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Auto Industry Business Model Needs a Major Overhaul

by: Research Recap July 24, 2008 | about stocks: F / GM / HMC / NSANY / TM    

Research Recap

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The challenges facing the automotive industry will require a major change in the business model, which is unlikely to arise without government intervention, according to Oxford Analytica.

General Motors’ (GM) announcement that it is collaborating with more than 30 electric utilities in the United States and Canada, as part of its plan to accelerate the introduction of plug-in electric vehicles, exemplifies the automobile giant’s effort to remain competitive in a changing global environment. Nevertheless, there are still major challenges facing the industry, OxAn says in Changes demand automotive rethink.

In the first century of its existence the automotive industry delivered major economic, social and industrial gains. However, the 21st century has brought a series of new challenges to the industry. Strong growth in emerging economies — particularly China and India — has placed upward pressure on global oil prices. This is also increasing demand for major commodities. The average cost of raw materials going into a car (including steel, aluminium, iron, plastic resins, rubber and glass) has risen almost 80% since 2003. The nature of competition in the automotive industry makes it difficult to pass on these cost increases to the end consumer.

There are growing signs of disruption and dysfunction in the automotive industry, which reflect its difficulty adapting to major external change. A major change in its business model is required.

Finding a new model is likely to entail abandoning various practices, including:

  • trying to make consumer durables into cult objects that confuse the need for personal transportation with self-image and motorsport;
  • retailing new vehicles exclusively through proprietary networks;
  • selling new cars below full cost;
  • changing the mindset of the industry that more products will solve problems;
  • financially undermining systems, components and materials suppliers; and
  • lobbying forcefully against any new legislation or regulations.

OxAn says major change is unlikely to arise from within the industry. Much of the impulse for change will probably need to come from regulation, legislation, standards-setting and fiscal measures. “This presents a huge challenge for the formulation of public policy.”

CreditSights, meanwhile, takes a look at the increasingly parlous state of the debt the “big three” US automakers in a new report Autos: Summer of Our Discontent Part 1.

The challenges to the macroeconomic story and the narrower “macro industry variables” are as complex as any we have seen in three decades of auto cycles.

gmf.gif“The industry just took a deep breath and decided no one can take the risk that oil prices will revert to anything close to the norm, ” CreditSights says. “Mean reversion for oil would be downright kind reversion, but the stakes are too high for forward mix and capacity planning for the legacy Big 3. Planning must now embrace the potential for a world of triple-digit oil, and that takes a multi-year planning response with even more restructuring outflows.”

For GM and Ford (F), the cash bleed keeps going higher on the follow-on restructuring execution (sends cash out) and a sharp North America sales volume slide (brings less cash in) so the painfully simple math ends up as “even more cash goes out.” Plugging that hole is at root of the panic.

In the end, we do not see GM or Ford facing bankruptcy by any stretch though US-centric Chrysler will remain vulnerable near term to the rumor mill on lack of transparency and rising default risk intermediate term.

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This article has 8 comments:

  •  
    Jul 24 02:43 PM
    I see all three of them facing bankruptcy, unless there is a federal bailout (loan guarantees like the Chrysler bailout several years back). If these companies can't make money when everything is going their way (big SUV and truck sales with low fuel prices), how can they make money in a bad environment? They can't! Instead there will be a long period of big losses--ending in bankruptcy.
    Reply
  •  
    Jul 24 03:51 PM
    It's simple. Develop a car that is fuel-efficient and focus on quality to every minute detail. Most people want transportation that gets them from point A to point B and back to point A. What's so difficult about this concept? Focus on a few models, turboboost quality, keep the same design for three to five years and you'll make money. If one or all of the big three would have developed a fuel-efficient car after the 1974 oil embargo, they wouldn't be in this mess. Plan long-range, not short-range. There is a large market of car buyers right now---looking for reliable transportation that won't bankrupt them at the gas pump. Give the market what it wants!
    Reply
  •  
    Jul 24 07:46 PM
    " Everyones getting a bail out ",

    Maybe theses factorys should keep a closer eye on whats going on, The SUV market started to die and they have nothing on the drawing board ??. Now it,s going to be a couple of years before they can get a car on the dealers lot. And what are people going to want or interested in. ethanol, hydrogen, battery cell ???
    Reply
  •  
    Jul 24 10:14 PM
    By the time US automakers retool their assembly lines to make small, fuel-efficient cars, the energy crisis will be over and the US market will crave SUVs and vans.
    Reply
  •  
    Jul 24 10:42 PM
    That could be true, Look at when all of the fuel efficient cars came out around 1974 fuel ration time., But after years went by we went back to big trucks and SUVS. This could be a cycle.
    Except for to much foreign oil.
    Reply
  •  
    Jul 25 10:14 AM
    The three trillion spent on the Iraq War could have purchased
    139,000,000 hybrid automobiles and cut automobile gasoline use in half. Not to mention air pollution.

    One of the FDR braintrust people suggested that in order to bring about a major good change in America, one had to bribe 51% of the people. This could easily be done in the name of economic sanity. It might even appeal to Americans. Subsidies and tax breaks for people buying hybrids, etc. Plus - money saved on gasoline would flow into all local economies and lift all boats: local businesses and local employment, municipalities and states.
    Reply
  •  
    Jul 25 11:01 AM
    There is NO question that U.S. automotive manufacturers need to drastically alter their business plans to survive. To that end, here's one idea they could consider:

    Yesterday Ford announced they lost over $8 BILLION in their 2Q this year alone, an all-time record. They added that they planned to offer several of their most fuel-efficient European models in the U.S. by 2012 (!) in an affort to stem these losses.

    The only flaw in this plan is at their present rate, FORD WON'T STILL BE AROUND IN 2012 for this idea to work.

    Instead, Ford should IMMEDIATELY dial up their Congressional delegation, financiers, lobbyists, the EPA and NHSTA, and start LOADING THE BOATS to bring these cars here TODAY. They can start building them in the U.S. when they see which ones are selling well.

    We need to quit FOOLING AROUND and "DEEP SIX" all the artificial regulatory red tape we've laid on our manufacturing and energy industries if America's economy is going to SURVIVE THIS YEAR AND NEXT, much less worry about what happens in 2012.

    For the life of me, I cannot comprehend why the Administration and the politicos in Washington cannot understand that we have AN ECONOMIC EMERGENCY, and keep on pretending that we should go about "BUSINESS AS USUAL!"
    Reply
  •  
    Jul 29 09:50 AM
    Here are a few things to consider:

    - High gas prices are here to stay, but maybe not at $4 or $5/gallon. While it is true demand has gone up on a worldwide basis, there is no true supply crunch. While acknowledging price of gas in the U.S. is out of touch with reality compared to the rest of the world, some of the spike in gas price over the past few years is also due to the value of the U.S. dollar. So there is a bit of a bubble here.

    - The current reaction of the average U.S. automobile owners to high gas prices is to flee to smaller vehicles. But Americans cannot live with small vehicles for long. Once we all get used to the higher cost of gas for our cars we will re-adjust our budgets and expectations and eventually go back to the bigger vehicles that support our needs. Because, we are not about to change our uniquely American lifestyles where everything is BIG, and we spend more time in our cars enjoying our roads, etc. Sure, SUV's and Trucks won't sell in record numbers like before, but they won't die, far from it.

    - What does it takes to sell cars engineered for non-US markets for an OEM like GM or Ford beyond just loading them in boats and bringing them over? There's a whole bunch of U.S. Safety and Emissions regulations they will have to pass. There are enough radical differences here that without engineering them into the vehicles from the beginning, they just won't pass most U.S. requirements. It is highly unlikely any administration/politic... will want to waive these regulations. Which would not even be right in principle since it would be the consumer suffering in a crash, with a big SUV for example, since they don't have these requirements in Europe. This is not to say U.S. OEM's cannot engineer small cars to be sold around the world, which is what they have already started to do.

    - Would automakers hesitate if there are any realistic cost-effective options to increase gas mileage or switch to other alternatives to gas engines? No. Beyond Toyota's ridiculously expensive Prius, GM's money losing Volt, and recently Nissan's plug-in vehicle PR gimmick, there's just nothing that's really ready for prime-time other than GM's already existing cylinder de-activation technology, Ford's soon to be available Eco-Boost engines, and the hundreds of thousands of Ethanol capable vehicles already on the road today. Fuel-cells? Not here yet in affordable terms. Lithium batteries? How do you make them safe enough to put in a vehicle your family rides in? Sure, these new technologies will be here sooner than later, but just not yet.

    Automakers will survive by consolidating and 'globalizing' models, pursuing fuel-efficiency and practicality as priorities in all models, revising their relationships with and reducing their dealer network, working as one team with all their suppliers and dealers with a do-or-die-together attitude, ridding forever the ridiculous sales incentives, and adopting a proactive attitude towards legislation while working with both governments and competitors to find solutions to issues affecting the industry as a whole. They just have to, or they won't be around.
    Reply
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