The Auto Industry
It wasn’t a lack of knowledge about what vehicles people wanted that caused the crash of two of the Big Three automakers, according to experts. The collapse was based on two things: 1. Gas prices shot up to more than $4 a gallon; 2. An economic recession immediately followed.
People were buying larger cars and SUVs, but once gas prices skyrocketed that changed, said Scott Baier, a Clemson economist.
“GM was doing OK until 2007-2008 when there was a run up of gas prices that hurt the models that GM had been successful with, and then the economy collapsed,” Baier said, adding that those two incidents drove GM to the point of bankruptcy.
And Gerald Meyers, professor of management and organization at the Ross School of Business at the University of Michigan, agrees with that assessment. “GM built vehicles the public wanted and then gas prices rose and the public didn’t want as many of those big vehicles,” he said.
But one member of the Big Three – Ford Motor Co. – escaped bankruptcy during the collapse. The Detroit-based company had mortgaged many of its assets a few years earlier, and drained its assets from Wall Street before it collapsed, Meyers said.
Ford did not return calls for comments, but company information shows that Ford continues to hold its own today. In fact, its stock nearly tripled early this year, although the company took a $1.4 billion loss in the first quarter. However, Ford leadership said it had enough money to finish the year. Much of this is because of the steps it took earlier.
In late 2006, Ford raised $23.6 billion in loans by putting many of its North American assets up as collateral, including the Ford logo. The loans have kept it independent and on a course to survive the worst new-vehicle market in nearly 30 years, according to company statements.
Earlier this year, Ford completed a debt restructuring initiative to reduce its debt by $9.9 billion. The company also announced the sale of 300 million shares of its common stock in a public offering in May – at $4.75 per share for gross proceeds of about $1.4 billion.
Restructuring at GM and Chrysler LLC has been much different. It has included government loans, sales of companies and car lines, and bankruptcy filings – with government involved in each step. The future for these companies now depends on government staying out of the auto business, according to both Baier and Meyers.
Chrysler formed an alliance with Fiat and emerged from its Chapter 11 bankruptcy filing in late April and early May. The new company is majority owned by the Voluntary Employee Beneficiary Association (VEBA), which has 55 percent. The remaining ownership is 10 percent between the U.S. and Canadian governments and 20 percent ownership by Fiat with the right to increase its ownership another 15 percent.
The new General Motors Co. launched on July 10, made up of Chevrolet, Cadillac, Buick and GMC. The U.S. Department of the Treasury owns the majority of the new company –60.8 percent. The rest is divided as follows: 17.5 percent UAW Retiree Medical Benefits Trust; 11.7 percent Canada and Ontario governments; and 10 percent the old GM.
“I worry about the government influence,” Baier said. “Government has different agendas that it wants satisfied, things not necessarily involved in the building of cars that people want. This introduces inefficiencies and cost, and cars people don’t buy.”
The White House says it has no intention of running the auto industry and will not make decisions on design, according to a White House spokeswoman. However, government influence can’t be ignored with new fuel efficiency standards announced earlier this year.
President Barack Obama set new fuel economy standards in May to increase fleet fuel efficiency by 5 percent per year beginning in 2012 and ultimately requiring the average fuel economy standard of 35.5 mpg in 2016. The 2009 requirement is 25 mpg.
But the real concern, some say, is what else politicians will require of the new GM and Chrysler since the federal government has ownership and/or influence in the companies following bailouts and loans. And, Meyers added, the Treasury Task Force has a deep bias against large vehicles, which could have an impact.
“Americans love their big cars, big anything, and you can’t take that away from the American public,” Meyers said. He gave the example of the early 1980s when higher emission standards were placed on the family station wagon, which had been popular.
When that happened, American buyers looked to Jeeps and similar vehicles. “That was the birth of the SUV,” he said.
Meyers said that while GM and Chrysler may feel the pressure to bring out more efficient and smaller vehicles, he sees Ford working in similar directions. “They’re all gambling on gas prices and it’s a gamble they’ll lose,” he said about the auto manufacturers. “Now, it seems we have oil coming out our ears and once the speculators are out of the picture, prices will probably get even lower.”
In fact, with gas prices lower this summer than last, SUVS are selling. Midsize SUVs, including GM’s Buick Enclave, saw sales up in June.
So, looking to the future, how do the revamped Chrysler and GM, as well as the other auto manufacturers, figure out what Americans want? Like all other businesses, it’s a guess based on the current facts.
“The plain truth is the public doesn’t know what it wants, it has to be sold on what’s there,” Meyer said. “The public, however, does know what it doesn’t want. The game is figuring out what that is three years from now.”
So, who seems to have it right? Meyers said it’s the niche companies – those that don’t try to build a car for everyone, but concentrate on one customer base. Pointing to BMW, he said that’s a company that puts out a high-end product and does it well.
· In 2008, GM sold 2.98 million vehicles, compared to Toyota with 2.2 million.
· 12 of the top 20 best-selling vehicles last year came from U.S. automakers. Two of those were trucks – Ford F-Series and Chevrolet Silverado.
