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Detroit Three
Detroit Three

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Detroit's mounting a comeback - believe it Add to ...

Who would have guessed that out of the carnage of last year, the Detroit-based auto makers would find the legs to get back in the game?

No, they are not all the way back, but there is growing evidence to suggest Ford, General Motors and Chrysler are on the right track. Consider:

Ford just posted its biggest first-half profit in 12 years ($2.6-billion U.S.), the company's fifth straight quarterly profit with projections for even more "solidly profitable" quarters ahead. And Ford's sales are booming in both Canada and the United States. In Canada, Ford is the No. 1 auto maker, with market share up to almost 17 per cent and year-to-date sales up more than 23 per cent. Canada is the only national market in the world where Ford is No. 1.

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The cars behind the turnaround

Fiat 500
Detroit-based auto makers know they need to produce new models to survive

Chrysler? Dealer orders for the redesigned 2011 Jeep Grand Cherokee are exceeding expectations, prompting Chrysler to consider adding a third production shift at the Detroit plant where the SUV is assembled. And the company says it just posted its second straight operating profit.

As for General Motors, the company is acquiring subprime lender AmeriCredit Corp. for $3.5-billion later this year in what could be the first step toward creating a full-blown captive finance company to replace the former GMAC Financial Services, now called Ally Financial Inc. Some analysts say the AmeriCredit acquisition will allow GM to sell more vehicles in North America - perhaps as many as 20 per cent more. Earlier, GM posted first-quarter net income of $865 million, saying it is on track toward its first full-year profit since 2004. GM isn't promising a profit for 2010, but all signs point to the possibility. And Reuters reports that GM plans to file later this month its registration for an offering of stock to the public.

Here we are, just about a year after both GM and Chrysler emerged from bankruptcy in the United States, and while both are still government-owned, there is reason to be optimistic about the future - a future where Detroit-based auto makers are fully competitive, profitable and free of government ownership in the case of GM and Chrysler. (Ford, of course, remained solidly profitable and free of government investment during the bankruptcy woes of its cross-town rivals - and is growing more profitable with each passing quarter.)

So the Motor City's auto makers, collectively given up for dead at various times in the last decade, are showing encouraging signs of a profitable future. GM is the "New GM" and the rhetoric is backed by sales at the remaining four "core" brands - Buick, GMC, Chevrolet and Cadillac - profits and managements moves such as the one that brought chief financial officer Chris Liddell from Microsoft.

The new GM CEO, Ed Whitacre, may not be a car guy and, unlike Ford CEO Alan Mulally, he does not have a manufacturing background - one grounded in developing and building complex machines such as airplanes and automobile. Still, Whitacre, who described the GM that exited bankruptcy July 10, 2009, as "shell-shocked" and "constrained" and "overly complicated" has been pushing hard to flatten out GM's bloated bureaucracy and make senior executives directly accountable for results.

GM today, it could be argued, remains overly concerned with the coming IPO, but at the same time there is no question that inside the company, the leadership group is spending more time than ever developing cars and trucks real customers want to buy at something approaching sticker price - unheard for the most part in GM's recent past. Cynics will say nothing has changed at GM, but they're not looking closely and without jaundiced eyes.

Ford, meanwhile, is emerging as something of the business story of not the year but the young 21st century. During one stretch from 2005-2008, Ford managed to lose about $30 -billion. Just to survive, a broke Ford in late 2006 borrowed $23-billion to fund a turnaround based on a single-minded focus on globally developed models for the Ford brand. After earning $2.1-billion in recession-wracked 2009, Ford's first-half profits this year have approached $5-billion.

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Launching new models and reducing debt are the two areas where Ford is now moving with single-minded focus. Ford, unlike GM and Chrysler, did not have its balance sheet cleansed through bankruptcy, so the company is paying off obligations the old-fashioned way - with earnings. In fact, Ford says it had reduced its total debt by $7-billion last quarter, saving $470-million in annual interest payments. That leaves Ford with about $27-billion in debt. Himanshu Patel, an analyst for J.P. Morgan, says in a report that, with a lower debt load, "We feel that Ford has the ability to reach investment grade status within the next two years."

At Chrysler, the Grand Cherokee is the first new vehicle of its Italian period - since Fiat assumed management control. Ads for the new Jeep play up the fact it is a high-quality vehicle built and designed in North America, not Germany, South Korea or China. Chrysler's Fiat-based products won't arrive for about two years, but that doesn't mean the product line will stagnate.

On the contrary, while the redesigned Grand Cherokee is a shot in the arm for both dealers and the company as a whole, updates and upgrades are coming for many other products - first among them the Chrysler 300. By the end of the year, the Fiat 500 will be in selected showrooms and a high-performance Abarth version is coming some time next year.

Fiat and Chrysler CEO Sergio Marchionne - who like Whitacre is not a "car guy" - is instead a notorious workaholic and stickler for smart, fast decision-making. And he's fanatical about improving Chrysler's quality. For instance, the Grand Cherokee "must be flawless, with quality unprecedented in the history of Chrysler," Marchionne said in a March 30 speech in New York. In the speech, he said he is investing Chrysler's cash, now $7.37-billion, in the Chrysler, Dodge and Jeep lineups.

The cars behind the turnaround

Fiat 500
Detroit-based auto makers know they need to produce new models to survive

However, "for Chrysler to have any sustainable future it needs to massively increase unit sales," Max Warburton, a London-based auto analyst at Sanford C. Bernstein & Co., wrote in an April 15 report. "The firm needs great new product." Chrysler says it has 16 "all-new or refreshed" models in 2010. Until they arrive, along with the Fiat products, the verdict remains out on Chrysler.

For GM, this fall brings two critical new products - the high-volume Chevrolet Cruze compact, which replaces the Cobalt, and the Chevy Volt extended-range electric vehicle. The Volt (going on sale in October for $41,000 down south, with Canada coming next year) is the halo car GM hopes casts a positive light right across the product line. The Cruze is the car real people will buy in numbers, though. It's certainly priced to be competitive, with a base sticker price in Canada of $14,995.

GM is also working hard to burnish its Buick division in North America. The new Regal, based on the award-winning Opel Insignia from Germany, will compete in the entry-premium segment where Buick has not been present for decades, if ever. The Buick lineup will expand further in the coming 18 months, too.

Add all this up and there is reason to be optimistic about the future of North American-based auto makers. The bailouts of GM and Chrysler remain controversial, certainly, but during the worst of 2009, the alternative - liquidation of both companies - looked worse. Now these two have a chance to prove they are valuable assets worth saving.

As for Ford, through luck, serendipity, good planning or good management - or all of the above - the company stockpiled the cash to fund a turnaround and a new product plan during the worst recession since the Great Depression. Ford now is poised to reap the rewards.

With a nod to Mark Twain, reports of Detroit's utter demise may have been greatly exaggerated.

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