U.S.A.:Ford and GM Fail To Increase Sales
The Auto Channel
DETROIT August 30, 2003; John Lippert writing for Bloomberg News filed this story: At the Cadillac factory in Lansing, manager Ken Knight tells workers not to be overly concerned about General Motors Corp.'s vehicle prices, which fell 6 percent in the first half of 2003, or the company's $25.4 billion pension fund deficit.
Instead, he tells them to focus on turning out quality cars. In 2002, the factory's first full year of operation, Knight's customers reported 88 complaints per 100 vehicles, according to J.D. Power & Associates. Buyers of cars from Toyota Motor Co.p.'s best factory -- in Georgetown, Kentucky -- reported 123 flaws per 100 vehicles in 2002.
"We can't do anything except what we're doing: learning to be the best car builders on the planet," Knight says.
The lessons may not come fast enough. All of Detroit's once mighty carmakers -- General Motors, Ford Motor Co. and the Chrysler unit of DaimlerChrysler AG -- have made strides in matching the quality standards of their Japanese and European competitors. And all of them, because of their declining share of the U.S. market and a global glut of auto factories, have never been in greater financial peril.
"It's not a given that all the domestic auto companies will survive," says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan.
General Motors earned $901 million in the second quarter, down from $1.29 billion in the year-earlier period, with revenue unchanged, at $48.3 billion.
Consumer Finance Units
Ford earned $417 million, down from $570 million in the year-earlier period, as revenue fell 3.6 percent to $40.7 billion. Both companies relied on their consumer finance units for 90 percent of their profit.
Many investors are shunning Detroit. General Motors shares sold for $39.40 and Ford's sold for $11.64 on Aug. 27. The companies' shares have lost two-thirds of their value since the end of the Wall Street bull market -- or about twice as much as U.S. stocks overall.
"The businesses we own have an economic profile superior to the general economy, and automobiles don't fit that profile," says Robert Torray, manager of the $1.4 billion Torray Fund, which sold 1.2 million Ford shares in 2001.
Detroit's automakers are destroying shareholder value, not creating it, says Christian Olesen, an analyst at Stern Stewart & Co. in New York.
During the 12 months ended on March 30, General Motors' operating profits were $9.9 billion less than the company's capital costs and Ford's were $7.1 billion less, says Olesen, who does not rate individual stocks.
Detroit is stumbling today because the U.S. market is less concentrated and more competitive than at any time since 1913, says Saul Rubin, a UBS Securities LLC analyst who advises investors to sell Ford shares and hold on to GM shares.
"The prospect of a Ford or General Motors Chapter 11 or a Chrysler ejection from DaimlerChrysler is far from a remote possibility," Rubin wrote in May.
Net margins of 8 percent for GM and Ford in the 1950s fell to 3 percent last year, and they're likely to fall still further as Asian and European automakers add or expand factories, Rubin says.
Detroit automakers captured 59.9 percent of U.S. sales in July. That's down 2.2 percentage points from the year-earlier period and down 14 points in the past decade, even though Detroit automakers boosted rebates and other incentives by 39 percent during the past year to $3,979 per vehicle, according to CNW Marketing Research.
Rebates and Incentives
Toyota's rebates and incentives amounted to $2,413 per vehicle.
Further market share losses would be dangerous for General Motors because of its high fixed costs. At the company's North American auto unit, revenue dropped 6.6 percent in the second quarter to $28.6 billion, while net income dropped 93.5 percent to $83 million.
General Motors officials are especially worried about retiree medical and pension costs. "Those costs could get wildly out of control," says John Devine, the company's chief financial officer.
By 2010, global automakers will be selling three-fifths of the 106 million vehicles they'll be capable of building annually, says John Hoffecker, a partner in AlixPartners LLC, a Southfield, Michigan-based management consulting firm.
That glut could drive down automotive prices for the next 20 years, Hoffecker says.
Philip Martens, a Ford vice president, is preparing for the onslaught by reorganizing the company's North American product development system. "Is Ford going to go through some difficult times? Yes, but so is everybody else," he says. "Maybe only two or three companies will stay above the fray."
Those more-secure companies are Bayerische Motoren Werke AG and DaimlerChrysler, because of their upscale brands, and Toyota, because of its disciplined manufacturing approach, Martens says.
General Motors is trying to buy time until 2012 -- when workers hired during the Vietnam War will start dying in large numbers and retiree costs will begin falling sharply -- by contributing at least $15 billion to its pension plan during the next four years.
About $13 billion of the total will come from the largest debt offering ever made by a U.S. company. General Motors officials popped champagne corks in their New York offices on June 26, when they completed the offering, worth $17.6 billion.
They celebrated because the offering was a third bigger than they'd hoped. To maximize demand, GM offered bondholders what was in effect a rebate. The yield on 10-year U.S.-dollar-denominated bonds was 3.75 percentage points higher than comparable U.S. Treasuries.
That was 2 percentage points more than the spread GM had offered on similar bonds two years earlier and 2.5 percentage points higher than the average U.S. corporate offering on June 26.
On average, General Motors will pay a 7.54 percent yield on the debt. Company officials say they hope to earn 9 percent on the proceeds contributed to its pension fund -- far from a sure bet. GM earned 9 percent on pension assets in the first half of 2003 and lost 7 percent last year.
Officials at Detroit's auto companies cling to hopes of a turnaround based on their improved production standards. Today's Chevrolet Corvette has a top speed of 171 miles per hour and travels 28 miles on a gallon of gas. Vietnam-era Corvettes' top speed was 30 mph less -- at half the gas mileage.
'A Random Vehicle'
"You can get a very good product these days by buying a random vehicle at a random dealership," says Gordon Wangers, president of Automotive Marketing Con******ts Inc. in Vista, California.
General Motors' customers reported 134 quality complaints per 100 vehicles in 2002 compared with Toyota's 115, according to J.D. Power. In 1981, GM reported 740 complaints per 100 vehicles compared with 105 for Toyota, according to Ford.
CFO Devine says his company is poised to prosper because of those improvements. "General Motors is just beginning to show an operating capability that's right at the top of the league," he says, thumping his forefinger on a conference table for emphasis.
Devine points to the Lansing plant as a showcase for the company's push for better quality.
The Cadillac plant sits a few blocks south of the state capitol, on a site where General Motors' Oldsmobile division has built cars for 106 years.
Bright Yellow Tape
Inside, the proper location for everything, including dustpans and brooms, is marked on the floor with bright yellow tape.
Preassembled instrument panels and engines are unloaded from delivery trucks and hauled to assembly lines without ever stopping.
The Lansing factory's key innovation, copied straight from Toyota, is a piece of white paper with the heading Practical Problem Solving Report. It contains spaces on which workers sketch and describe problems they encounter on the job as well as spaces for defining and tracking corrective actions.
"As long as we're all talking the same language, we get solutions a lot quicker," Knight says.
Bill Nosis, a team leader on the final assembly line, filled out a report when holes had been drilled improperly for grip handles in the ceiling of the Cadillac SRX sport utility vehicle.
"In my old plant, they told us to shut up," says Nosis, a 26-year General Motors veteran. "Here, they listen."
Until the 1990s, each department in General Motors plants used individual methods to conceptualize and solve problems, Knight says. In addition, manufacturing methods varied from plant to plant.
For example, each GM factory used customized tools to hold metal body panels in place during welding, Knight says. Those tools had to be scrapped as each model was redesigned or discontinued.
When the Lansing plant opened, it was the first to use flexible tools that can accommodate any car or truck General Motors might build in the next 25 years. In North America overall, GM needed 24.4 hours of labor time per vehicle in 2002, according to Harbour & Associates.
The company trailed industry leader Nissan Motor Co. by 7.6 hours, down from 10.1 hours in 1999.
Ford is beating the drum of improved quality as well. During opening ceremonies for a new truck factory in Dearborn on June 12, Ford CEO William Clay Ford Jr. described suggestions of bankruptcy for his company as crazy, partly because his auto unit has $25 billion in cash.
Still, Ford had to overhaul its North American product development system in February, since it was going backward in terms of productivity and quality.
Ford trailed General Motors by 1.7 hours per vehicle in the 2002 Harbour productivity survey after having led its crosstown rival by 4.9 hours in 1999.
Ford reported 136 complaints per 100 vehicles in the 2002 J.D. Power quality survey for a fifth-place ranking among major automakers; the company ranked fourth in 1999.
Those setbacks weren't caused by lack of resources. Ford spent 5.7 percent of its revenue on product development in 2002 compared with 3.6 percent at General Motors, says Deutsche Bank Securities Inc. analyst Rod Lache.
Ford could have saved $3.4 billion if it had matched GM's efficiency, he says.
To lead his new product development system, Ford turned to Martens, a 43-year-old mechanical engineer who'd previously led small-car development teams in Europe and Japan.
Martens traces Ford's product development woes back to 1994. To cut costs, then CEO Alex Trotman sought to globalize the company by merging engineering and manufacturing operations in the U.S. and Europe.
"We created a globally integrated company in 1994, but we completely ripped up what I call the neural network we need to get things done," Martens says.
When he took his new assignment, Martens says, he tried to count the "special project" teams operating in Ford's product development headquarters. He counted 77 and still wasn't sure he'd found them all.
One team, called the craftsmanship group, could order changes to a vehicle's interior even if the chief engineer disagreed.
By 1999, Ford had five separate North American product development teams acting as autonomous businesses, Martens says. Each team insisted on unique components for its vehicles. In the case of Ford's new F-150 pickup, the unique components added $2,000 per vehicle to the costs of a new engine and bigger interiors with more options.
Enthused by the U.S. stock market bubble, Ford's engineers thought they could raise prices to pay for the new components, Martens says.
In 2002, customers could choose among 4.6 million different variations of an Explorer SUV, according to George Stalk, an analyst at Boston Consulting Group Inc. That compares with 336 variations available for the Toyota 4Runner.
Ford damaged its ability to manage such complexity by rotating engineers to new jobs, says Jeffrey Liker, an engineering professor at the University of Michigan.
"At Toyota, if you work on a door handle three or four years, then maybe you're good enough for another part of the door," Liker says. "At Ford, if you stayed on a door handle more than six months, you'd be in a dead-end job."
Ford asked its suppliers to take on primary engineering responsibility for major systems like interiors or brakes. The company was emulating computer maker Dell Inc. in defining design and assembly as core competencies, Martens says.
He adds that his first step in creating his new system was to reclaim responsibility for manufacturing engineering. He created the title of senior engineer for those specializing in a single area like brakes, and he passed out laminated index cards listing basic attributes -- such as powerful engines or well-appointed interiors -- that customers expect from each Ford brand.
He put Ford, Lincoln and Mercury stylists in a single studio. That way, they can watch each other as they derive distinct brand identities from the same platform, or family of vehicles, using similar engines, bodies and manufacturing techniques.
Martens describes the new product development system as so fragile that Ford may have to leave him in his current job for 10 years.
"We don't have the constancy of purpose to be able to do it all in 18-24 months," he says.
Martens can point to encouraging changes: Ford now needs 20 months to engineer and build a new car or truck after design specifications have been completed, down from 27 months previously. Martens says he'll cut the number of platforms to 12 by 2010 from the current 18.
He won't approve a new vehicle unless 60 percent of its components are going to be recycled from previous models; that's up from 10-15 percent previously.
He's releasing 100 percent of his engineering and manufacturing specifications to suppliers on time, up from 55 percent three years ago.
He's trimmed his North American product development staff by 15 percent to 12,700, yet he expects to introduce 65 new models in North America during the next five years, up from 40 that Ford could have turned out with its old product development system.
Martens's chances of ringing Ford's cash registers with his new models may be decreasing. Automakers plan to introduce 51 new models in North America in 2004, 63 in 2005 and 73 in 2006, says John Casesa, an auto analyst at Merrill Lynch & Co. The average during the past decade was 35 a year.
"Of the 1,400 nameplates on sale in the U.S. today, only 50 make money," says Sean McAlinden, an economist at the Center for Automotive Research in Ann Arbor, Michigan. "It's a big roulette wheel."
Rubin, the UBS analyst, says the cash holdings and borrowing capacity of Detroit automakers mean they can carry on in their present form for much of this decade. The additional time means they'll just destroy more shareholder value, Rubin says.
Hoffecker, the AlixPartners analyst, says the longevity of global automakers will be determined by their success with new technologies like fuel cells and their success in emerging markets like China.
General Motors and its affiliates have captured 8.3 percent of Chinese car sales so far this year compared with 35.4 percent for Volkswagen AG. Ford's share of the Chinese market during the period was 0.6 percent.
Road to Survival
As the big U.S. automakers struggle to find a clear road to survival, investors continue to probe the industry for bright spots -- and they've found some: Isuzu Motors Ltd., Japan's largest truckmaker, lost $1.2 billion in the fiscal year ended on March 31.
Even so, its shares have quintupled in value this year to 222 yen as new environmental rules favored its diesel engines. Ford shares rose 77 percent from March to July as they recovered from 10-year lows.
"Ford is now a valuation story," says John Arege, who helps manage the $8 billion Merrill Lynch Basic Value Fund, which owns 4.5 million Ford shares.
Some investors have also found success by targeting the big automakers' suppliers. For example, since the beginning of 2000, shares of American Axle & Manufacturing Holdings Inc., the world's second-biggest maker of automobile-drive systems, rose 162 percent, to $31.70 on Aug. 27.
During the same period, shares in Johnson Controls Inc., Lear Corp. and BorgWarner Inc. all rose 71 percent, and Magna International Inc. stock surged almost 99 percent.
'Ahead of the Curve'
"These companies were ahead of the curve in seeing where automakers would accelerate their outsourcing," says Robert Park, who helps manage $20 billion at Pioneer Investment Management. Outsourcing is industry jargon for assigning work to outside suppliers.
Park held 815,523 shares of Johnson Controls as of March, and he'd sold 3.9 million shares of Ford and 1.4 million shares of General Motors during the previous three months.
At $100.8 billion, Toyota's stock market value is more than the values of General Motors, Ford, DaimlerChrysler and Volkswagen combined. Even so, only one in seven of the company's investors comes from outside Japan compared with two in seven for Honda Motor Co. Toyota shares have risen 0.9 percent this year, to 3,280 yen on Aug. 27.
To attract more overseas investors, Toyota on Aug. 5 provided its first quarterly earnings statement conforming to U.S. accounting standards, says Toshiaki Taguchi, CEO of the company's North American unit.
Toyota reported net income of 222.6 billion yen ($1.89 billion) for the quarter, down from 246.4 billion yen in the year- earlier period, as revenue rose 5.6 percent to 4.09 trillion yen.
The company earned less because a stronger yen and rising incentive spending cut its U.S. profits. Even so, the U.S. accounted for three-quarters of Toyota's earnings.
Mustafa Mohatarem, chief economist at General Motors, says Toyota's U.S. earnings would have been 20 percent less if Japan's government hadn't intervened to keep the yen weak at 117.47 to the U.S. dollar.
Taguchi says Toyota would be happy at 110 yen to the dollar, adding that the company boosted its U.S. sales even with the yen at 79.75 to the dollar in 1995.
Taguchi dismisses the notion that the U.S. auto industry is headed for economic disaster. "Today, maybe Ford, General Motors or Chrysler have some difficulties, but it's not perpetual," he says.
That sort of optimism draws a smile from Devine at GM. "There are always, in any business, going to be winners and losers," he says.
Toyota, forging ahead with growth plans, will no doubt be among the winners. Company officials say they plan to boost their North American manufacturing capacity by 11.5 percent to 1.65 million vehicles annually by 2006.
By that standard, the future for General Motors and Ford appears far less rosy. Each company has two U.S. factories that haven't been assigned new products for after 2005.
My first car was a 67 Mustang Coupe, 2nd one was a 67 Cougar XR-7, 3rd one was a 66 Mustang Coupe. Why did I get rid of these cars for ? I know why, because I'm stupid, stupid, stupid.
My next Ford.....