The Big Assumptions powering Detroit’s automotive rebound from near-collapse in 2009 increasingly look mistaken.
Oil prices are not soaring as predicted, even hoped. That market-based reality makes it harder to persuade consumers to choose the electric and hybrid vehicles touted by the Obama administration and regulators accustomed to deciding what’s best for everyone else. Not so fast, official cheerleading notwithstanding.
Demand for pickups and SUVs, the lifeblood of this town’s automakers, is not ebbing. It’s soaring, prompting General Motors Co. to begin importing a Chinese-made Buick SUV and Fiat Chrysler Automobiles NV to reshape its North American footprint and double-down on its hot Jeep and Rams brands because of what it said Wednesday is a “permanent shift” in the U.S. market.
Competitive contracts with the United Auto Workers locals, reached in the aftermath of the global financial meltdown, by themselves are not enough to produce profitably at home the less expensive, lower-margin cars in less demand. That’s why FCA and Ford Motor Co. are steadily reorienting car production for the U.S. market to lower-cost Mexican operations and boosting higher-margin truck and SUV assembly in union plants here.
Robust sales and record profits in North America, a long time coming, are not sufficiently convincing to investors content to bid shares in GM, Ford and FCA down even as earnings go up. That’s a clear signal the smart money thinks Detroit is not prepared to meet the competitive threat posed by Silicon Valley and its penchant for disrupting traditional business paradigms.
Tough federal fuel economy guidelines requiring automakers to deliver 54.5 mpg for their fleet by 2025 are forcing investment in technology and alternative powertrains the market is not necessarily prepared to buy, judging by sales numbers. Absent a fundamental shift in energy prices, how long can the companies afford to fund the disconnect between invested capital and return on that investment?
Bottom line: the real world of petroleum politics, technological advancement and consumer choice is prompting a fundamental rethink of the Detroit-based industry that just a few years ago was steeling itself for traditional battles with the UAW and such rivals as Toyota Motor Corp. and Volkswagen AG.
The game is changing, quickly. Investors who just a few years ago craved signs Detroit’s automakers could deliver sustainable profitability in the home market now want evidence they also can make money in the fast-changing world of “mobility” enabled by leading-edge applications of technology. And if they can’t make money doing it — a profit-making venture’s reason for being — then why bother?
“The stock market’s like ‘Hey, we’ve seen this before,’ ” Morgan Stanley’s Adam Jonas said earlier this month at the Automotive News World Congress. “This industry is incredibly ripe for disruption. The disruption’s probably not going to come from the 100-year-old mechanical legacy.”
Swooning equity markets this year don’t help mitigate that century-old history, either. Ford shares are trading near their lowest level in three years; GM shares are off more than 28 percent from a high of nearly $41 in December 2013; FCA shares are down roughly 32 percent since March of last year.
FCA’s response? Mark Twain, in CEO Sergio Marchionne’s written prelude to the FCA business plan update released Wednesday: “The reports of my death have been greatly exaggerated.”
Maybe so. But the FCA boss is by far the most outspoken of his peers when it comes to questioning the sustainability of capital demands for the industry. He says consolidation is not only inevitable; it is necessary. He acknowledges the interdependence of Detroit and Silicon Valley even as he cautions against trying to turn “Detroit into Silicon Valley,” as he said at the North American International Auto Show.
Making good money developing, building and selling cars, trucks and SUVs in the rich U.S. market is just not good enough anymore — at least not to those who own and finance pieces of the companies. Ford is expected to report one of its most profitable years in history Thursday, only to likely be pressed about what else it’s doing to avoid becoming the Kodak of its industry because it did not respond quickly enough to rapid change.
Nearly seven years after the Obama administration decided to emulate its predecessor by continuing the auto bailouts and ordering the bankruptcies of GM and Chrysler, the script is flipping. Assumptions then do not adequately reflect reality now, nor the quickening pace of change the industry and its people face.
It’s a new game Detroit still has to prove it can play.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7.