, and slash the number of its suppliers, to try to halt the bleeding, although the $6 billion GM hopes to save from these measures won’t erase the massive 2005 shortfall.

Click on the image at right to view Plant Closings Chart

Ford Motor Company (NYSE:F) (Dearborn, Michigan) has recently announced its second restructuring since 2002, the later one even more comprehensive than the earlier one (see attached chart for specific closures). In 2002, Ford closed five plants and cut 35,000 jobs in North America. Added to Ford’s burden is the collapse of its major supplier, Visteon Corporation (NYSE:VCI) (Van Buren Township, Michigan), in which Ford reabsorbed 23 North American Visteon facilities into an Automotive Components Holdings, LLC. Ford, which buys about $70 billion worth of parts and components a year, also means to cut its suppliers from 2,500 to 800, and has already announced the first 27 of its future preferred suppliers. Ford also will close fourteen manufacturing facilities (including seven assembly plants) and eliminate 30,000 jobs, almost one quarter of its North American labor force, between now and 2012.

In 2005, Ford’s market value dropped to 17.4% from 18.3% in 2004, and 24% in 1990. It was, like GM’s, Ford’s tenth year of slipping market share. The company is presently using only about 75-79% of its North American plant capacity, considerably less than that of even GM’s 87%. The company has, besides its eighteen assembly plants in North America, 23 metal stamping, casting, engine, and transmission plants. See attached chart showing OEM product utilization percentage, market share for 2004 and 2005, total U.S. plants, and North American employees.

Click on image at right to view the OEM Product Utilization Table

Toyota, by way of contrast, is operating at 111% plant capacity and is building two new assembly plants (San Antonio, Texas, and Woodstock, Ontario) - both of which Industrial Info has previously reported on, including their respective expansions - is reportedly looking around for land for a new engine plant, and has announced plans to use a platform at the Subaru plant in Lafayette, Indiana to produce at least one of its models. Try as it may, it can hardly keep up with global demand for its vehicles.

The number of transplant automotive plants in the U.S. in 1993 was eleven; as of this year, there are, or will be 28. Add to this the number of new models available and competitive pricing, and it becomes easy to understand Detroit’s precarious position. But that is not to say, as GM and Ford are both so fond of parroting, that Toyota and Honda are stealing their market shares. Accept it, GM and Ford have handed it to them on a silver platter by focusing determinedly on out-of-date business models for so long, among other missteps.

While pointing fingers of blame is ultimately counter-productive, even Congress must accept some of the responsibility for the sad state of affairs in the automotive industry in specific and the manufacturing industry in general. The almost endless string of policy failures generated by the Congress, whose members seem to live in another world (or fancy that they do) include, most particularly, failed energy policies, failed pension and health-care policies, and failed industrial policies (think: globalism – but that’s another article). One could get the idea that their actions have been orchestrated and finely-tuned by interests that are diametrically opposed to the best interests and well-being of the U.S. and its workers. (See The King Report, February 23, 2006, for a penetrating and sobering article on this subject.)

What seems to be uppermost on people’s minds these days is Will General Motors and Ford be forced into bankruptcy? In spite of Rick Wagoner’s almost surreal, out-of-touch assessment that GM will never declare bankruptcy, the fact is that it is almost inevitable – if not in 2006, then certainly in the near future. Delphi’s bankruptcy and future might be seen as a dress rehearsal for GM, but that also is fodder for another story. It is impossible to know what is really going on at the upper levels at GM, but whatever it is, it seems to bode ill for the company as a whole, vis-à-vis the personal interests of the powers-that-be, who have taken every opportunity to vote themselves outrageous bonuses and even higher salaries. Every decision taken by the board and announced by Wagoner seems to be a little more far-fetched and out-of-touch with reality than the last. But the calling in of Robert “Steve” Miller to preside over Delphi’s bankruptcy (this is the same man who presided over the bankruptcy of Bethlehem Steel several years ago, by the way) might be more than just a bad omen of the future fate of GM. Watch out if he moves on to GM! Caveat emptor.

Ford, on the other hand, while also beset by awesome problems, appears to be headed in a healthier direction. Closing plants and laying off thousands of workers is not a job Bill Ford and others take lightly, but at least he has taken the bull by the horns and is addressing Ford’s problems with advice from some of the best minds in the industry, in a reasonable and measurable manner. Compared to GM’s ill-thought-out scatter-shot measures, it seems downright refreshing to hear from Bill Ford, as he announces each step the company plans to take in its attempt to heal itself. Whether he will be successful or not depends on many factors, none look too good for the company at the present moment. The bottom line here is that the bankruptcy of either one of these industrial behemoths would be a huge blow, not only to the U.S. industrial community, but also to the collective psyche of the American people. Fortune Magazine’s Carol J. Loomis in The Tragedy of General Motors opines that such a bankruptcy would “toll the death knell of the American industrial model.” As we look around us at the general piecemeal demise of American industry nationwide, it doesn’t take a huge stretch of the imagination to buy into that gloomy statement.

Industrial Info Resources (IIR) is a Marketing Information Service company that has been doing business for over 23 years. IIR is respected as the leader in providing comprehensive market intelligence pertaining to the industrial processing, heavy manufacturing, and energy-related industries throughout the world.