Detroit Still Has a Long Way To Go

We have been hearing a lot of cheery news about GM this year, not least its IPO and successful fund raising, the launch of the Volt and a return to profitability, even on what is a historically low level of sales. So it is interesting to read an alternative viewpoint by Edward Niedermeyer, editor of the Web site The Truth About Cars espoused in a NY Times article.

The article takes GM in particular to task, but ropes in Chrysler and Ford in its criticisms on a number of fronts, not least for failing to live up to President Obama’s hype at the time of the bailout that Detroit was turning its back on gas-guzzling trucks and SUVs and would become the world leader in fuel efficient transport, meaning smaller engine petrol cars or hybrids. Taking General Motors as an example, the NYT states sales of actual cars this year have fallen by nearly 6 percent compared with last year’s already anemic numbers, while light trucks (which include pickup trucks, SUVs, minivans and crossovers) are up by more than 16 percent. Nor is fuel efficiency making big gains: according to the EPA, the Big Three are among four of the lowest average fleet fuel economy ratings among front line manufacturers, and none achieves the industry average of 22.5 mpg. But to what extent are GM, Chrysler or Ford at fault for this? They all produce a range of cars and light trucks in response to what the market demands. With some justification, critics could argue that Detroit’s offerings in the small- to medium car market are not as attractive as those from European or Japanese manufacturers, leaving the Big Three with sales only in larger vehicles. Even hybrid sales have been disappointing — a quarter of all the hybrids built by Detroit has been bought by federal agencies, graphically underlining the public’s attitude toward models like the Volt compared to Toyota’s Prius, for example.

As if GM’s lack of small car development was not enough, the company stands accused of further misdemeanors. As a result of poor demand for the manufacturers’ product range, all the Detroit car makers were guilty to varying degrees of stockpiling or over-production, then offering large cash discounts to move that stock, and an excessive reliance on discounted fleet sales, all of which led directly to poor brand identity and low residuals. It would appear from the article that GM and Chrysler are relying on the same tactics, reporting production as if they were sales, building inventory GM now has three months worth of sales sitting in lots and falling back on fleet sales to shift cars (32 percent of the Big Three’s October sales were to the fleet operators.)

This has not passed the markets by. Trading today at around $33.50-34, GM’s stock price has yet to reach the $36 a share it reached on its first day of trading last month, in spite of the wider market rising from 11,000 to 11,400. Does this matter so long as GM is trading somewhat profitably? Yes, to have a viable long-term future the company needs an attractive product range that can compete across a broad spectrum of the market. It needs to operate sound business practices, not adopt the tactics that got it into bankruptcy in the first place. For suppliers, for workers, and for the taxpayers that bailed them out, GM and Chrysler need to do more than just divest themselves of bad working practices and accumulated responsibilities — they need to transform themselves into modern automotive manufacturers. It sounds as if they may have some way to go.

–Stuart Burns

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