2015 was one of the best years on record for the American auto industry. So why are so many predicting gloom and doom? Turns out, the industry's strength is also its weakness.
Sergio Marchionne is the CEO of Fiat-Chrysler. And the other day she sat down to lunch with an old college classmate of mine, Mary Barra and tried to persuade her to buy Fiat-Chrysler and merge it with GM.
Ms. Barra politely declined. Maybe she didn't see value in the proposition. Maybe she thought that the two companies wouldn't blend well. Maybe she thought that the basic strength of both companies (SUVs and Trucks) were redundant.
But I think the deal-killer was what she read, on her first day as CEO of GM, scrawled on the inside of the desk drawer of her desk by a previous GM President: "Beware of Italians bearing gifts!"
You see, many years ago, in the 1990's, GM paid $2 Billion dollars to buy Fiat. They then realized what a horrific mistake they made and paid $2 Billion more not to buy Fiat. Fiat took its four billion and bought Chrysler instead, and using technology from Chrysler's previous owner (Mercedes) as well as the GM tech they were privy to during their brief honeymoon, built some nice cars and made money.
And now Sergio comes a-calling with a box of candy and a bouquet of flowers and says, "Heya, pretty lady, you wanna buya car compagnia? I sella to you, best price!"
What exactly is going on here that would make Marchionne so desperate as to propose a merger of GM and Chrysler? And remember, he did this right after selling off cash-cow Ferrarri.
Well, despite record sales in the US last year, the car business is far from being out of the woods just yet. Globally, manufacturing overcapacity is still an issue. There are too many car companies, too many brands, too many factories. As a result, factories don't run at peak efficiency.
In addition, the cost of bringing a new car "platform" from design to production is staggering. Not only are design cycles becoming increasingly shorter (requiring more intensive and expensive design staff and testing capabilities) the technical requirements for autos today are staggering. Today's cars are more complex than civilian airliners of the 1960's. Cars not only have dozens of computers in them today, they may have hundreds. And consumers are no longer wowed by technical gimcrackery - they expect it and expect more with each new generation.
If you want a seat at the table, power locks and windows ain't gonna cut it no more. You need all the bells and whistles. And it better be the safest car yet, drive itself, and product hardly any pollution.
No easy task, if you understand Engineering.
So it makes sense to consolidate. Why design five different kinds of pickup trucks, when they are all about the same, in terms of performance and capabilities? Use one design, save money.
But a GM/Chrysler merger would be problematic. Which do you keep and which do you dump? The Chevy Silver-a-do or the Dodge Ram? Both have loyal followings. Do you keep the Challenger or put the "Hellcat" engine in the Camaro?
Or are you, in effect, just buying Chrysler to shut it down and reduce your competition? I am sure Ford would thank you for the effort. Of course, that may raise anti-trust issues.
No wonder Ms. Barra turned down the offer. It just didn't make any sense. For GM to acquire three more brands after struggling to dump three old brands, simply doesn't make any sense at all. And to make products that compete with each other across the line makes no sense. All GM would be buying is factory capacity, and it has enough of that. Building Dodge Rams on Silver-a-do platforms makes even less sense. GM might find value in the Jeep brand - which is the core of Fiat's profit in the US - but that's about it.
I think the car companies, worldwide, are vulnerable in the next few years, for a number of reasons. For starters, just as in 1957, we've had a few record sales years in a row. Everyone bought a car and now there will be a pause as the market saturates and sales slow down. The China market, once going gangbusters, is slowing way down, as the market saturates and goes from a "let's put everyone in a car" mode to "Hey, that old car worn out yet?" mode.
And since capacity in China is high and demand is low, it will not be long before the Chinese start to think about exporting cars. When this happens, well you know the pattern. The US automakers are already losing money on small cars (Ford, after pledging to build the new Focus in Michigan, pulled up stakes and moved the plant to Mexico, so that SUVs and trucks -which are more profitable - could be made here).
The CEO of Ford (of the same name) laments that the industry is going back to its old tricks of extended financing (as long as seven years) which tends to bankrupt customers and take them out of the new car market for longer periods of time (as they are upside-down on their loans longer).
And then there are gas prices. In the short term, US companies will remain profitable as - once again - we all go out and buy gas-hog vehicles because gas today is cheap. Then, five years from now, or ten, gas goes up in price. The economy stalls, and then people dump their gas-guzzlers and go looking for cheap fuel-efficient cars to buy - this time from China.
Oh, yea, it will get bad, again. Round 1 was to the Germans, who invaded the US with their cheap Beetles. Round 2 was to the Japanese, with their Corollas and Civics. Round 3, to the Koreans with their Hyundais. China is slated to make the knockout blow. Hell, they already own Volvo - which they bought at Ford's garage sale.
So what does this all mean? Well, the auto industry is consolidating, worldwide. It is a mature industry and the product has reached a level of maturity to the point where product differentiation is no longer an issue. You look at the high-tech features on one brand of car, and chances are, the competing brand has the same features, possibly made by the same supplier.
We may, as I predicted years ago, reach the end of the car-based economy. People in the future may travel less and stay home more. Owning a car may seem less important in an era where you can summon one on your cell phone. As the cost and liability of building cars becomes so steep, designs may become more standardized, with common platforms being used to support a rage of similar-looking vehicles.
And I say this, because it is happening already. Small players like Suzuki and Isuzu are out of the car business already. Mitsubishi may soon follow suit. Mazda, cut loose from Ford, needs to find a big brother to share expenses with. They've already sold the Miata (MX-5 as they call it) to Fiat as the new Spider 2000. They'd probably like Marchionne to buy them out, but he ain't got the money. And a merger of the two would be as disastrous as the merger of Packard and Studebaker - two weak companies that combined, still could not survive.
Many countries, such as Australia, are seeing their domestic auto industries disappear entirely. I expect you will see the same trend in places like France and Spain. Just ask the British. The few cars made in the UK these days are no longer made by British companies.
I think you will see some car brands disappear. If Mary Barra wants excess production capacity, she can buy it at Fiat-Chrysler's bankruptcy sale. Or Mazda's. But I suspect they have all the production capacity they need, so why buy someone else's rundown factory and besmirched brand names?
Of course, it is hard, without a working time machine, to predict which companies will go and which will stay - and the timeline of when this will happen. We can only say for sure that something is indeed happening in the marketplace right now, as smaller car companies struggle to compete with their larger brethren to develop new platforms.
VW, facing a crises, may be forced to sell off its luxury Bently or Bugatti or even Lamborghini divisons, which are not big money-makers, but require huge amounts of R&D to come up with cutting edge products. Such divisions are also very susceptible to recession, as people cut back on half-million-dollar cars during down years. VW may in fact end up, due to this debacle, being a merger candidate itself.
Even companies with large market shares could be vulnerable, if their profit shares are not correspondingly large. We saw this with GM, once the world's largest automaker, but losing money on each car it made. It doesn't take too many years of negative earnings in the car business for things to come to a screeching halt. And will Congress bail out these companies yet again? Or will another merger be forced as the last time around?
It could very well be high-cost producers like BMW or Mercedes - who sell high-tech cars at high prices, but who are increasingly being undercut by other producers who offer increasingly comparable goods at far lower prices - end up being the ones in trouble. It is not just Lexus that they have to worry about anymore, but even Hyundai with its Genesis and KIA with its K-900. For the time being, they are safe, as people still buy German cars for the three-pointed star or the blue-and-white roundel. But if people's perception of status and luxury every change..... well how do the Germans win back their buyers?
Of course, none of this is going to happen overnight. Just as it took a decade or more for Radio Shack to topple (longer after people wondered why it was still in business) and just as Sears/Kmart keeps going on as a zombie business well into 2016, these long-term trends will take a long time to materialize.
But you can see the signs now. And when Fiat-Chrysler, coming off a banner year, decides to unload Ferrari and then peddle the entire company to GM, you have to wonder what it is that they know about the business that we don't.
Strange days, indeed!