I am still on alert for a larger pullback in the market. The larger picture suggests the SPX will li...
Exactly how much time do Ford and GM have for a comeback? Two model years at most, I'm afraid
08/12/2009 5:15 pm EST
The prize, market share in the U.S. car market, will go to the company that can get new models out the door and into showrooms fastest.
That, and not the fate of low volume $40,000 bragging rights cars like the all-electric Chevy Volt, will determine if General Motors (gm) stays No. 1 or gets lapped by Ford Motor (F) or Toyota Motor ™.
In July GM’s share of the U.S. market dropped to less than 20%. Ford edged by Toyota to take second place with a 16.1% share. Ford’s gain in market share, as well as the a stunning $2,000 gain in the average transaction price for each vehicle sold, was a result of new models, such as the Fusion hybrid, hitting the show room floor. New models bring more people into a dealership, command higher selling prices (and lower discounts and cash-back awards), and sell better, at least initially than older models.
“Cars are like donuts, Ford CFO Lewis Booth, told a press conference on August 5. “The ones you want to buy are the fresh ones.”
That’s why Ford plans to replace about 90% of its North American product lineup by 2012.
And why General Motors, not to be topped, told reporters at the flashy announcement of the Chevy Volt’s 230 miles per gallon mileage rating from the Environmental Protection Agency, said it will launch 25 new models by 2011.
For years the key differences between, say, a Toyota and any U.S. automaker were to be found on the assembly line. It took U.S. automakers more labor hours to make a car. But that labor gap has shrunk In 1996 it took the least efficient factory in North America—and it was a factory that belonged to a U.S. automaker—16.6 more hours to produce a car than it took the most efficient factory—and that was a factory that belonged to a Japanese automaker. By 2004 that difference was down to just 9.08 hours and the gap closed to just 7.33 hours per car in 2005.
A 2007 report from Harbor Consulting named Ford’s Atlanta plant as the single best assembly plant in the U.S. It took Ford workers just 15.4 hours to assemble a car. (Ford has since closed the Atlanta plant as part of its restructuring.)
Now the critical difference between U.S. automakers and the best of their overseas competitors is time to market.
Take a classic comparison of the Toyota Tundra and the Ford F-150, two best-selling pickup trucks. Ford engineers began work on the truck in 1999 but the car wasn’t launched until late 2003. Toyota took just 24 months from “clay freeze,” the point at which the clay model of how the car or truck will look is declared final, to the beginning of production.
Ouch! No way the F-150 could be as fresh or as responsive to market trends as the Tundra. And no way that a development process that took up much of five years can compete on costs with one that took just two years.
Ford and GM and Chrysler (remember them?) have been struggling to close this design to market time gap for roughly a decade now. It’s hard to tell exactly how much progress they’ve made. All the comparisons I’ve been able to find pit Toyota now, when it averages 24 months from clay freeze to the start of production and Detroit in the 1990s at 30-40 months.
The signs aren't good. Toyota will beat GM (and Nissan) to market with an plug-in electric hybrid in 2009. That doesn't argue that Toyota has lost a significant amount of its clay freze to production edge.
What we do know is that this differentiator has become more important with each year because of two trends.
First, according to a Merrill Lynch study, the number of new products introduced each year has climbed until, between 2003 and 2005, 60 new vehicles were being introduced each year in the U.S. market. That increase multiplied the effect of a quicker clay freeze to production schedule.
Second, although the number of new products introduced each year has been climbing, that increased number of products is being built on fewer and fewer unique platforms. At the height of this practice, General Motors, for example, was building Chevys, Pontiacs, Buicks, and Oldsmobiles with different sheet metal skins that rested on essentially identical mechanical and structural platforms. You might think that this would help companies that take longer to go from clay freeze to production but it doesn’t: the increased number of models built on a platform means that delays in one platform ripple out into delays all across a company’s product line.
Ford and General Motors are emptying the bank to turn over their U.S. product line as quickly as possible by pulling in models from their operations all over the world. That will give them a huge one-time boost—sort of like the major league team that trades all the best prospects in its minor league farm system for aging veterans in an attempt to win it all now. But it’s not sustainable unless
- The Detroit Big Two have actually closed the clay freeze to production gap with their competitors, and
- This wave of new models sells and brings back market share.
Unless they’ve closed that clay freeze to production gap, Ford and GM will be faced with the impossible task of refreshing their lineup next year and the year after against competitors who can get a car from design to production in half the all time.
And unless this wave of new models sells, Ford and General Motors won’t have the cash to design and produce another wave of new product. Ford’s automotive operations had a debt of $26.1 billion as of the end of the second quarter of 2009. That’s twice the debt that GM had when it emerged from bankruptcy. But both companies will add to that debt pile in any quarter that isn’t profitable.
I think we’ll know how this is going to come out pretty quickly. Either new models will sell this fall—without the cash from clunkers cash—or they won’t. The Chevy Volt and other WOW new models will hit the market on time in 2010 or they won’t. New designs and perceptions of improved quality will bring people back to the Big Two’s showrooms or they won’t.
Fans of the Brooklyn Dodgers, perennially frustrated in their World Series matchups with the New York Yankees, used to swear “Wait until next year.
Detroit has maybe one or at the most two next year’s before time runs out.
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