Making cars is cheaper now for General Motors and Chrysler
A year after their historic bankruptcies, General Motors and Chrysler have already cut the cost of making each vehicle by $3,000,and labor costs could be lower than at any Japanese automaker in the U.S. in less than five years, according to the Center for Automotive Research.
That means a new small car like the Chevrolet Cruze can be made profitably in the Midwest instead of Mexico, and the restructured carmakers will be profitable at lower sales and market shares than expected.
Tuesday is the first anniversary of GM’s bankruptcy filing. Chrysler exited its 41-day makeover a year ago June 10.
Government loans won’t be repaid in full until each company completes a public stock sale. For GM, that could happen later this year; for Chrysler, more likely sometime in 2011.
Politics aside, the plant closings, worker buyouts and lower incentive spending are making a big difference, even with a very modest rise in new car sales.
Citi Investment Research analyst Itay Michaeli reported last week that GM’s fixed cost per vehicle will drop from $10,400 last year to $7,280 this year and fall to $5,772 by 2012. While Michaeli didn’t have a corresponding cost analysis for Chrysler, Sean McAlinden, senior economist at the CAR in Ann Arbor, and IHS Global Insight analyst Rebecca Lindland say Chrysler’s reduction likely is in the same range.
Both companies still chase Ford, which fixed its fundamentals sooner and used what CEO Alan Mulally calls an $18-billion “home improvement loan” taken in 2006.
“GM is much closer to Ford than people think,” McAlinden said. “When the dust clears, their market share will fall below 18%, but their prices will be much firmer and their costs lower than most people understand.”
Ford in the lead
At the moment, Ford is the front-runner in the Detroit Three’s race to turn around their long-troubled operations.
The Dearborn automaker is profitable, generating cash and enjoying wave after wave of customer buzz and loyalty.
But Ford could see its public opinion halo — largely a reflection of its decision to bypass taxpayer assistance last year — fade as GM and Chrysler rejoin the fray with cleaner balance sheets, new cars and trucks and exciting initial public offerings in the next year.
Both post-bankruptcy companies generated more than $1.4 billion in cash in the first quarter — largely a consequence of all their cost-cutting and lighter debt loads.
That inflow of funds will keep new vehicles on schedule and pay for fresh advertising, which is critical as GM and Chrysler try to reach beyond their most loyal customers and find new buyers who want their vehicles enough to pay full price.
GM’s new marketing Vice President Joel Ewanick, hired last month from Hyundai, is expected to sharpen the automaker’s advertising and marketing tools immediately.
“In GM’s case, you have exceptional product, but they aren’t yet getting the message out,” said Sheldon Stone, managing director with Amherst Partners, a turnaround advisory firm in Birmingham.
Getting back on consumers’ shopping lists is priority one for Chrysler. Only 18% of potential car buyers are even considering a Jeep, Chrysler, Dodge or Ram Truck, according to a March survey by AutoPacific Group. That’s down from 24% in 2007.
But GM and Chrysler have to move fast to catch up with its rivals.
Ford and its respected management team, headed by CEO Alan Mulally, are focused on keeping its momentum and new products coming. The Fiesta subcompact is to arrive this summer; the Explorer SUV is to come late this year.
Interest-free loans and discounted leases are stabilizing Toyota’s sales following its unintended acceleration recall crisis. And Nissan has created a loud buzz around its Leaf electric car, which could be prove to be a game-changer.
GM and Chrysler catch up
But a year after their traumatic trips through bankruptcy, General Motors and Chrysler are back in the race.
Both are launching their first American-made post-bankruptcy vehicles after reporting better than expected financial results for the first three months of 2010.
GM made $865 million. Chrysler’s $197 million net loss contained the silver lining of a $143 million operating profit before taxes and interest payments.
What matters most is both have much more cash than they had on Jan. 1 — $1.75 billion in GM’s case and $1.49 billion for Chrysler.
“Cash flow is really the lifeline to survival,” McAlinden said. “It provides a strategic fund to attract credit if you need to borrow and allows you to keep future vehicle development on schedule.”
A major reason for the accelerating recoveries is a decision to put profitability ahead of market share.
GM’s market share this year through April slipped to 18.7% from 19.2% a year earlier, despite phasing out four brands. More important, GM slashed spending on rebates, discounted leases and financing by more than $800 per vehicle, according to Edmunds.com.
Chrysler has taken heat from analysts as its market share slipped to 9.3% this year through April from 10.7% a year ago. But by keeping production more closely in line with demand and dropping nearly one in every four of its dealers, Chrysler also slashed incentive costs by more than $1,000 per vehicle over the same period.
Combined with lower wages for newly hired workers, shedding money-losing factories through bankruptcy and, in Chrysler’s case, using $2 billion in federal money to settle $6.9 billion of debt, profitability can come from modest sales.
This does not imply that crisis has passed at either company. Despite GM’s repayment of some government loans, there’s still a stigma from the bankruptcies in some consumers’ eyes.
“GM underestimated the public’s intelligence when they ran their ads touting that they paid back all their loans,” said Jim Hall, managing director of 2953 Analytics in Birmingham. Because the government owns 61% of the new GM, taxpayers won’t recoup anywhere near their entire investment until the automaker completes one or more public stock offerings.
“Chrysler‘s biggest problem is fewer people are considering their products,” Hall said.
Only strikingly better cars and trucks can changing hearts and minds.
Chrysler will get its first reading by late summer after its 2011 Jeep Grand Cherokee hits showrooms. The Chevrolet Cruze and the anxiously anticipated Volt electric car will be GM’s key barometers.
“Post-bankruptcy there is some hangover, but people are no longer as concerned about whether these companies will be around a year from now,” said Jeff Schuster, executive director of global forecasting at J.D. Power and Associates.
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