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Downtown Detroit, including the General Motors World Headquarters is pictured from a vacant lot along Woodward Avenue in Detroit, Michigan in this July 21, 2013, file photo. (REBECCA COOK/REUTERS)
Downtown Detroit, including the General Motors World Headquarters is pictured from a vacant lot along Woodward Avenue in Detroit, Michigan in this July 21, 2013, file photo. (REBECCA COOK/REUTERS)

Driving It Home

Detroit may be bankrupt, but its car companies are booming Add to ...

The City of Detroit is bankrupt, not the city’s car companies. Let’s remember that. The Detroit Three are, in fact, far, far from bankrupt. Don’t believe me – believe the numbers.

Today, Ford Motor announced that second-quarter profit was up 19 per cent to $1.23-billion (all figures in U.S. dollars). This despite heavy losses in Europe, losses the company says will be less this year than last.

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Tomorrow, General Motors will release second-quarter results and they should be healthy, too – not just in the second quarter but for the rest of the year. The Chrysler Group, meanwhile, says it will have a net profit of $2.2-billion this fiscal year.

GM should keep printing money for a simple reason that is as old as the car business itself: product, product, product. GM is in the early stages of a massive new-model blitz. Aside from the redesigned Chevrolet Corvette, Chevy Silverado/GMC Sierra and Chevy Impala, 15 other new or refreshed GM vehicles will hit showrooms this year. It is, says GM’s North American President Mark Reuss, the biggest barrage of new models in GM’s history.

The point Reuss has been making for the better part of the last year is that GM has an old portfolio of products – one of the oldest among all car companies. That is about to change. If the success of the Cadillac ATS and other new GM models is any indication, GM is about to reel in a lot of new buyers.

“Where we put new product in, we have gained (market) share in sales,” he recently told Automotive News. “Chevrolet is next. We’ve got all the (full-size pickup) trucks coming, we’ve got the utilities, we’ve got a mid-sized truck, we’ve got the new Corvette, we’ve got the new Z28, we’ve got the Impala, which is just hitting the ground and is sorely needed. That’s the plan. There’s no substitute for product.”

By this time next year, GM will have one of the newest lineups in the industry. That is why, as Bloomberg notes, Goldman Sachs Group Inc. last week swapped GM for Ford on its Americas Conviction Buy list. Goldman Sachs projects that GM’s share price will rise to $45 in the next year from the mid– to high-$30s now.

“We see GM as one of the most attractive product stories in the sector,” Patrick Archambault, a New York-based auto analyst for Goldman Sachs, wrote in a recent report.

GM and Ford are earning pretty good profit margins, too. In North America last year, GM’s profit margin was 7.6 per cent, notes Bloomberg, trailing Ford’s 10.4 per cent. GM’s margins should grow more in the coming year because the auto maker plans to refresh 90 per cent of its cars and trucks in North America over the next three years. Ford will replace less than 50 per cent of its lineup from this year through 2016, notes Joseph Spak, a New York-based auto analyst with RBC Capital Markets, in the Bloomberg report.

As for Chrysler, the smallest of Detroit’s car companies continues to generate income and grow. Chrysler, in fact, is central to Fiat and Chrysler CEO Sergio Marchionne’s plan to create a global car company capable of competing with the biggest in the world.

To get there, Fiat has been exercising options to increase its ownership stake in Chrysler. The latest move in that direction came in early July when Fiat pushed its stake in Chrysler to 68.49 per cent. Why does Fiat want full control of Chrysler? With it, Fiat would get full access to Chrysler’s cash flow. Marchionne has long suggested that he wants more cash flow to invest in new models.

Detroit’s car companies were as dead in the late 2000s as the City of Detroit is now. Yes, yes, Ford never declared bankruptcy, but to reinvent itself, Ford borrowed $22.5-billion, mortgaging even the Ford Blue Oval. The point is, the Detroit 3 have been engineering a stunning comeback and while no one is raising a banner saying, “Mission Accomplished,” even the most dedicated naysayer and cynic must admit one things: Detroit’s car companies have for now engineered noteworthy turnarounds.

Let’s hope for a similar success story for the City of Detroit.

globedrive@globeandmail.com

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