The car makers at Detroit should have seen the coming of the tipping point of the US Big Three and their competitors in Europe and Asia. The long-term challenge is to develop truly competitive hybrid or hydrogen cars. We need to make the investments now, so that they become available in 15 or 20 years. In the short run, we need to incrementally improve fuel efficiency and help people switch to more efficient cars. It may be delayed but Detroit’s aggressive investment in alternative engine technologies is an encouraging sign. Eventually to see hybrids offered across every manufacturer’s full range of models. One good thing is that they are expecting a more permanent shift in consumer demand. So they are actually closing down products of rapidly slowing down demand and working hard on the new technologies.
Japanese and European manufacturers are the best positioned right now. But, GM and Ford cannot be written off as their efforts are continuous in improvement. They will become much nimbler and smaller and they are already investing in hybrid cars. They will probably manage to catch up with Toyota.
But can the US manufacturers do what they have to do fast enough? Can they develop the technologies, design the vehicles, retool the factories and sell the new cars before they run out of money? That will be a tough fight. European and Asian manufacturers have invested billions to build flexible assembly plants throughout the United States, all with the latest robotic technology. And when Detroit last stumbled over gas shortages in the 1970s and 1980s, Korean manufacturers such as Kia and Hyundai were not even factors in the US market. Today, Hyundai not only sells cars in the US but builds them here as well.
Ford, GM and Chrysler each should be able to get access to the capital they need to shift to a more fuel-efficient product line and avert rumored bankruptcy filings. GM is certainly feeling an unexpected cash crunch. The company’s stock has hit an historic low. But GM executives have the potential for raising cash by selling some things. They could even go to the capital markets to get more money. They may have better options to deal with the cash crunch.
GM, which maintains a narrow and shrinking lead over Toyota for the most sales in the US market, has said it may be interested in selling its Hummer division, and is reportedly considering the sale of its Saab, Buick and Pontiac divisions. The cars in many of the GM divisions differ only cosmetically and often are built on identical platforms, sometimes even in the same plants. In the end, GM will have to weigh the marketing and sales value of maintaining each division against the money it would save through consolidation. That calculation led GM in 2000 to begin phasing out its Oldsmobile division.
Meanwhile, investor Kirk Kerkorian, who spent $1 billion to buy a 6.5% stake in Ford, is willing to invest “a few billion dollars” if the company finds itself short of cash. Kerkorian, who has a reputation for fighting with the management of the companies he invests in, “likes what Ford CEO is doing to reduce the size of the company and wean it off its dependence on light truck profits. Chrysler in a way seems to be the most squeezed.
Even though the stocks of Ford and GM (Chrysler is privately held) might seem like a takeover opportunity, the companies “have enough problems” to stave off serious interest. Those problems should also dissuade most bargain-hunting individual investors from picking up Ford and GM shares. For most investors, there is too much uncertainty in these shares.
A strategy that could help the Big Three, is to partner with each other or with overseas competitors to share research and development costs for new power trains. GM, BMW and Daimler-Benz have been working jointly since 2005 to develop an advanced hybrid system which is expected to appear in some of their vehicles by 2010. Ford and Nissan have licensed Toyota’s hybrid technology to power hybrid versions of the Ford Escape and Nissan Altima. When people talk about a company’s core competency meaning the one thing that the company would never give up and a good example is of car companies and their engines. There has been a steady increase in companies buying engines from other companies.
The internal combustion engine, a technology that is now more than 100 years old, will soon fade into history. Eventually there will be a fuel cell or hydrogen based alternative coming along, but not so soon because the infrastructure costs are so massive. There will continue to be innovations to the internal combustion engine. There’s often a kind of last-gasp dynamic in which there is a flurry of innovation before an old technology is finally replaced by a challenger.