By Brendan Moore

12.23.2006

If you haven’t been following this story in the newspaper, on television, or on the internet, Ford Motor Co. is in tremendous trouble. They are failing miserably from a financial perspective, they are losing sales volume and market share, they are hemorrhaging workers, shutting down plants, their senior managers are jumping ship, they have a new CEO from outside the auto industry that is supposed to get them out of this free-fall, and worst of all, there is nothing in the product pipeline for the next couple of years that looks like the blockbuster sales hit they so desperately need.

How bad is it? Just looking at the financial aspect of the current situation yields the following: Ford’s market share in the U.S. market is now at 16%, down from 25% in 1995. Toyota will undoubtedly pass them as the No. 2 auto company in sales in the U.S. in 2007. Ford lost $9 billion USD in the first three quarters of 2006. The company estimates that their losses in 2007 will exceed the up-to $10.5 billion they forecast losing in 2006 and that their market share will drop to 14.7%. Company officials estimate that they will burn through $17 billion in cash the next three years trying to get the company back on track. To sustain that effort, Ford has borrowed $24 billion USD through a financing package that was made possible by putting up the whole company (even including rights to the Blue Oval brand) up as collateral. Ford is literally and figuratively betting the farm on their turnaround, which they predict will happen in 2009, the year they anticipate being out of the red. If they fail, they will have nothing left of any value to call their own.

Of course, the staggeringly dire financial condition of Ford begs the question of whether their leadership is up to the task of executing a massive turnaround successfully. From what I can see, Alan Mulally, the new CEO, recently of Boeing, is a good pick to lead the company during this difficult time. I think he is damn good at fixing a manufacturing company, he is tough without being mean and that he will expend every effort to make good things happen at Ford. I like Ford’s chances with him at the helm. As you get down to the next level of senior management there at Ford, though, there are some possible question marks, starting with Mark Fields, Head of North America for Ford. I want to be proven wrong, but he seems like a guy who knows the right things to say about what should happen, and makes those utterances with a great deal of confidence, but is not skilled enough to actually make those things happen. And as to why I’m singling him out when there are others that are suspect – if Ford North America doesn’t get fixed, then nothing else matters. Too early to tell at this point whether my uneasiness with him is justified, but if my intuition is wrong, I’m prepared to issue a public mea culpa when he does something wonderful for Ford. The mid-level managers seem like a pretty strong group in the aggregate, allowing for the usual exceptions, and Ford would do well to give the ones who can stick around a voice in turning things around, since they’re a lot closer to the front line than the senior managers. And finally, the actual production workers – this much-maligned group has always deserved better leadership than what they’ve had, and if they get it, I think they’ll surprise a lot of people with their productivity and quality results.

So, if we assume that they have the money and the horses in management to turn things around, and they’ll make the hard choices in terms of cutting brands, cutting costs and personnel, then we arrive at product. This is where things get really tough in terms of the turnaround scenario. Jaguar, Aston Martin, and Land Rover are very likely to be sold off in 2007. Volvo is on the bubble, but even if it manages to weather the brand-cutting storm, it doesn’t have enough volume to pull Ford out of the abyss. Everything that’s going to be sitting on the blacktop for sale at Ford-Mercury-Lincoln dealerships across the United States in the next two years was already set for production before their new CEO arrived; and what they have for sale now runs the gamut between not-so-good and good, with nothing except the F-150 pickup and the Mustang coupe considered top dogs in their respective segments. Ford’s full-size SUVs and their Lincoln-Mercury clones are among the leaders in their segments, but those segments are getting smaller by the day. The new Ford Edge is a good vehicle, and the new Ford Fusion/Mercury Milan is a very good vehicle, but it doesn’t seem likely that either one is going to dominate the sandbox they play in out in the marketplace. Ford did some preview shows last week for the automotive press in which they showed some future production cars, some concepts, and some concept drawings, but by all accounts, there was no show-stopper in the group of future production cars, and the concepts are, well, concepts. It’s going to be awhile before anything that is now a concept can make it to market as a production vehicle. And frankly, there is no guarantee in the car business that a great concept vehicle can be transformed into a great production vehicle. Things that make the concept vehicle so endearing and attractive on the display stand frequently get lost along the way as the car moves to the reality of the production line. Add in the fact that a stagnant auto market is forecast for next year, and that means that a shell-shocked Ford has to take market share away from some very strong competitors in a flat market and has to do it with decidedly average product. That’s a pretty tough hill to climb.

So, what can Ford do for the next 24 months in terms of product? Not very much, the answer turns out to be, but here are some humble suggestions.

Shamelessly raid whatever you can from the expensive brands that are leaving (engines, platforms, etc.) and work it into Ford vehicles wherever possible. High-end components in a mass-market brand can do wonders for sales. Look at the current Chrysler 300C with the last-generation Mercedes-Benz hardware underneath.

Take a hard look at the Ford of Europe and Ford Australia lineups and see if there’s anything there that Americans might want to buy. The Ford Focus C-Max was just named Europe’s Car of the Year, the Ford Focus ST is a wonderful little rocket, and those cars might just sell in the United States as the price of gasoline keeps going up. The Australian Ford Falcon is a good rear-wheel drive platform that could be used as a potential performance car platform here in the States.

Address, when feasible, the known shortcomings of the vehicles that aren’t selling currently, i.e., the horsepower deficit of the Ford 500. Put an engine in it with more horsepower, regardless of whether you get the horsepower through larger displacement or boost. Offer a flagship version with even more horsepower and AWD to get all that power to the pavement. You won’t have a BMW-eater, but you sure as hell ought to be able to embarrass a Toyota Camry or a Honda Accord.

You have some wonderful designers and engineers working for you. Take whatever concept car that people exclaim over and make it show up in undiluted form in a showroom as soon as possible. If you have to water it down in looks and/or performance, then don’t do it. Go on to the next one. You don’t need any more mediocre iron in your lineup.

Those are my general product suggestions for the short-term. Long-term, it gets more complicated, but the next 24 months is what Ford needs to get though first.

Can Ford turn around their business before the borrowed money runs out? It’s going to be tough. Very tough. In the car business, having great product solves a lot of problems and having lousy product makes all of your problems ever so much more formidable. I think Ford can actually turn it around, but almost everything they do (stopgap measures, big ideas, etc.) in the next 2-3 years is going have to work, and even if that’s the case, they’ll still need to be a little lucky here and there. I want them to succeed but I am a realist, and the truth of the matter is that Mr. Mulally and colleagues have a lot of hard work and a lot of sleepless nights ahead of them.

COPYRIGHT Autosavant – All Rights Reserved

Odds and Ends About Cars and the Car Business

Brendan Moore

12.19.2006

MAZDA announced that it will scrap all 4,703 new vehicles that were on the freighter Cougar Ace when it went into a 60-degree list on its way across the Pacific Ocean in July of this year. Mazda originally said it would be selective about which vehicles to scrap since many of the vehicles suffered no damage whatsoever, and the company received a great many inquiries from consumers about buying one of the vehicles at a considerable discount. In the end, though, Mazda decided that all of the cars on the Cougar Ace would be tarred with the same brush of (suspicious) public opinion, no matter what their condition, and decided to scrap all of the vehicles in order to avoid any bad press that might result from someone getting a car with subsequent chronic problems.

AUDIO systems in cars are going to be changing dramatically in the next few years. You will still have a radio, but that radio will offer regular channels, a subscription channel (or two), and HD (high-definition) channels. You might have a CD player, but if you do, it will be in addition to a hard drive that will store 20 gigs or more of MP3 files, just like your PC does now. Through an input jack, BUS connection, or via a wireless connection, you will be able to load MP3 files from a laptop, flash drive, external hard drive, mobile phone, etc. right into your car’s audio system. Which, of course, is the hot setup, and is how it should be. There will also be input jacks that will enable to plug an external player, like an iPod, into your in-dash system. This option exists on many car audio systems now, but will be a requirement on OEM systems in the very near future. And that’s just audio – the video options available for your passengers to enjoy will also expand considerably. More on that later.

SMALL cars (B-Class cars in Europe) like the Chevrolet Aveo, Nissan Versa, and Honda Fit have doubled their market share in the United States in 2006, which sounds pretty impressive until you learn that their market share in the U.S. last year was 1%, making their current market share a wee 2%. Some market analysts are predicting another doubling in market share next year, but it depends on what the price of gasoline does in the next 12 months – Americans tend to react to current gas prices as opposed to long-term fuel cost trends when they’re buying a new car.

CHRYSLER has to contend with lots of problems these days; swollen inventory, poor sales figures, stale product, management departures, the ire of their German parent company, etc. You can now add this to the mix: the increasing chatter in in the auto industry that DaimlerChrysler will sell off ailing Chrysler in 2007, and that the most likely buyer will be one of the Chinese car companies. Will it happen? Hard to say, but it’s not a far-fetched scenario, that’s for sure. Any Chinese buyer gets access to the U.S. market and a huge existing dealer network, instant international credibility, and access to technology and design that they currently need, and all by simply writing a check, as opposed to having to wait for those advantages to occur slowly through organic growth. If DaimlerChrysler were to put Chrysler up for sale, at least two of the Chinese car makers would be likely bidders.

AUTOMATIC transmissions in AMC Ramblers in the 1960’s were called “Flash-O-Matic” transmissions by the company in the sales brochures and owner manuals.

EUROPE doesn’t like SUVs, and public opinion shows signs of increasing hostility toward SUVs and their owners. In London, city officials have proposed an approximately $40 USD fee for SUVs to simply be allowed to drive in the center of the city. Not $40 per year or month, but per day. The measure has widespread support in London. In Italy, the new national budget calls for an additional annual tax of approximately $1750 USD on any SUV registered for road use. The city of Florence in Italy has banned all SUVs from the city. Amsterdam is considering banning SUVs from its city limits. So are Madrid, Barcelona, Brussels, and others. In Paris, SUVs and their owners are subject to jeers and threats, and a whole movement called les dégonflés (the deflated) has sprung up, whose mostly-young members methodically deflate all four tires of any parked SUV they come across in the city. For the benefit of our American readers, it should be noted that the typical European SUV is only the size of a typical family sedan in the U.S. – these are not anywhere close to the size of the hulking 3-ton behemoths that Americans are used to seeing at their local grocery store or on the commute to the office. And yet, the feeling in Europe is that even the much-smaller European SUVs are too big for urban use, and should be confined to the countryside. People who drive an SUV in an urban area are generally viewed as selfish or stupid, or increasingly, both.

TOYOTA plans to produce 9.45 million vehicles worldwide next year (2007), according to Nihon Keizai Shimbun, a Japanese publication. This production number includes vehicles produced by Hino and Daihatsu, two of Toyota’s subsidiaries. If Toyota does hit 9.45 million, that output will probably be enough to surpass General Motors as the world’s largest vehicle manufacturer for the first time ever. I say probably because if GM has a good year, it will retain the top ranking by a thin margin. If not, then Toyota will be the new market leader, because it’s a pretty safe assumption they’re going to have a good year.

HOPE springs eternal for all sports fans, with cries of “wait til next year” heard after every losing season, and the car business is similar, but with a longer lag time – the cry of “wait till the next few years” is the one you hear when an automaker is having a bad year (or bad decade). Of course, you can’t just say it if you’re a car manufacturer, you have to show investors and the automotive press something, so the idea of advance showings of future product (and one-off design studies) was born a few years ago. It is now common to show everything in advance if the whole line-up is in trouble, but if the car manufacturer is in good shape, and there’s a single model that’s getting knocked around by it’s competition, then you give an advance showing of the one vehicle that will turn around that segment So, Ford just finished a series of preview shows of their whole lineup for the press, which by all accounts, was met with reserved applause by the various audiences; Nissan has offered a look at a single model, a fairly small crossover, again, to nodding heads, normally-reluctant Honda has shown drawings of a new sporty Accord coupe (the new Toyota Camry is giving Honda fits in that bread-and-butter segment) which will appear in the metal at the Detroit Auto Show in January 2007, and Chrysler is giving “exclusive” peeks at upcoming product in every segment to as many automotive scribes as possible. But, there is no auto maker that has mastered the art of the advance showing quite like General Motors. In the last two years, GM has been able to show enough future product to journalists so that the previous knee-jerk tendency by automotive writers to ridicule any and all efforts by General Motors has been tamped down considerably. Whereas, in the past, GM was usually described as big, dumb, and slow, and the cars they made were described in similar terms, those words don’t appear so much in print anymore. And last month’s show that GM was no exception; in fact, several people who were there (unfortunately, we didn’t get an invitation – maybe next year) were quite impressed and described some of the vehicles shown as “real game-changers” for GM. In addition, the Q & A sessions in which GM executives answered every question thrown at them by the press about market share, platform extensions, engine choices, design influences, etc. convinced those in attendance that the folks at General Motors actually have a plan, and at least as far as product goes, it’s a good one.

AUDI has decided to start production in India, and the first model produced in-country will be the A6. Production will commence in third quarter 2007 at a plant in Aurangabad.

SOMETHING interesting to think about: The U.S. Department of Energy did a study recently regarding the existing power grid’s ability to handle the demands of plug-in hybrid vehicles. And according to the DOE, the existing grid will handle 180 million plug-in vehicles. There were some other thought-provoking assumptions in the report; for instance, the fact that if more electric power was being provided by utility companies as a result of electric vehicles being recharged, this additional power would be provided over existing infrastructure, resulting in a maximum realization of value for the utility vis-à-vis the fixed network, thereby driving down the overall cost of electricity nationwide. This effect, however, would be much more pronounced on the East Coast and the Midwest, which currently has idle capacity in current transmission infrastructure. The report also noted that carbon dioxide emissions in cities would go down by about 5%, but sulfur dioxide emissions (the cause of acid rain) would go up in rural areas as a result of more coal being burned in those areas to produce the extra electricity. Just as an FYI, if you think environmentalists are fanatics about plug-in hybrids, you should spend some time with a utility company executive. To them, it’s all about a different kind of green power – a switch to hybrid electric vehicles by a substantial number of drivers would mean a tremendous increase in revenues and profits (green, indeed!) for utility companies nationwide. To say that their self-interests are at work in their support of plug-in vehicles is a considerable understatement of fact.

LEXUS is running television commercials in heavy rotation this holiday season showing nice-looking people giving a new Lexus to their equally attractive significant other. Seeing these commercials might make you think that this sort of thing happens all the time during the holidays. It doesn’t. There are some cars (almost always luxury makes) given as gifts this time of year, but most retail dealers say it is a small percentage (less than 2%) of the cars sold by the average luxury dealership in the month of December. Lexus, however, states that the percentage of their cars sold in December and subsequently given as gifts is around 10%. That statement can not be proved or disproved since the tracking data doesn’t exist regarding gift intentions, but it seems unreasonable to believe that their statistics regarding vehicles bought as gifts would be so different than the other luxury makes. But, at the very least, the marketing dollars spent on the commercials go to brand advertising, so no problem.

A 2007 Bugatti Veyron weighs 4162 pounds, has 1001 bhp, and tops out at 250 mph. It costs 1.2 million USD.

COPYRIGHT Autosavant – All rights reserved

Odds and Ends About Cars and the Car Business

By Brendan Moore

12.05.2006

DRIVING done by American drivers dropped in 2005, for the first time in 25 years, according to Cambridge Energy Research Associates, a consulting group based in Boston. The main reason says CERA, is the same reason that sales of gas-hungry SUVs dropped in 2005 and continued to drop in 2006 YTD – the price of gasoline. As an interesting sidebar, average miles per vehicle also dropped in 2005 from 11, 946 to 11,856, but CERA attributes that to three reasons; one, the aforementioned price of gas, two, many households have more than one vehicle per driver, and three, the fact that the percentage of elderly drivers in the U.S. increased.

VW now says it may not make a profit in North America until 2009. VW says this is due to continuing unfavorable foreign exchange rates and the weakening United States economy. While this is undoubtedly true, the additional reason left unsaid by VW is that their current product lineup is not doing as well as hoped. This omission is made apparent by the statement by VW that the way the company will return to profitability in 2009 is by the presence of several new models, including the compact SUV Tiguan, the new Scirocco, a new minivan shared with Daimler-Chrysler, and 50-state compliant diesel versions of several of their current models like the Golf, the Jetta, and the Passat.

VISIONARY VEHICLES, the firm owned by auto entrepreneur Malcolm Bricklin, has been saying in a loud voice for a couple of years now that it would bring Chinese-made Chery cars into the U.S. as soon as possible. In fact, the original date for sales to commence was 2007. Bricklin says now that he’s not going to do that anymore, the deal with Chery is off, and that Visionary Vehicles LLC is going to design and engineer vehicles in the United States with production occurring in China. In effect, Visionary Vehicles proposes to be a virtual auto manufacturer, with design and engineering occurring in one place, engines and transmissions sourced from various manufacturers throughout the world, and all of this coming together in low-cost China for manufacture and assembly. The finished cars will then be sold in various markets internationally, including the home market of Visionary, the United States. Of course, if you are not familiar with Bricklin’s history as an automotive entrepreneur, it’s worth mentioning that Malcolm Bricklin has something going on somewhere almost all the time, and everything Mr. Bricklin does is going to be big, big, big. Just ask him, he’ll tell you. But, all commentary aside, I hope he pulls it off, because he wants to put out the best product possible, and more market competition is never a bad thing.

NEW car affordability is important to consumers and therefore to car companies, auto dealers, and banks. Comerica Bank out of Detroit says that, as of third-quarter 2006, it takes 23.6 weeks of average family income to purchase an average-priced new vehicle. That is a decline of almost two weeks from the average amount of time it took in 2005. The affordability index is based on an average cost of $26,500, which includes the loan finance charges accrued on such a purchase. This amount is down approximately 5% from 2005. Conversely, average family income has increased approximately 5% in this same period. All of these factors contributed to a new car being easier to buy this year.

ELECTRONIC parallel parking systems could be the next big thing, with Lexus offering one currently in their flagship LS 460, and Hella, an electronics manufacturer, selling one to an undisclosed car company buyer in Europe for use on its cars in 2009. The Hella system is simpler and cheaper than the one Lexus uses, and also has the ability to determine if your car will fit in the available space, something the Lexus system cannot do. Simpler, cheaper, and more features are all good things when you’re competing in any market, so Hella’s prospects look good in that regard, but the test for the mass market will be getting the retail cost down to a price point where the consumer says, “okay, that’s worth it”. Just off the top of my head, I would guess that you might get 25% of car buyers at $300. And some sizeable percentage of drivers are not going to be interested at any price for quite some time, either because they generally don’t have to parallel park, or, parallel parking is not something that is difficult for them to accomplish. An illustrative example is air conditioning in cars in the United States. When it was first offered in the 1950’s, it was so expensive compared to the price of the car that most people considered it a ridiculous extravagance, akin to having a fur-lined sink or chrome pajamas. As the price came down, buyers in areas where it was hot most of the time (Florida, Arizona, etc.) embraced the technology first (1960’s), with people in Minnesota and Vermont coming along years later (1980’s, 1990’s). Now, no matter where you live, it’s very difficult to get a new car without air conditioning standard. We’ll see what happens with the parallel parking systems.

VOLVO believes it will turn around their sales numbers in the U.S. with four new/redesigned models in 2007 – the C30 hatchback, the V70 wagon, the XC70 wagon, and the S80 sedan. Here’s a word of advice for Volvo – go big on the C30, and sort-of-big on the XC70 (as long as you support it with marketing that emphasizes the AWD).

U.K car companies are thriving, but government over-regulation is threatening production, says the Society of Motor Manufacturers and Traders. The SMMT, which represents domestic and foreign manufacturers as well as suppliers, states that more commitment from the government there regarding the importance of their operations would be a positive sign, and would also send a clear signal that future growth in the industry would be welcomed in the UK. The largest auto producers in the UK are Honda, Nissan, Toyota, Ford, and GM.

GM had to be happy to get rid of Kirk Kerkorian, but the bigger question is how his departure will affect the stock price of GM, and inextricably connected to that, the investor and consumer confidence in GM’s turnaround plan. Kerkorian voted on his faith in GM’s ability to right itself with his stock and bailed out of his huge investment in GM. Similarly, GM’s employees recently voted with their feet, with 35,000 leaving GM last summer in the employee buyout plan executed by General Motors in an attempt to get their worker costs down. My opinion is that GM will make it, albeit as a significantly changed company with some different measures of success in the overall market. Their costs are coming down, and they’ve got some very good product here now and in the pipe for later. But I am a scribe, not an investor – the stock market will make its own assessment of GM’s efforts in reinventing itself.

HOW many people would be stunned to hear that a Hummer H3 is actually far better for the environment than a Toyota Prius? CNW Marketing Research has spent two years painstakingly researching what they call the ‘dust to dust’ analysis of various cars, which includes an assessment of all of the energy needed to design, build, sell, drive and recycle/dispose of a vehicle from genesis to junkyard. CNW says their study imputes all energy costs, thereby arriving at a ranking of the total environmental impact of a vehicle while it exists on this earth. Instead of focusing on one area of environmental impact (fuel mileage), the study calculates attributes like vehicle longevity, size and shape of steel panels used (recycling ease), materials, transportation, chemicals used in production, inert chemicals in the car itself, and just about everything else you can think of that happens when you make a car, drive a car, and then subsequently scrap a car. Interestingly, the one of worst mass-market cars for the environment, according to this study, is the Toyota Prius. The absolute best car for the environment, says CNW, is made by the same company, Toyota, and is a Toyota Scion xB. The worst vehicle sold in the U.S. from an environmental standpoint, says the study, is a Maybach.

SEAT is looking more and more like an orphan under the future VW boss Martin Winterkorn. Seat, the Spanish subsidiary of VW, has been navigating choppy waters lately in the market, despite making some great vehicles, and it is said that Winterkorn wants it to go away as soon as possible. Look for the Seat company to be sold soon after he takes the helm at VW.

MOVING up the recently ended L.A. Auto Show a month did wonders for the press coverage accorded to the event, since the show is no longer so close to the massive Detroit Auto Show in January. And it was a much better show this year, with more production models and concepts present, with a greater percentage of those vehicles possessing greater importance in terms of automakers’ future plans. That said, it’s still not quite there in terms of the big boys, the aforementioned Detroit show, the shows in Paris, Tokyo, Frankfurt, etc. Don’t get me wrong, it was far better than what you’d see in other large cities like Houston or Miami or Washington D.C., which are just basically large dealer showrooms with a couple of the obligatory concept cars from one or two carmakers, but it wasn’t the show spectacle that is Detroit.

COPYRIGHT Autosavant – All Rights Reserved