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Globe and Mail Update Published on Thursday, Dec. 11, 2008 12:34PM EST Last updated on Tuesday, Mar. 31, 2009 9:23PM EDT
With the Detroit auto industry in a turmoil, consumers are wary of buying from auto makers whose futures are far from certain today.
Saab is on the chopping block, based on the plan General Motors sent to Congress. Ford wants to sell Volvo and focus, laser-like, on just the Blue Oval Ford brand. And so on. Nissan's Carlos Ghosn said in my recent interview with him that as this whole financial mess resolves, there will be consolidation in the auto industry and brands will disappear as part of that. Chrysler may go away entirely.
The oddity in all this is Toyota Canada bringing in the Scion brand for 2010 . Bucking a trend. However, Toyota and Honda look like they are having big troubles themselves these days.
What should we make of this mess? With auto makers desperate to sell vehicles, is it a good time to buy a car? Jeremy Cato was online earlier to take your questions on the state of the North American auto industry.
An award-winning print and broadcast journalist who has covered the auto industry for more than 20 years, Jeremy Cato hosts the weekly television show Car/Business, which appears Fridays at 8 p.m. on Business News Network and Saturdays at 2 p.m. on CTV.
He is an expert on cars and trucks — the issues, the players and the products — from the inside out. He has won more than two dozen awards for journalistic excellence, including being named Automobile Journalist of the year in 1999, 2003 and again this year.
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Danielle Boudreau, globeandmail.com: Hello Jeremy, thanks for taking our questions today. This is shaping up to be a dark day for the auto industry. Is there a silver lining in this situation at all? Could this be the push that the industry needs to shape up, and start making cars for tomorrow?
Jeremy Cato: Hi and thanks for having me today.
I don't know that today is any darker than a lot of other days we've seen this fall in the auto industry. The day in September when Lehman Bros. failed, the very day General Motors was celebrating its 100th anniversary, was a darker day for the auto industry — we just weren't sure of it at the time. That's when credit markets really began to freeze up. The auto industry needs credit to function properly. Since then, all car companies have been hoarding whatever cash they have because they know they can't borrow more in the commercial paper market or anywhere else for that matter.
But that's was not the question. Yes, there is a silver lining — many of them.
First, this crisis is forcing car companies to streamline their businesses. They are all looking at whatever ways exist to be efficient at what they do. It's a reality check for all of them, even mighty Toyota which is shuttering plants, cutting bonuses and revising dramatically downward its profit and sales targets.
Second, the Detroit auto makers, especially General Motors, are finally, finally facing the reality of their situation. They'll all be better companies for it. There will be new leadership at the top of GM, no question. Rick Wagoner, the current chairman, is a very smart man but he's had eight years at the very top of this company to turn it around and make GM profitable. Eight years is long enough. Wagoner is a loyal and likeable man. I have interviewed him many times and believe him to be sincere, hard-working and highly intelligent — certainly much smarter than me. But enough is enough. GM's board of directors also needs to be reshuffled so that it does more than rubber stamp management's recommendations.
Third, this crisis is going to force governments to fix a few of their own problems with respect to the auto industry. I've written about this matter in my blog today , so check that for more details.
Fourth, the unions, the CAW and the UAW, I think might finally recognize that they must compete with non-unionized workers in plants run by Honda, Toyota, Nissan, Mercedes-Benz, Kia, Hyundai and others. I watched UAW president Ron Gettelfinger's press conference this morning and it seems quite clear that he gets it. Ken Lawenza at the CAW? Not so sure yet. But I know former CAW president Buzz Hargrove understands what's going on in the global auto industry.
Fifth, the industry as a whole is making cars for tomorrow — and today. Ford, according to independent research by several sources, has quality essentially equal to Honda and Toyota. GM has many fuel efficient vehicles, though not all of them are competitive in other ways with rival models. There are a lot of innovative models coming, too.
What I hope the Detroit-based auto makers and their unions now realize is that they do not so much have a cost problem as a revenue problem. Buyers perceive many products from Detroit as second rate compared to many imports. The object data says that is not really true across the board now. But economics is as much about psychology as it is about raw, hard numbers — perhaps more. Until buyers perceive the Detroit companies differently, they won't be able to charge as much for their vehicles as the best imports.
Dave Rigby from Toronto Canada writes: Hi Jeremy, Interested in your thoughts on the future of General Motors. Could you ever see a day when GM would really be gone? Not really a huge GM fan although I admit to liking a good number of their newer models and wish they would hurry the heck up and bring some of their European models to North America. Nonetheless, interest to know what you think and in a related query, do you think the various North American governments would actually let General Motors die given all the employment created by them and their many suppliers? Thanks!
Jeremy Cato: Hi Dave: GM will not disappear, at least not today. As I write this it looks like President Bush and his administration will provide bridge loans from the Troubled Asset program, to get the Detroit auto makers to Jan 20 when President Obama takes over with a new Congress.
No one with any sense can suggest that the U.S. and Canadian economies are in a position to withstand the impact of a failure of any one of the Detroit auto makers a this time. I have roundly criticized all these companies many times over the years and if we were in a healthy global economic situation I would be among those saying "no" to any sort of bailout. But there is a global economic crisis out there and the shattering effects of a shutdown or even partial shutdown of any one or all of the Detroit auto makers would be devastating. We're not in a global depression yet, but this might precipitate one.
The U.S., senators, Republicans from the U.S. south, who are chiefly responsible for the failure of the loan package in Congress, are playing a game of high-stakes chicken with the White House and the White House signalled today that it will blink. These southern senators are hypocrites. They say they are idealogically opposed to helping the Detroit car companies, yet states like Kentucky, Georgia, Alabama and Tennessee have all used taxpayer money to subsidize transplant factories that build Nissans, Toyotas, Kias, Hyundais and Mercedes-Benzes. The reality is, if you want an auto industry — with its high pay, high tech jobs — governments must pay something for it. That's the way it is in this global business.
As for GM in particular, the company needs at most three brands: Chevrolet, Cadillac and Buick. All the rest are a waste of money and have no chance of surviving, profitably. The sooner GM jettisons Saturn, GMC, Pontiac and Hummer, the better.
Jamie Vandenbossche from Sidney, BC Canada writes: I would like to by a Mini and I have been waiting to see if the lease rates will come down. They had the lease rates at 4.9% for the 2008 models which they were clearing out and 6.9% for the 2009. Are all car companies having problems or are some immune. Are some models immune like the Mini. I was hoping January would be a good month to buy, is this true? Thanks, Jamie
Jeremy Cato: Mini is not immune to the global economic crisis. In fact, this week BMW's Mini announced that not only will it shut down its Oxford, England plant for an extended four-week Christmas break, but in January production will shut down for an extra three days to help match production with demand. Mini sales in Canada remained healthy through the end of November, but elsewhere it's a different story. Mini sales in the UK were down 58 per cent last month and are down 13 per cent on the year.
So will Mini offer better lease rates here? I can't say one way or another. But car sales are slowing in Canada, that I do know. The general rule is that when sales slow, better deals come along. But then we do have this global credit crisis to deal with so business as usual is not how the world is operating.
Brian Keelan from Bright's Grove Canada writes: I heard a story about the Ford Wixom plant in Detroit. They spent 3.5 billion to build it back in the 90's and closed it in 2006. They offered it to Toyota for 1 bill and Toyota turned it down and came to Canada where they spent over 2.5 billion to build a new plant here. The word is that they did it because here they have no U.A.W. to deal with. Is that right? I think the U.A.W. has to face the piper on this and I hear no talk of that. Why don't they put up some money if they think the Big 3 are so viable?
Jeremy Cato: Brian, thanks for writing.
You are correct to suggest that Toyota and other imports do not want to assemble cars in Michigan. They do not want to deal with a unionized work force — the UAW or the CAW. And let's not forget that Toyota in Canada had some level of government assistance in locating the new plant in Woodstock, Ont.
I do think we need to be clear on what the UAW has surrendered in the latest negotiations. The "Jobs Bank" is gone, as of this week. That is, no more paying UAW workers not to work. (I would point out that when Toyota shut down its Tundra pickup plant in the U.S., it put workers to work doing essentially nothing — a different type of jobs bank that involved "training" and cleaning. I did not hear any criticism of Toyota for this.)
The top hourly pay for a UAW worker in the U.S. is $28.12. But in the new UAW contact, new hires in basic jobs get $14 an hour, or half as much. The UAW has agreed to take control of its own health care costs, with seed funding from the Detroit auto makers. So health care is going off the books for the car companies in the U.S., too. The aging UAW work force is in serious retirement mode, so overall labour and benefit costs for the Detroit auto makers will go down dramatically over the next few years.
Labour costs for the Detroit auto makers are high, but not as high as many have been led to believe. That $75 or $78 an hour figure you've seen bandied about includes benefits for social security and health care in the U.S., as well as retiree costs. Base pay rates in the non-union auto plants are quite similar to the union rates, though older, higher seniority workers do get more. The foreigners do not have pension costs, yet, but they're coming.
I'd say Detroit is getting its reality check right now. One is coming for the imports.
Mark Armstrong writes: Many are excited about the Chevrolet Volt and the move towards electric cars. Unfortunately, at the rumoured price of $40,000 it will fail, if it even sees the light. Is this technology really that expensive? If GM is truly believe this is the future, surely they'd make it affordable to the masses, even if it is initially a loss leader.
Jeremy Cato: Hi Mark:
There is that rumoured $40,000 price tag, though nothing is official yet. For the consumer, though, it will be much less. The U.S. Government has already passed legislation for a subsidy program to the tune of $7,500 and the Volt qualifies. So right off, say that $40,000 is real, for the consumer the price will be $32,500. There may also be state and local subsidies to push the real cost down even lower.
The technology is expensive for three reasons:
- The batteries. Probably worth about $10,000 per car, though the cost should go down a lot once volumes go up.
- Up front research and development. GM said in its statement to Congress that it's investing $750 million to develop the Volt. First-year sales are project to be about 10,000 units, ramping up to 60,000 in the second year. GM has to build in its costs to the pricing.
- Contingencies: The Volt's batteries and many other technologies are completely unproven. Therefore, GM must build into the pricing structure the worse-case scenario for warranty costs, depreciation and so on. This is just the way business is done.
I would expect to see the price tag of Volt-like technology drop dramatically within two year of launch in 2010. GM wants to make it affordable for the masses, but as you well know, it can't afford loss leaders right now.
Ballin Munson from toronto Canada writes: Jeremy, many thanks for taking questions today.
On the broad question, how do you distinguish survivability between the company (say GM) and the brands (Buick)? DO any American brands have long term value (out side of anomalies like Buick in China). Is there an opportunity for brands like Peugeot, Fiat, and others to (re)enter North America?
Finally, do you think there is something to the Silicon Valley investors who believe the auto industry needs a complete remake, with totally new players, with no pre-conceived notions (given Tesla's launch problems)?
Jeremy Cato: Tesla? Lots of readers bring up Tesla, the battery-powered luxury car maker. Well, Tesla has its hand out right now, asking for $350-million from the U.S. Government. Tesla says it won't go ahead with production of its four-door car without the handout. There is no magic there.
As for the American brands, at GM there is mountains of evidence to suggest Chevrolet, Cadillac and Buick can thrive as global brands. They already are. Chevrolet-brand cars are sold all over the world, from South America to the Middle East. Cadillac and Buick have established themselves in China. In fact, Buick in China out-sells Buick in the U.S by more than 2-1.
These other brands you mention are not likely to come to Canada and the U.S. any time soon. It's just too expensive to launch a new brand, especially European ones like Peugeot and Fiat which left along ago, leaving behind many unhappy customers. I know there were happy ones, too, but not so many.
Fiat, interestingly, is actively seeking a partner to help it survive the global financial crisis.
S H from Windsor Canada writes: Jeremy.....Sweden just announced a bailout for Saab and Volvo of 3.4 billion. China announced it is giving money to Chery, about 1.4 billion. Japan has subsidized its manufacturers in the past. Even Ford has gotten money from Canada, $85 million for an engine plant in Windsor. Cars sales in Spain are down a whopping 50%! All sectors of business around the world are in a recession. So why are Canadians so against helping their own industry ,saving 10's of thousands of jobs. Everyone else is! Don't they know it will cost us more, a lot more if we don't. What is your take on this dilemma? Remember now, the big 3 have been in business for over 100 yrs. with organized labour and legacy costs that the Foreign competitors don't have. To blame the big 3 is unfair! You can't change 100 yrs. in a few months! Thanks
Jeremy Cato: Hi S H:
Developed and developing countries covet the auto industry not simply because of good-paying assembly jobs. Automobiles are complex products, with plenty of value-added benefits in terms of suppliers and research and development work. This is why the Ontario and Canadian governments have done some things to support the industry and more money is coming, mark my words.
The reality is that capital — while frozen now — is over the long term mobile, which means auto company investments can go anywhere. That's why governments subsidize car companies and will continue to do so. Organized labour can help itself by toning down the rhetoric and acting in a professional way, recognizing that the competition is not just here, but everywhere. So we in Canada need to create the best possible situation if we want auto and auto-related jobs.
The auto industry is critical to the middle class not just in Canada and the U.S. and around the world. I recognize that and support and encourage reasonable actions that keep good auto jobs in Canada and North America.
Dar Cullihall from Rocky Harbour Canada writes: Mr. Cato, The General Motors' Chevrolet Impala has been my car of choice for a long time. I have bought different brands over the years, but it is the Impala that has impressed me the most. I have never bought a so-called 'foreign' can and have no intention of doing so. My question is: Do you think the Chevrolet Impala will withstand the turmoil now taking place at General Motors, especially in light of the fact that is must be one of General Motors' best sellers if the number I see in my travels is any indication?
Jeremy Cato: Dar, the Impala has been a solid offering from GM, but it's also dated compared to the best midsize cars out there. It will be phased out in favour of models like the Chevrolet Malibu. It's sold well over the years, but lately most sales have been to fleets — taxi companies and so on. For the current car, the best days are over.
Dave Donovan from Ottawa Canada writes: Hello Mr. Cato, This summer, I bought a new Chevy HHR - partially because of the 5 year warranty offered by GM. One thing I'm concerned about is that if GM files for bankruptcy, they may not honour liabilities such as warranties. Is that something you see as a possibility?
Jeremy Cato: Ah, a made-in-Mexico HHR. I like this little van/wagon.
No matter what happens, the law stipulates that GM must provide parts for its vehicles for 10 years.
As for warranties, I simply cannot envision governments in Canada and the U.S. allowing GM to fail, period. I would not be concerned about warranties; the worst-case scenario I can envision involves a so-called "car czar" being appointed to oversee a restructuring of GM, with the goal being a fully private company at the other end. This is exactly the sort of thing the U.S. Government is doing with the financial industry. The car czar idea is part of the current loan plan for Detroit and most certainly will be part of whatever plan the coming Obama administration offers. And there will be one, no doubt about it.
My hope is that the car czar is former Federal Reserve chairman Paul Volcker.
Rumon Faskater from Yuho United States Outlying writes: Based on the overall financial condition of the N.A. players, I believe that Ford may be the only company to pull through this downturn. They appear to be the only company that is doing what GM and Chrysler should have been doing, minimizing the number of vehicles that they sell. Can I get your thoughts on that?
Jeremy Cato: Ruman, the Ford plan is simple to understand, difficult to execute: be Toyota, one global brand with streamlined product development processes and highly flexible and efficient factories.
Chrysler is a regional brand and that's a big problem. In the long run, Chrysler will need a partner or many partners.
GM has done a lot to streamline its product development processes around the globe. GM is also very successful in Asia, South America and the Middle East. Europe is okay, though not a screaming success.
The problem for GM is North America, where it has less than 20 per cent of the market and a pile of underperforming brands. GM needs to be simply Chevrolet, Cadillac and perhaps Buick in North America. The rest of the brands have to go.
For lessons in this, Ruman, look to Ford. Ford has sold Land Rover, Aston Martin and Jaguar, and its controlling stake in Mazda. Volvo is for sale, too. In the end there will be a simplified Blue Oval. That's a good place from which to grow.
Danielle Boudreau, globeandmail.com: We're out of time for today. Thanks again for your insight on this topic, Jeremy.
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