Interesting Perspective on the State of the US Auto Industry

State of the US Automotive Industry
YPO Global Conference Call – 10/12/08

Dennis Desrosiers, Desrosiers Automotive Consultants, http://www.desrosiers.ca/

· Dennis Desrosiers is a long time auto industry analyst and consultant – based in Canada and specializes in the Canadian sector but tracks and comments on North America and the Global trends and issues. He is one of the special advisors to the Canadian Government on this industry issue.

Conclusion
· This issue is here to stay for a while. There is a global market issue but the industry crisis is really centered in the US.

· The market must return first – and that could take until 2013 or beyond to get back to current new car demand levels

· The “structural” issues with the Big 3 will take even longer – realistically it’s a 2015 “fix”.

· The Big 3 need to become the Big 2 or potentially the Big 1 – Chrysler will be the first to go and has several quality assets that will be split up and acquired/assumed by others.

· The current financial assistance plans are not the solution, not even a good band aid – realistically the $15B assistance will provide 90 days of life support and the same issues will exist at the end of that window.

Comments
· The market issue is driven by 10 years of overbuying and there is no short term solution out of this ….just a fundamental correction. Consumers, especially in the US have been incented into maintaining new car purchase levels at above sustainable levels.

· Interesting fact. Canada and the Global (ex US) data point is 0.7 cars per adult driver. The US ratio is 1.3. This overconsumption of cars in the US isn’t sustainable and will correct – this will and is causing a significant adjustment in US new car sales for the next 5 years.

· US Market – if you remove fleet and government sales from the mix 60% of the US market is now imports and the Domestic Big 3 are 40% share and declining.

Projections:
Canada – annual new car volume has been approx 1.6M units & is projected to drop to 1.5M
Mexico – projected 8% decline.
US. – much more complicated.

The US has been running at around 17.5M new car units per year. The normalized run rate should have been approx 15M units. So the market has been over consuming by 2.5M per year driven through purchase incentives.

Conservative estimates suggest that the market will correct to 12M in 09 and ’10 and then grow to 14M (’11), 15M (’12) and 16 (’13) – still below today’s new car levels by 2013. There are some scarier scenarios that suggest that should US consumers begin to adjust their 1.03 cars per adult ratio and with the glut of used cars in the field that the normalized demand could be as low as 9M – 10M new units for the 2009 and 2010. That significant drop would cause a massive adjustment in the Big 3 – Big 2 – Big 1 scenario.

· Chrysler – no likely purchaser for the full package (GM and Renault/Nissan would be the front runners but clearly GM is out of the race and the European market conditions would make a full deal impossible for Renault). Viewed that the Chinese are no longer probable candidates – their product range is just too far away 5+ years. The more likely scenario is a break up – GM takes the minivan range, Renault takes the truck business, Jeep will have multiple party interest, the Chrysler car range will have no interest and get buried.

· Legacy costs are insurmountable. Not discussed in the media but on current mfr costs – the legacy costs for health care and pensions are approximately $2,000 per new vehicle – the same input cost as steel. No matter what the industry does to reposition it can’t get out from underneath the legacy burdens – it really progresses the Chapter 11 scenario.

· Future state of the dealerships. Projected significant shakeout – up to 50% of the dealership count. Highly unlikely the industry can restructure to a pull through model so the dealers will still be counted on for carrying the inventory burden but projected that in the future model/colour variety options will be reduced as will the high touch state of the dealership structure today. Desrosiers is a big fan of how the Japanese and Koreans are managing their dealer network and believes that they value dealer profitability and are structuring their networks to create profitable (powerful) dealers. On the other hand he states that a fundamental competitive disadvantage for the Big 3 is they built their structure on wanting a weak dealer base (to protect factory power) and this is really hurting them in a time of need. Desrosiers believes in dealership consolidation and dealer groups and believes that it’s serving to better equalize the power base between the factory and the dealerships. He believes that the future of the dealership network will be a web of dealer groups – smaller dealer count, consolidated ownership, better structure, more powerful voice.

· Future state of product mix. Green/fuel efficient technologies/car downsizing is a here to stay trend globally. BUT Desrosiers suggests that there is nothing to suggest that (despite all of the press) that the US consumer is really ready for this trend and is prepared to make the personal switch. He therefore sees political requirements for green technology as part of the Big 3 support plan a huge red flag – political pressure and hooks may require the Big 3 to change faster than their customer base is prepared to change – thus more market and market share issues in the future. He also believes that green technology is too diverse right now – too many technologies to choose from, too many people working on different solutions. In order to make a real impact there needs to be quick convergence – pick the leading technology and divert the massive research $’s into commercialization. Get focused.

· Future state of parts and accessories. OE suppliers are in massive trouble and there will be tremendous Chapter 11 occurrences with the significant reduction in 5 year new car demand. On the other hand, aftermarket parts suppliers and retailers will do okay. The prediction is the used car over supply will get sucked up in the next 3-5 years which will mean more repair and investment in an ageing road fleet.

The Grinch and the Meaning of Christmas

“And the Grinch, with his Grinch-feet ice cold in the snow,
stood puzzling and puzzling, how could it be so?
It came without ribbons. It came without tags. It came without packages, boxes or bags.
And he puzzled and puzzled 'till his puzzler was sore.
Then the Grinch thought of something he hadn't before.
What if Christmas, he thought, doesn't come from a store.
What if Christmas, perhaps, means a little bit more.”

Dr. Seuss

Copied by permission from the December 5, 2008 issue of OPEESA's "OPE-In-The-Know, The Business of Outdoor Power Equipment" newsletter which can be found at http://www.opeesa.com/.

No. 12 December 2008

Economists are predicting the beginning of an economic turn-around in the third or fourth quarter of 2009. I don’t know about you but my vote would be to see a turn-around a whole lot sooner! Please?

As Tecumseh Snow King engines become NLA, the result will be both problems and opportunities in the OPE marketplace. If you produce snowthrowers, you have to have snowthrower engines. Unfortunately there are not a lot of choices left. I heard one snowthrower engine rumour about a US equipment manufacturer who imported Chinese manufactured snowthrower engines for both the US and Canadian markets in 2008, only to discover a casting defect in the block that resulted in an oil leak. Supposedly all the engines had to be replaced. If true, it will be the first major problem this company has had with Chinese manufactured engines. The rumour says heads have rolled in China at the engine manufacturing plant……..I hope that doesn’t mean literally. Here’s hoping all OPE manufacturers find the snow engines they need and that we have lots of snow this winter, and lots of snowthrower sales. It would definitely be a bright spot in an otherwise dismal product sales year.

Christmas time always reminds me of the four stages of life. Stage 1 - you believe in Santa Claus; Stage 2 - You don’t believe in Santa Claus; Stage 3 - You are Santa Claus; and Stage 4 - You look like Santa Claus.

There are two auto industries in the US today. One is in the Midwest, unionized with huge pension and health care obligations and making vehicles few people want to buy. The other is in the South, non-unionized and making vehicles people do want to buy. The three companies located primarily in the Midwest (GM, Ford and Chrysler) are suffering because they’re too large, too inefficient and as described by one pundit, “have essentially gotten their collective butts kicked by foreign automakers since the 1980’s.”

It was mentioned in the September 17, 2008 issue of USA Today that the Big Three US auto makers have an average hourly compensation rate of $73.20, while Toyota’s average hourly rate is $48.00. The article also listed the average hourly US compensation for Management and Professional Workers as $47.57. Manufacturing/Goods-Producing workers had an average hourly rate of $31.59, and all workers overall had an average hourly rate of $28.48.

When you do the math, GM, Ford and Chrysler compensate their employees 52.5% more than the competitors like Toyota, 54% more than US management and professional workers’ average wage, 132% more than the average US manufacturing wage, and 157% more than the average compensation of all American workers?

I’m sorry, but I just can’t see why we (taxpayers) should bail out (reward) these three companies and their unions for consistently making poor decisions for the past 30 years. Let them fall into bankruptcy so they can quickly and easily restructure or merge, eliminate brands they should have gotten rid of years ago, shut down inefficient plants making vehicles nobody wants, shed outrageous pay and benefit packages, improve their quality, and hopefully become competitive once again. I believe that even if we dump money into these companies at taxpayer expense to try to save them, it will only briefly delay the ultimate outcome.

There was a terrific article on the front page of the November 7, 2008 Wall Street Journal called “A Snowthrower Maker Braces for Slump’s Blizzard of Woe.” It’s about Ariens and the impact of the country’s economic problems and the shuttering of Tecumseh Power on the company. You can read a copy of the article at http://www.opeesa.com/ in Volume 131 of their business newsletter “OPE-In-The-Know.” You’ll really enjoy reading the article and learn a few things too, just as I did.

During this holiday season, take a minute to filter through the bad news and think about all the good things going on in your life and our country. When you hear a high unemployment rate, think about the other side of the equation and the 90+ percent of Americans who do hold jobs. If you’re employed, receiving a pay-check, have family health insurance, have children and grandchildren living nearby and doing reasonably well, then give thanks for all those blessings you do have. It’s very hard to look at a glass and call it half-full instead of half-empty. Your positive and grateful state-of-mind touches everyone around you, including your family and your employees. You have a choice every day about how you approach life and the people around you. Make it positive. Make it thankful. Count your blessings. Then share a few.

Merry Christmas and Happy Holidays.