Tag Archives: auto

Fix It Again, Tony (FIAT)

In my previous post, I noted that Chrysler fared dismally in Consumer Reports‘ brand reliability study. They have no data on Fiat models, of course, but the strangely named journal Which? Car (WC) in the U.K. does. As quoted on Autoblog.com:

WC’s annual survey of ownership experiences in the UK rates vehicle models up to eight-years-old, and keeps track of all the standard quality metrics (breakdowns, unscheduled repairs, etc.). … Of the 38 brands listed last year, Fiat ranked 35th on the list, with Renault, Land Rover and Chrysler/Dodge filling the bottom and garnering a “Very Poor” rating. Jeep came in 29th, just missing the lowest designation, but still walking away with an overall rating of “Poor.”

This obviously bodes well for Chrysler’s future in a Chrysler/Fiat mash-up. Not.

Chrysler: Doomed to Fail

Some friends have asked me what I think about Chrysler, so I’ve prepared this FAQ.

Why is Chrysler in the trouble it’s in?
The immediate issue is that Chrysler is essentially out of money. That’s the problem the government has been trying to resolve by loaning it a seemingly unending stream of cash. Your cash.

But obviously, if you peel back the onion one layer, the reason Chrysler has run out of money is that for years it’s been building notoriously unreliable, quirky, uncompetitive cars that fewer and fewer people want.

So will bankruptcy help Chrysler?
No. The government argues—and they’re about the only ones who claim this to be true—that Chrysler’s key problem is cost structure. In other words, if Chrysler could only cut its expenses dramatically, then it would be profitable, and thus would be a viable business.

Yes, Chrysler’s cost structure should be reworked: it has too many employees, too many plants, too many dealers, and it pays its UAW workers an uncompetitively high wage. That’s the expense side of the equation, and it’s a fixable problem. But the government apparently missed Accounting 101, where one learns the equation:

Profitability = Revenue – Expenses

Chrysler needs to increase revenue, otherwise it won’t be profitable and simply cannot continue operations.

So how would Chrysler increase revenue?
They need to make (a) better cars that (b) people want. These are distinct issues. (A) is doable. There’s a lot that goes into (A): good engineering, good styling and good reliability, to name a few. But Chrysler has a mixed bag of product goodness.

Its most mainstream car, the 300C, is actually a fairly well-engineered vehicle with some solid (albeit dated) Mercedes-Benz underpinnings. But its sales have been hindered by, among other things, the car’s love-it-or-hate-it styling, and the fact that it’s too big for the most popular mid-sized car segment. Moreover, it has nothing significant to offer over the Camry or Accord, the two mainstream cars everyone in the auto industry benchmarks.

The smaller car in Chrysler’s lineup, the Sebring, is a product engineering disaster, with absolutely no stand-out qualities versus the competition. It’s really no better than the cars it replaced, the Cirrus/Stratus twins, that were launched in 1995.

On the truck side, Chrysler has a stupidly large portfolio of quirky vehicles. Like the Nitro, which is a tiny, goofy-looking and underpowered mini-SUV that somehow replaced the acceptably decent Neon, which was a compact sedan. Huh?

Chrysler once led in the minivan class, but today Chrysler’s minivan offerings typically rank dead last against the now wide field of competition. And minivan sales are dropping, anyway.

Thank God Chrysler Never Produced This

Thank God Chrysler Never Produced This

There’s one surprising bright spot in Chrysler’s portfolio, which is its new Ram pickup. In a comparo of full-size pickups by Car and Driver Magazine, the Ram took top honors. Its biggest and perhaps only downside: deplorable fuel economy. Woops.

Oh, and speaking of bad product: in Consumer Reports’ latest survey of vehicle reliability, Chrysler ranked 32nd out of 34 overall among all brands sold in the United States, beating only Saturn and Land Rover. And referring to overall product quality, in April 2009 Consumer Reports wrote:

“Chrysler is at the bottom of the class, with a drop in its overall score and average reliability rating. Most models from the manufacturer have noisy, inefficient, unrefined powertrains; subpar interiors; and poor visibility. Chrysler is the only automaker with no models on our Recommended list.”

As if Chrysler’s poor product lineup wasn’t problem enough, (B) is the much, much harder piece to execute. Do you know anyone who owns a Chrysler product and would buy another? I don’t, either. And now that Chrysler has been tarred and feathered in the media, coupled with bankruptcy concerns, do you think anybody wants to give Chrysler money? And does Chrysler make a single vehicle you would seriously consider over a competitor’s product?

(B) boils down to a marketing problem, and frankly, as a marketer myself, I don’t know if this one can be solved. Ford and GM have been struggling with this for decades, too, and all I’ve seen is that strong marketing in this industry can blip sales up for a short time, but in the longer-run market share has continued to erode. Don’t be surprised to see some kind of “This is the New Chrysler” campaign. It won’t work.

Okay, so how does Fiat fit into all this?
If you didn’t notice, Fiat has no U.S. operations. They haven’t sold cars here in decades. But like any automaker, sales success in the U.S. is critical to growth because Americans (except for the last year) buy a lot of cars. So Fiat wants in. To do that, they need North American manufacturing and parts suppliers, and a dealer network. This is called a supply chain, and it’s really hard to develop one from scratch. So, Fiat is thinking they could piggy-back on Chrysler’s supply chain.

So would that help Chrysler?
Nope. Fiat’s product line-up has a problem similar to Chrysler’s: a bunch of quirky, uncompetitive niche vehicles. Chrysler has told the government that Fiat makes incredibly fuel-efficient cars, which meets the Obama Adminstration’s desire that the Big Three make more environmentally-friendly vehicles. Well, yes, Fiat makes some respectably fuel-efficient vehicles. They’re fuel-efficient because they’re tiny and have underpowered engines—a recipe Americans don’t want. They also look quirky or boring, depending on your point of view, and have few, if any, product advantages over smaller cars from brands that have gained traction here. Nobody will buy them. I mean, really, do any of these Fiat gems available in the U.K. appeal to you?

As a particular example, Chrysler has talked about selling the Fiat 500 here—a tiny car that looks, well, ugly to me. Yes, it gets great mileage. But that’s its only selling point. Interestingly, Ford sells the Fiat 500 in Europe as a rebadged Ford Ka. Ford studied whether the Ka would sell in the U.S. and decided it wouldn’t. If Ford—which hasn’t collapsed like Chrysler—couldn’t figure out how to make money on this Fiat model here, why would anyone think that Chrysler/Fiat could?

And let’s not ignore that the majority of corporate mergers—particularly in the auto industry—fail miserably, for a variety of reasons. I don’t see why Fiat/Chrysler would be any different.

But does that mean Chrysler is doomed?
Yes! The problem is timeline. Consider:

  • Car sales are not going to pick up dramatically for at least another year.  During this time, Chrysler can cut expenses until the cows come home, but the revenue variable in the profitability equation will continue to drop.
  • Chrysler—whether or not they’re tired up with Fiat—could theoretically start developing competitive cars right now. But they don’t have the money to do so. It costs billions. Moreover, it takes 3-4 years to get a car from the drawing board into production. By then, Chrysler will have long been deceased. And, to date, Chrysler has not significantly invested in the development of a small, fuel-efficient gasoline, or a viable hybrid model, or an electric vehicle. They’re already way, way behind the competition.
  • Fiat can give Chrysler a cash infusion and some additional product to sell. Cash could fund new product development, but it would take years to see the fruit of that. And again, nobody on this side of the pond will want to buy anything in Fiat’s product portfolio.

So what should Chrysler do?
Liquidate! Chrysler does have some salable assets, albeit few. Like the new Ram pickup. Pickups will always be in demand, and several foreign brands need one. Maybe Nissan? Their Titan pickup is uncompetitive. So they could literally takeover production of the Ram and call it their own.

Or the Jeep brand. From an engineering perspective, they’re terrible vehicles, but the brand has a cult following that may never die. Maybe that’s what Fiat should take over, and only that. It’s a very strong brand in Europe, too.

Really?
Yes. I’m sorry, folks, but Chrysler is dead, and has been for some time. Cause of death: suicide. It’s time to move beyond the denial stage and just accept it.

Saving the Auto Industry: A Radical Solution

I plan to write a series of posts on the issue of bailing out the Big Three. Let me cut to the chase on a couple of points.

First, yes, I do think we need to save the car companies. The primary reason: if they fail, the U.S. would be looking at a near-term loss of up to 3 million jobs, mainly in Midwestern states that are already beaten down economically. Given the fragile state of the economy, the consequences of this would be nothing short of catastrophic.

Second, I don’t think a bailout of the form the government is currently considering would be much help. Yes, it would buy the car companies some time. However, given that the Big Three are collectively burning through about $6 billion per month, “bridge financing” bailouts in the $25 billion range would buy them only four months. Nothing in the economy is going to change in the next four, or even six to ten months that will suddenly propel car sales and again secure the finances of the car companies. And I don’t think our country can realistically afford yet another bailout in the $100+ billion range.

So, what can be done? I have two radical suggestions. The two are not mutually exclusive.

Option 1 is for the government to buy a controlling stake in the three companies. The combined market caps of three car companies is now only about $10 billion (Chrysler is privately held; I’m guessing its value is $3.7 billion, which may be high). If the government were to buy a controlling 51% stake in these companies for all of $5.1 billion (or less), it would be able to select Board members and directly influence corporate policy and finances in whatever direction it sees fit. In fact, it might be able to do the same with much less than a 51% investment. When the economy recovers, the government would simply sell its shares on the open market and make a nice profit, which it could return to taxpayers in the form of a tax refund.

There already is precedent for this. Unless you missed it, the government now owns (or soon will) pieces of several financial institutions. And one could argue that the government also effectively owns “corporations” like Amtrak and the Post Office through tight regulations and by controlling their funding sources.

Option 2 is to offer Americans a $10,000 refund on their purchase of a new car. Instead of taxpayers footing a $25 billion tab to help the automakers—which has no direct benefit for the average Joe—I’d rather the government take $25 billion and give it back in the form of a discount to car buyers. 2.5 million people could get a dirt cheap car this year. Why would this help? Because, by keeping U.S. car factories running at full capacity for months, no one would be losing their job.

I would add a few stipulations. First, the car or truck must be assembled in a U.S. factory—but it can be a foreign nameplate. This specifically keeps U.S. manufacturing jobs intact, but keeps the playing field level. Honda will still be rewarded for making Accords in Ohio, Toyota for making the Camry in Kentucky, and so on. Remember, this is about American jobs, not GM, Ford or Chrysler jobs.

Second, optionally, we can add fuel economy sticks and carrots to the size of the refund amount. More fuel-efficient vehicles or those with key technologies (hybrids and electrics, namely) could get a bigger refund, and certain gas guzzlers could be exempted from a refund altogether.

Third, to avoid price gouging, I would add a requirement that manufacturers cannot suddenly raise their cars’ prices above list.

The beauty of this approach is that everyone benefits. Consumers get a new car at a bargain price, and still have the freedom to purchase a foreign nameplate. The car companies get their much-needed cash infusion. Manufacturing jobs are preserved. The government can provide a viable incentive for consumers to choose more fuel-efficient vehicles, thus helping to advance a sensible environmental agenda. States will get a boom in sales tax revenue. And I would expect that the stock prices of the car companies, their parts suppliers, and all the companies that support the auto industry will rise, as well, thus helping drive the broader U.S. (and world) economy.

Obviously, Option 2 is a one-shot deal, good for 2009 only. Which is why I like Option 1 in conjunction with this plan. My biggest objection to bailing out the car companies is my fear that even if they cross the chasm until the economy recovers, they still won’t be any better managed and will be doomed to repeat the mistakes they’ve made over the last three decades. Can the government do a better job by controlling their Boards? I’m not sure, but I think it’s time to try something new.

Please share your thoughts by adding a comment.

The End of General Motors?

The stock price of General Motors dropped almost 23% today, to a 60-year low of $3.36. The list of reasons for the company’s horrendous recent stock performance is expansive, but today’s sell-off was primarily triggered by two analyst’s new price targets for the stock price. Barclays believes it will hit $1.00, while Deutsche Bank has set a target of $0. Zero. Nothing. Nada.

It’s hard for me to conceive of this, but once-mighty General Motors may actually soon be worth nothing at all. In fact, if current trends continue, I feel this is unavoidable. A government bail-out could buy some time, but in my most optimistic thought exercise scenarios I don’t see a way out of this.

What does it mean for a stock to be worth zero? Well, there are a couple ways to look at it. Generally, a stock price reflects an expectation of future earnings. So, a stock price of $0 means that the expectation is that the company will never again make a profit. Ever. If you believed that the company would eventually be profitable, the stock should still have some value—a low value, to be sure, but not zero.

There’s another way to look at is this. Earnings (profitability) is a function of both revenue and expenses. Right now, GM can’t increase revenue, because nobody wants to buy cars (anyone’s cars), and even if they did, securing financing is difficult right now. So, all GM can do is control the expense side of the equation, by doing things such as reducing its workforce, idling factories, and selling under-performing assets like the Hummer brand.

But a stock price of zero reveals a deeper problem. It means that even if you sold off all of the company’s asset and then subtracted all of its liabilities (money it still owes), you’d have nothing left (or even still owe money). Put differently, if you sold off all of GM’s currently unsold vehicles and parts inventory, all of its facilities and the land they’re on, all of its manufacturing machinery, all of its computer systems, office furniture, staplers—literally everything—all the money you’d collect wouldn’t be enough to pay its current bills or other existing financial commitments. Complicating this severely is that it’s hard if not impossible to find buyers for any of GM’s assets, let alone at good prices. So even in a “fire sale” situation, investors would be left with nothing. Hence the $0 price target.

So GM is in the perfect storm. Sales are a standstill. Liabilities are climbing. It has assets, but can’t sell them. And the company will be out of cash in a few months. Unless you believe that a multi-billionaire (an oil sheik, perhaps) will sweep in, buy GM, and somehow turn it all around, I think Deutsche Bank’s estimate is fair.

I’ll talk more about the fate of the auto industry in future posts. But man, it’s depressing to think about.