American automakers aren't out of the woods just yet.
One of the things going on behind the scenes in America is the slow demise of American auto industry. After repeated bailouts, bankruptcies, and near bankruptcies, as well as re-negotiation of labor contracts, the American auto industry is in a more weakened position that ever, even as sales continue to climb.
It may seem strange to think that the "Big 3" are in any kind of trouble with the sales of SUVs and light trucks going through the roof. But as the events of 2008 illustrated, dependence on one product for all of your sales and profits can be risky, if public taste for that product suddenly evaporates.
Chrysler, or as it's now known, Fiat-Chrysler, is arguably the weakest of the three. Having been bailed out by the federal government twice in bankruptcy, it seems that each bailout only provides a lifeline for a decade or so, before the company finds itself again in trouble.
During the last decade, the company's iconic leader, Sergio Marchionne, spent most of his time trying to find a buyer for the company until his untimely death. This isn't a good sign when a company is constantly trying to sell itself or merge.
But Marchionne had a point. The worldwide auto industry is way over capacity as it is, even during boom times. In order to run efficiently and profitably, most auto plants have to run at or near capacity - usually 80% or more. With factories running at less than 50% or sometimes even as low as 20%, some car companies are losing money on certain product lines. If recession hits - and it will - companies that are only marginally profitable will find themselves hemorrhaging cash in short order.
Chrysler has gone through a number of owners, including Mercedes-Benz, a private equity firm, and now Fiat. Fiat is losing money in its European operations but it still making money on the sales of Jeeps and pickup trucks in America. However Chrysler's profits in America are derived entirely from the sales of these gas-hungry vehicles. If the price of gasoline jumps, Chrysler will find itself in the position of losing money rather quickly.
General Motors seems to be in a good position after the bailout of 2008. They've renegotiated contracts with the UAW and are making highly profitable SUVs and pickup trucks. But the reality is most of their profits are derived from sales of Buicks in China, and these sales could taper off rather quickly if this trade war with China continues. Already the Chinese are pushing a nationalistic agenda, and it may be seen as unpatriotic in the future for a Chinese person to be driving an American-branded car. If so, GM sales and profits could collapse overnight.
GM is well aware of these difficulties and it's been trimming its sails for the coming storm. They sold off their money-losing European operations and have closed down small car production in America and shut down unprofitable and antiquated plants, much to the chagrin of our President.
President Trump believes himself to be an expert in the auto business and believes that small car production should be moved back to America, even though it's never been very profitable for American car companies historically. Trump also has proposed freezing emissions regulations which one would think would be a popular position with the automakers. However in a turnabout of epic proportions, the car makers are actually petitioning the government to maintain emissions regulations and increase mileage standards. This is puzzling to many people, including myself, as back in the 70s and 80s the automakers complained that these emissions and fuel efficiency regulations were killing off their industry.
The problem is, the automakers have been preparing for these emissions regulations for some time now, and have spent a substantial amount of money to meet these emissions goals. Thus, they stand to lose a lot of money if the rules are changed. Ford, for example, has invested a lot of money in technology such as aluminum-bodied pickup trucks, small-displacement turbocharged engines, and ten-speed and nine-speed transmissions to achieve increased fuel economy. The amount of money needed to develop these things is so staggering that Ford had to share the development costs with General Motors for the new generation of nine- and ten-speed transmissions. This technological approach has its drawbacks as will be discussed below.
GM has been buying and banking carbon credits, most notably from Tesla and other electric vehicle manufacturers. These can be used to offset mileage requirements, allowing them to sell gas-hungry SUVs and pickup trucks and still meet regulations. If the regulations are changed, GM stands to lose billions of dollars in these banked carbon credits, or at the very least they will look like a very bad investment.
Again, as with Chrysler, GM's reliance on large SUVs and pickup trucks could come around to bite it on the ass, as it did in 2008 when sales of these vehicles plummeted when gas reached $5 a gallon. GM has the additional problem of its exposure in China particularly in view of the current trade war.
And then there is the issue of quality. And this is where Ford has a particular exposure. As noted above, Ford has invested in a lot of high technology in order to achieve mileage goals. And in some instances, this technology has worked well, but in others it hasn't.
General Motors tried to leapfrog Japanese competition by developing a diecast high-tectate-silicone aluminum block engine for the Vega back in 1970, and learned a valuable lesson - technological solutions to management problems usually don't work out.
Ford's technological solution may have similar problems. While Ford has abandoned its small car market, it still is on the hook for liability due to its dual-clutch dry-plate transmission used in the Ford Focus and Fiesta, which is turned into a bit of a small nightmare. It seems the curse of the Pinto has not entirely escaped that company. Angry owners are upset that there is no fix for these transmissions, which continue to behave strangely, stuttering and shuddering upon acceleration and popping into neutral on the highway. It only takes a few of these types of flaws to send customers over to the foreign competition - forever.
It is a funny thing, but when you think about the recession of 2008 and the bailouts of the American car companies, no one bothers to point out that the foreign car companies didn't seem to have the same problems. No one had to bail out Toyota, Honda, Nissan, Mercedes-Benz, or BMW. They all seemed to do just fine, and in fact, expanded their US manufacturing base since the recession. BMW's largest auto plant isn't in Germany, it is in the United States.
These companies all have American manufacturing operations and manage to make a profit building automobiles United States - and even export these vehicles to Europe and other countries. They're able to do this because they have a lower labor cost in their non-union factories and since they have younger factories, they don't have a large pension liability dating back to the 1960s.
When push comes to shove, quality can be the one thing that tips a company over the edge. One reason Japanese car companies made such inroads into America in the 1970s was that the quality of American cars was horrific. We may look back with nostalgic feelings to the pimp barges of the 70s or the muscle cars of the 60s or the befinned monsters of the 1950's, but the reality of the cars in those eras was that they were horrifically built and fell apart rather quickly. The carefully restored and never driven "classic" American car at the car show is not representative of the reality of owning one of these pieces of junk back in the day.
When the economy gets tight and consumers have limited resources, they will spend their money more wisely and choose products which are more durable and less costly to own. And this is where foreign competitors have a leg up over American vehicles. With each successive recession, the foreign car companies increase their market share, increase their manufacturing output, and increase their profitability. With each cycle, the "American" car companies retract further, close more factories, and cede yet more portions of the market to overseas competitors. The next recession could be a real killer for Ford, GM, and in particular, Fiat-Chrysler (which technically, is no longer an "American" car company anymore).
While we are enjoying our second-hand Ford F-150, it is quite clear to me that the quality of this vehicle is not up to Japanese standards. While the Nissan was perhaps not as luxurious a truck, it ran flawlessly for the five years that we owned it. Other than changing fluids, putting on new tires and a battery, it never went in for service, never broke down, and never failed to start and run properly. This basic functionality and reliability still seems to elude the "Big-3" automakers.
Our experience with Ford cars has been less sanguine. Ford seems to have a particular problem with switchgear. They position buttons and knobs based on style choices rather than ergonomics. Thus, they tend to favor things like rows of identical buttons which have radically different functions, forcing the driver to remember which button does what. The switchgear also feels flimsy and cheap and has to be treated delicately. As I noted another posting the power sunroof switch on our Ford Taurus SHO had to be replaced no fewer than four times in five years. For some reason, Ford felt they needed to use a Hall-effect sensor for that switch which made it expensive and flakey.
It is clear that a recession will occur in the future - economic growth doesn't continue linearly forever. And such a recession will be temporary in nature and be followed by more economic growth after that. The nature and extent of the coming recession is what is unknown, as well as the timing. My personal take is, the longer we wait, the worse it will be, particularly if we goose the economy by artificially messing with interest rates, the currency, taxes, and deficit spending (which are all the same thing, of course).
Some events could really exasperate this problem, such as the growing tensions in the Middle East. As I noted before, a few sunken tankers in the Persian Gulf could jack oil prices through the roof. And it seems Iran wants this to happen, shortly. Americans faced with $7 a gallon gasoline this time around will panic. And if this occurs in conjunction with a general recession and layoffs, it could mean serious trouble for American automakers.
American car makers, awash in a sea of debt and dependent on highly leveraged customers to buy expensive products and stuck with a line-up of low gas mileage vehicles could end up seeking petition for relief once again from Congress. And whether Congress will bail out the Big-3 again, is not entirely clear, particularly when one of the companies is Italian.
In other words, we are not out of the woods yet.