Did the Financial Crisis Save Detroit’s Big Three?
Detroit’s big-three automakers — General Motors (NYSE:GM), Ford (NYSE:F), and Chrysler — owe the financial crisis a debt of gratitude as the slump forced them to make changes that have in turn made them stronger companies and that have put them firmly on the road to a full recovery, and then some.
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For one, the financial crisis forced automakers to come out of their traditional, ‘comfort-zone’ business model: make money on SUVs and trucks, never mind the losses on cars. This was a model that worked when gas prices were low, but all that changed when prices rocketed in 2008. Americans simply stopped buying gas guzzling machines, sending two of the three into bankruptcy. GM and Chrysler were kept afloat by government bailouts, while Ford (NYSE:F) incurred billions in losses but maintained its independence.
But a lot has changed since then, and the three posted hefty first-quarter profits in 2012 that beat estimates. Intriguingly, the higher profits have come despite lower sales, down 10 percent compared to 2007 levels. What happened?
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“What both GM (NYSE:GM) and Ford (NYSE:F) have shown is the ability to be profitable at unusually low levels of auto sales in North America,” Peter Nesvold, an analyst with Jefferies & Co., said in an interview. “Both companies have fully transitioned away from the dependence on SUVs and to some degree pickups. So both are thriving even when small cars are sort of what’s in demand.”
All the three are rolling out hot new fuel-efficient models this year and the outlook is very confident: “The indications for the remainder of the year continue to be absolutely positive,” Chrysler Chief Executive Officer Sergio Marchionne said on an April 26 conference call.
Though North America is doing well, Europe is the fly in the ointment – all three lost money there in the first quarter. Suggestions that lessons from the severe, and successful, restructuring in North America might similarly work in Europe are doomed in view of the intractable unions and labor laws in the region that make it difficult to close factories or cut production. Yet, auto executives are confident that even Europe, eventually, could be solved.
But what of the domestic stock market? Detroit executives are puzzled why their stocks are being pummeled by investors despite excellent results.
Putting on a brave front, Tony Brown, Ford’s group vice president of global purchasing, said, “We can’t run the business based on what the market does. If we continue to deliver the performance, the market will respond. So we’re just going to keep our heads down and continue to deliver.”
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