By Richard Stoyeck |
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When Bill Clinton ran for the Presidency in 1992, his platform was
basically, it's the economy ?Stupid? When we look at the state of
the American automobile industry, we believe both companies are on
the wrong track. General Motors stock bottomed at $17 per share, and
is now trading in the $30?s. Everybody is excited about chopping
employees, closing plants, and potentially hooking up with Renaults
formidable Carlos Ghosn. This is all financial engineering, which is
great for what it is, but it's not what car manufacturing is all
about. It's all about cars, does anybody remember that GM, and Ford
make cars.
What gets you into trouble is what has to get you
out of trouble. The 25 year problem with American car companies, is
that we manufacture cars that are less than desirable. Is anybody
listening out there? If you look at sales patterns on the East
coast, and West coast of the United States, you will see that
Japanese manufacturers dominate both coasts in sales. The car
companies are selling to long-time loyal Americans that buy American
in the Midwest and Southeast. They are not selling on the basis of
quality, and bang for the buck. They can't compete on that level.
The problem comes down to this. The Japanese companies have mastered
zero defect manufacturing. This means the car comes off the assembly
line perfect. There are no (zero) problems to be fixed at the dealer
level. When a person takes delivery from the showroom, he rides out
with a car that doesn't have to come back until the first major
service. The reason why so many Japanese companies have instituted
free oil changes on their vehicles is because the cars run like
toasters. They run for tens of thousands of miles with nothing going
wrong. People were not even changing their oil, so if most cars were
leased, the companies had to make sure that at least the oil got
changed. Cars are designed for the first buyer, to have zero
problems, and the Japanese have mastered this.
Contrast this
management decision with Detro it's way of thinking. The cars go
into the showrooms with defects. Detroit has made a conscious
decision to fix these problems after the customer takes delivery.
The customer will then bring the car back with a list of problems,
and fix it at the dealer level. There is no comparison between
consumer satisfaction with domestic cars, versus Japanese cars.
The Chairman of General Motors is a throwback to an age that no
longer exists. Einstein said, We can't solve problems by using
the same kind of thinking we used when we created them. This is what
we are experiencing at GM, and Ford. William Clay Ford Junior, the
current Chairman of Ford has done restructuring after restructuring
to no avail. Ford is still losing market share. What about market
share, Bill?
Every time GM loses a point of market share,
they create for themselves an additional $1.4 billion in pretax
losses. Our work shows that the automobile industry may be sliding
into recession in 2007, and then where is this industry going to
find itself Lets take a look.
Last year in 2005 if you
look at GM is automobile operations as a standalone business, they
went through almost $7 billion dollars. This year aside from
restructuring costs, we think they burn another $4 billion, plus
$4.5 billion in 2007. The announced restructuring only amounts to
$4.5 billion in savings. They are still bleeding, they are still
losing market share. Over the next couple of years, you have to add
upwards of $900 per car for raw materials, and costs imposed by
Washington regulators, and GM isn't alone. Ford will burn through $4
billion this year, and almost $4.5 billion next year in 2007. How do
these guys keep their jobs?
For GM we can't see where what
they save from restructurings which is $4.5 billion in cash can
offset the cash burn rate they have created. They are still
hemorrhaging cash while LOSING MARKET SHARE. Do you have any idea
how tough it is to turn around a gigantic company like either of
these companies while they are still losing market share. It would
be tough to do it in a fabulous economic environment.
Lets
look at two points here. The first is when you break down the
automobile companies by divisions; GM and Ford make a lot of money
from selling light trucks. GM by itself made almost $1.5 billion
income last year from this division. The year before that, they made
twice as much. We see this division taking a real hit next year for
both GM and Ford. Gas prices are going to wreak havoc with the sales
of these vehicles, and housing starts will be down. Look at the
homebuilding stocks and their declining prices (more like an
avalanche), and you will see where housing is going next year. Huge
numbers of these trucks are sold to people in the construction
industry. Figure it out for yourself.
What's going to happen
is this. Quickly, GM and Ford are going to have to start selling
passenger cars, and what you call crossover vehicles. They are going
to get clobbered. The Japanese get between $900 and $3800 more per
passenger car than the guys in Detroit. This means the Japanese care
are loaded down with extras that we just can't put in our American
built cars. This segment includes SUV.
We are looking for
16.8 million cars to be sold in the United States this year 2006.
Contrary to what GM and Ford believe, we think next year is down a
couple of hundred thousand cars, and neither of these companies is
budgeting for that experience. Housing prices in this country are
sideways to down. People will not be extracting cash from their
houses in the form of home equity loans to be buying cars next year.
They will not be feeling good about the price of their house, and
therefore consumer sentiment will suffer. The first hint as to
whether we are right will be if there is a Democratic watershed
coming in the Congressional elections this November. If the
Democrats take control of either chamber of the Congress, it will be
prelude to a down automotive cycle in 07. That will be your
indicator. Watch for it.
Goodbye and good luck
Richard
C. Stoyeck
StocksAtBottom.com
August 1, 2006 |
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