3 big questions for Detroit's Big Three
 

Very sad for American manufacturers and jobs that are at stake.

3 big questions for Detroit's Big Three
Despite the buyout of Chrysler, big questions loom about the future of the troubled U.S. auto industry.

By Chris Isidore, CNNMoney.com senior writer
May 15 2007: 1:51 PM EDT


NEW YORK (CNNMoney.com) -- Despite this week's big bet by a big private equity firm that it can turn around Chrysler, major questions remain for the troubled automaker - and the answers could shape the nation's auto industry for years to come.

DaimlerChrysler (Charts) announced Monday it would pay about $650 million to dump 80 percent of its money-losing Chrysler unit, undoing the industry's most expensive and least successful merger. The buyer, private equity firm Cerberus Capital Management, is investing about $7.4 billion in all, but most of that is new financing for Chrysler and its finance arm going forward.

Daimler was willing to pay to walk away from Chrysler because it wanted to end its exposure to the automaker's massive losses - and future retiree health care costs estimated at $18 billion. The extent of the losses came into clear focus Tuesday when Chrysler reported a loss of about $2 billion for the first quarter, compared with earnings of $857 million a year earlier.

The first-quarter loss topped the $1.5 billion Chrysler lost for all of 2006. Those numbers were reported on Feb. 14, Valentine's Day, when Chrysler also sent a love letter to its employees, announcing plans to cut 13,000 jobs and close several North American plants. That was also the day DaimlerChrysler put Chrysler Group up for sale.

The charges from the cuts amounted to $1.2 billion in the first quarter. But that leaves another $800 million in operating losses, from weak sales and stiff competition from the likes of Toyota (Charts) and Honda (Charts) as well as Chrysler's cross-town rivals in Detroit, General Motors (Charts, Fortune 500) and Ford (Charts, Fortune 500).

All of which gives rise to the first and most important question facing the U.S. auto industry.

When will auto losses end?
Of course Chrysler isn't the only U.S. automaker that's bleeding.

GM, despite record global sales, reported another loss in its core North American auto operations in the first quarter. Ford's loss in autos in North America jumped 39 percent to $614 million in the first quarter, and the automaker doesn't expect a return to profitability in North America until 2009.

All three automakers are still working on the difficult, expensive job of cutting capacity. But growing competition, record gas prices and the changing tastes of American consumers - who are back to buying cars rather than the pickups and SUVs that Detroit lived on for years - will make it tough for the automakers just to break even - though breaking even won't be enough.

"They scrape by year after year and are not building up the type of profits to invest in the new products they need," said Bob Schnorbus, chief economist for J.D. Power & Associates, the auto research and consulting firm.

Many experts say they fear that even if none of the automakers are facing the kind of immediate crisis that prompted worries about a bankruptcy filing at GM only a year ago, they are all facing the death of a thousand cuts unless they can overhaul the business of making and selling cars.

"I still believe that there is going to have to be a real rationalization of the industry," said Kevin Tynan, auto analysts for Argus Research. "It has to be more serious than every few years closing some plants here and there. It has to be torn down much further."

And the biggest change Tynan and some other analysts are looking for is on the huge costs from benefits promised to employees and retirees such as pension and especially health care. That leads to the second big question for the auto industry:

Will the union agree to

RE: 3 big questions for Detroit's Big Three
 

Good article, again we need to be more productive.

RE: 3 big questions for Detroit's Big Three
 

Good article. The Big Three can fix their problem, but it will take some serious changes which will cost a considerable amount of money. Chrysler needs to offer a true economy built by themselves that will match the Civics fuel economy numbers with similar acceleration, while offering the SRT-4. They need to retire the 4-speed automatics in Dodge, Chrysler, and Jeep. They need to offer the full 255hp version of the 3.5L in the Avenger and Sebring to compete against their competition, with an SRT-6 level option using a Chrysler engine this time. They need to get rid of the W5A580 5-speed and replace it with 6-speed automatics designed and built by themselves in the LX cars. They need to go back and add soft dash materials to all their product line. They need to ditch the 3.7L V6 and replace it with a 4.2-4.3L V6 made from the 5.7L HEMI and offer it with MDS. They should use that in all of their truck offerings and consider using it in the Charger, Magnum, and Challenger as well. They need to offer the 5.7L HEMI in the Dakota as well as an efficient diesel option.

Ford needs to increase the power out of the 2.3L I4 used in the Fusion/Milan as well as either use a taller axle ratio to get better fuel economy and/or get a 6-speed for that level. They need to offer a more fuel efficient option in the Focus as well as improve the interior and add a performance model to compete against the SRT-4. They need to offer their new 3.5L V6 in the Fusion and Milan to compete against the Nissan Altima and Toyota Camry. They need to offer the Yamaha 4.4L V8 in the new Taurus and Sable and revive the SHO name plate. They need to take the Crown Vic/Grand Marquie/Town Car behind the wood shed and put it out of its flaming misery, and replace it with the Australian Falcon with Mercury and Lincoln varients. They need to bring the Escape back to the designers and give it some decent styling and while it is in there give it a slightly detuned 3.5L V6 with a 6-speed automatic for the top level. They need to retire the Ranger and build a mid-sized truck offering the 2.3L I4, the upcoming 3.7L V6, 4.6L V8, and 5.4L V8. They need to offer a more powerful top engine in the F150 and retire their 4-speed transmissions. They should also bring back the Thunderbird and Cougar as model mates like they had during the 80s and 90s with a Lincoln version as well.

GM needs to abandon all 4-speeds in every model except for Chevrolet and use their new 6-speeds. They need to drop the 3.4L V6 in all models and replace it with an upgraded version of the 3800 series III. They need to consider fixing the HV engine's problems or dispose of it. They need to make sure the HF engine is flawless. They need to put comfortable seats in all cars no matter what brand it is. They need to offer the Solistice GXP engine in the G5. They need to offer an upgraded version of the supercharged 3800 series III in Pontiac G6. They need to call the G8 the Grand Prix. The Aura should feature a forced air induction of the 3.6L HF engine as well as a Direct Injection version of the 2.4L I4. They need to bring back both the Firebird and the GTO. They need to make a Buick Regal Grand National again with a GNX limited edition. They need to drop the stupid I5 engine idea for the Colorado/Canyon/H3 and offer the 3800 series III in its place with the 4.2L I6 and the 5.3L V8 for the engine options. They need to make sure to offer soft dash materials on all models except on Chevrolet models.

RE: 3 big questions for Detroit's Big Three
 

I think you need to go work work in one of their marketing departments. Maybe that will help these American car companies get their act together.

You got my vote? Where is the voting booth.

Vote for RLSH700!

RE: 3 big questions for Detroit's Big Three
 

Agreed Jeremiah. But I think the big three's problem now goes beyond that. After years of abuse, and neglect, customers have left in droves and many after buying chap and “reliable” Toyotas and Hondas will not come back. They have to get people to trust in their brands and their dealers again. People rave about the Lexus or Infiniti experience from their dealer. Short of Saturn, I cant think of many American brands that have that distinction.

RE: 3 big questions for Detroit's Big Three
 

very good article, I think the unions have just a big part if not more than the componies themsleves for the decline of the American auto industry

RE: 3 big questions for Detroit's Big Three
 

I think RLSH700 has some very good ideas about changes to the product lines for the Big 3. But I think the problem with the companies goes much deeper than models.
At the risk of being redundant, I'll repeat my previous statement about the Japanese not really inventing much, but improving and perfecting products and processes we originate over here. In this case, it's improvements in the manufacturing process that make the biggest difference.
US cars don't sell as well as they used for for several reasons.
The "buy American" loyalty isn't as prevalent as it was 40-50 years ago because in the "global economy" we have now, the US consumer has more products to choose from. Loyalty is tied to "reliability" and "value". Foreign cars offer more reliability for the projected useful life of the cars they build than American (made) cars, and usually for a lower MSRP.
Financial bloat in "executive salaries" in US companies is NOT tied to performance as it is in foreign companies. The same is true on the assembly line. Foreign companies compensate the employees based on performance - from the assembly line to the executive level. The employees have "ownership" of the company and perform accordingly. The better they make cars, the more they sell. The more they sell, the more money they make. Additionally, they're rewarded for finding more efficient/cost effective ways to get thier products to the market. They have a personal stake in the company they work for, where US auto employees (through the UAW) work on a "contract" for a predetermined amount of money - regardless of the performance of the company overall. Thier incomes are based more on the number of hours worked than anything else. In the Japanese system, Pride In Your Work Pays big dividends, contrary to the "put in my 40 a week" philosophy, regardless of the quality of what's being made. And God only knows how the executive compensation packages are arrived at for Ford, GM and Chrysler (if it were performance based, those high-level exec's would be a LOT thinner than they appear in the photographs). Alan Mullaly of Ford recieved $39.1 million in compensation in 2006, while Ford continued to lose money! I'm not "picking on him", but rather using this as an example.
Japanese marketing is very different from American marketing too. Almost everyone knows who Lee Iacocca is. Can anyone name any of the chief executives at Honda, Toyota, or Mitsubishi?
Has anyone ever seen a "designer nameplate" on a Japanese car (like the "Bill Blass" or "Givenchy" Lincoln Mark IV's, or Shelby or Roush Mustangs)? The Japanese approach is simple - no gimmicks or marketing pretenses - just simple value at the point of sale.

The foreign auto makers have learned well from us - both what to do and what NOT to do. Maybe we could learn something from them?
If you want to succeed, find a process that works and repeat it. Rich people don't get to be rich people by hanging out with the homeless - they rub elbows with millionaires. If the Big 3 want to succeed, they need to change thier way of producing and marketing automobiles to those of the companies that are growing and displacing them in the market.
Adapt or perish.