Fleetowner 8317 Oem3

Emergency surgery

July 16, 2008
“We are responding aggressively to the challenges of today‘s U.S. auto market. We will continue to take the steps necessary to align our business structure with the lower vehicle sales volumes and shifts in sales mix.” -Rick Wagoner, chairman and CEO, ...

We are responding aggressively to the challenges of today‘s U.S. auto market. We will continue to take the steps necessary to align our business structure with the lower vehicle sales volumes and shifts in sales mix.” -Rick Wagoner, chairman and CEO, General Motors

It‘s hard watching the domestic automakers cutting huge chunks of flesh out of their slumping operations right now - engaging in messy battlefield triage as part of a furious attempt to stave off disaster.

It‘s hard because a lot of this comes at a time when their products were finally turning a major corner in terms of quality, durability, and reliability. It‘s hard because the slash and burn tactics being employed now result from decades of poor decision-making in terms of research and development, product planning, labor relations, and customer service strategy.

(A serious gas-sipping hybrid 2009 model pickup arrives from GM at last -- but is it too late?)

For commercial light- and medium-duty truck users, it‘s even harder to watch the painful downsizing of General Motors, Ford Motor Co., and Chrysler because they build the very products those fleets rely on to conduct business. Many are wondering how these efforts affect the dealers that provide the maintenance, parts, and other services. Many dealers are no doubt sweating out some of these same issues too.

At issue, of course, is the impact from a perfect storm of economic calamity: record high oil prices alongside a U.S. dollar in free fall, collapse in housing market, ballooning inflation, a banking system in turmoil, extremely tight credit lines and a myriad of other ills. The domestic automakers bet heavily on sales of sport utility vehicles (SUVs) and pickups at the end of the 20th century and now find those very units being abandoned in droves by consumers due to record high fuel prices. Annual vehicle sales for cars and trucks are now projected to be around 14 million - a level not seen since the recession of the early 1990s. So the bleeding is now very heavy, with the triage required to stop it just as severe.

GM, for example, plans to slice $10 billion in costs from its operations by the end of 2009 - on top of some $4 billion to $5 billion in cuts already on the books, to be fully in place by 2011. The new cost cutting efforts includes more buyouts for its 32,000 salaried workers, freezing their pay rates, eliminating health care coverage for retirees over 65, speeding up the shut down of four truck/SUV plants, and deferring a $1.7 billion United Auto Worker (UAW) pension fund payment.

(Wagoner is slashing costs furiously to stop the bleeding at GM.)

GM is also going to sell off more product lines, such as its behemoth Hummer, to generate an additional $4 billion to $7 billion in cash. Even Buick is rumored to be on the auction block - Buick, which has improved its product so much in recent years that its challenging Toyota‘s Lexus brand in quality markers.

“[These] actions, combined with those of the past several years, position us not only to survive this tough period in the U.S., but to come out of it as a lean, strong and successful company,” said Rick Wagoner, GM‘s chairman and CEO. He noted that at the end of the first quarter this year, the company had liquidity of $23.9 billion, with access to U.S. credit facilities of an additional $7 billion.

“While [we] have ample liquidity to meet its 2008 funding requirements, it is taking additional measures to bolster liquidity to protect against a prolonged U.S. downturn,” Wagoner noted. “These actions include a combination of operating and related actions, as well as asset sales and capital market activities. The cumulative impact on cash through 2009 is projected to be approximately $15 billion.”

Things are no rosier over at Ford. Jim Farley, Ford‘s group vice president for marketing and communications, said recently that Gasoline prices $4 a gallon during the first half of the year accelerated the decline in SUV and truck sales by 40% and 31%, respectively, versus 2007. Overall, sales in the first half of 2008 for all Ford, Mercury, and Lincoln vehicles totaled 1.1 million, down 14% compared to the same period in 2007, with fleet sales declining 11%.

(The introduction of the new 2009 model F-150 is being pushed back into the fall due to the slumping market for pickups.)

“Consumer fundamentals and consumer confidence deteriorated as the first half unfolded,” said Farley. “Clearly, the rapid rise in gasoline prices, and the resulting shift toward fuel efficient vehicles, has been challenging. The economy enters the second half of the year with a notable absence of momentum and a high degree of uncertainty.”

According to George Pipas. Ford‘s chief sales analyst, it is still unclear if the auto industry sales, as a whole, has reached bottom. “There is nothing in the leading economic indicators to suggest that we've reached the low point,” he said. “That may still yet be in front of us.”

Ford is even adjusting the public introduction of the new 2009 Ford F-150 by approximately two months due to the industry-wide slowdown in the U.S. truck market and the need to sell down dealer inventory of the current model.

(Mark Fields, working hard to adjust plans at Ford to deal with the downturn in SUV and truck sales.)

“Our plan all along has been to introduce the new F-150 after our dealers had a chance to sell down inventory of the existing model,” said Mark Fields, Ford‘s president of The Americas. “With the current slowdown in the marketplace, we decided it was prudent to adjust the start of public sale for the new truck by about two months.”

Ford added it‘s now is clear that 2008 pre-tax results from its automotive operations will be worse than 2007, with cash outflows to fund operating losses and restructuring will be greater than previous guidance and, unless the economy improves, it will be difficult for Ford to break even company-wide on a pre-tax basis in 2009, excluding special items.

Chrysler LLC, now a private company after its de-merger from Daimler last year, is also struggling - but like its domestic rivals, Chrysler is also digging in to try and weather the storm

Nancy Rae, senior vice president-human resources and corporate communications, recently noted in an open letter to Chrysler‘s employees that the company believes its retrenching plans will help it survive. “Our full year plan for the market in 2008 has been aggressively conservative, allowing us to be better positioned for the current slowdown,” she said. “ We are clearly in a challenging environment, but continue to be focused on building a profitable enterprise for the long term.”

Rae noted that Chrysler‘s worldwide sales are down 14% year-to-date (YTD), which includes YTD increases in Canada (up 5.5%), Mexico (up 5.1%) and international markets (up 8%). Fleet sales in the U.S. were down 40% in May and 23% for the year, with dealer inventory volume down 67,000 units from a year ago. Despite the challenges, Chrysler is meeting or exceeding our financial targets and is ahead of its cash flow forecast by $1 billion.

In the U.S., Chrysler now has 3,488 dealers, down from a year ago 3,684 and it enacted a 5% cost reduction on certain non-production materials and services as a part of ongoing efforts to reduce our cost footprint in a highly competitive marketplace.

(Chrysler still believes there's a strong market out there for pickups.)

She also noted that while Chrysler believes it is better aligned than previously for the shift towards smaller, more fuel efficient vehicles, the company also thinks there is a strong and viable pickup truck market going forward. Through May, Chrysler‘s U.S. sales were 41% pickup trucks and traditional SUVs, and 59% cars, car-based crossovers, compact vehicles and minivans, compared to the industry‘s average ratio of 33%/67%.

Still, it‘s going to be rough going for what used to be known as “The Big Three” in the automotive world. But now the focus is on survival, not who‘s the biggest. I for one am really hoping the emergency surgery GM, Ford, and Chrysler are performing on themselves helps them live through this rough patch.

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