When last I talked with John Hoffecker, head of Alix Partners LLP's global automotive practice, he predicted Armageddon.
A Detroit automaker would go bankrupt, he said. Two did. The industry would be rationalized; it was, starting here. A financial reckoning would be realized; it was, though at the time my own failure of the imagination — shared by many in this town — did not anticipate how thorough that reckoning would be.
When I talked with Hoffecker Monday, he predicted a different sort of test will affect all automakers whether their leaders want it to or not. It's essentially the capital-eating challenge Fiat Chrysler Automobiles NV CEO Sergio Marchionne envisions as he seeks a partner to tackle the looming confluence of slowing sales growth and skyrocketing demand for software integration, electrification of cars and trucks and self-driving vehicles.
The question is who does what — and how — to position themselves competitively for a future that will pivot more tightly around market demands for sharing technology, even transportation itself. What might that all mean for automakers, their positions in their respective markets and their brand differentiation in a world markedly different from the engines, transmissions and sheet metal of the past century?
"It is company and merger-partner dependent, not industry defined," Hoffecker said in an interview, detailing the firm's global automotive outlook to be released Tuesday. "We're living in a very prosperous time right now. The one thing I'm sure of is we're in a cyclical business that will always be cyclical" — and that times will get tougher when global, and U.S., market growth cools just when automakers are contemplating major bets on their technological futures.
Neither he nor the Alix Partners study call the findings a wake-up call for the industry. But that's what they are: a necessary reminder, less for top executives aware of the trends and more for average folks who depend on the industry, that the profitable rebound of the past five-plus years will not likely continue unchallenged.
Or that the ability of comparatively smaller players to compete effectively without the massive scale Marchionne seeks — think Subaru or Hyundai-Kia, Hoffecker says — can continue. It might, but Hoffecker and his team see industry leaders analyzing similar trends and coming to different conclusions.
Marchionne wants a full-blown merger with a General Motors Co. that says it wants no such thing. Ford Motor Co., shorn of non-Blue Oval brands, insists it can negotiate the Brave New World on its own. Toyota Motor Corp., Honda Motor Co. and BMW AG lead the industry in capital spending and research and development investment as a percentage of revenue, according to Alix Partners.
"I don't believe it has to be one way or the other," Hoffecker said. Everyone with the automakers "is taking a different view because there's no understanding of where the answer may lay."
The stakes are potentially huge. The push toward self-driving, or "autonomous," vehicles amounts to a treasure quest that could richly reward whoever gets there first. The brand-building bonanza and technological bragging rights alone could anoint an industry leader who isn't necessarily one today.
That's not all. Alix Partners predicts the cars and trucks of the future will be developed around four pillars it calls CASE, as in connected, autonomous, shared and electrified. The automakers and suppliers willing to make smart bets — and show a willingness to take risks in those areas, even if they don't net huge unit sales today — are likely to emerge as the winners of the new race, with or without partners.
Meaning tough choices lay ahead. Players like GM and Ford who think they can go it alone may be forced into a strategic rethink, especially if they are unable to show tangible results in the marketplace; German luxury players may find their technological edges eroded by the democratization of technology; others, like Marchionne's FCA, may grow more desperate for partners its leadership may struggle to find.
Three other variables, each likely to exert more pressure: first, that oil prices are more likely to return to their (higher) long-term trend; second, that rising interest rates signaled by the Federal Reserve likely would reduce the purchasing power of U.S. consumers; and, third, that global sales growth is likely to slow in the United States and in China, just when big investment calls are likely to be required.
There is, of course, opportunity in all this. GM and Ford each demonstrate an understanding of these emerging industry mega-trends, from Ford Executive Chairman Bill Ford Jr.'s evangelism for mobility and electrification to GM CEO Mary Barra's prediction that the industry will see more change in the next 10 years than it has seen in the past 50 — and GM intends to be a leader.
Fine, but saying it isn't the same as doing it. The world Hoffecker and his team detail in 45 bracing pages looks pretty realistic, considering the way technological change continues to march through our daily lives. The auto industry is not immune; it's a bellwether — to the extent its players see and accept the challenge.
Daniel Howes' column runs Tuesdays, Thursdays and Fridays and can be found at http://detroitnews.com/staff/27151.