Howes: Do fat auto profits herald new normal for Detroit?
The timing could be better.
Less than two weeks into national contract bargaining with the United Auto Workers, Detroit’s automakers each confirm a profit-margin bonanza that is likely to sharpen union pitches to share the wealth — chiefly because there’s so much of it.
General Motors Co. delivered a blistering 10.5 percent margin in North America. Ford Motor Co. topped 11 percent. And, Thursday, Fiat Chrysler Automobiles NV reported margins of 7.7 percent, reaching targets it officially did not expect to hit for several more years.
“We need to be very careful not to fall in love with these numbers in terms of what the machine can do at all times,” CEO Sergio Marchionne cautioned analysts in a call from London. “The objective for us is to close that gap” separating FCA from GM and Ford “and close it as quickly as we can.”
“We’re still far away from where our other competitors are. I think we have a long way to go. We need to keep on pushing,” he said, adding that FCA does not expect “substantial market deterioration” in the second half of this year or all of next year.
The risk is clear. The longer the horizon for a robust U.S. market, the more likely players on both sides of the bargaining will assume they’ve reached a new normal that will support higher fixed costs and evoke caricatures of Old Detroit.
This is uncharted territory for all sides. Whatever cynics say of Detroit’s collective inability to change its ways fundamentally, double-digit margins have long been the stuff of envy and fantasy in this town’s eponymous auto industry.
It was something rivals in Germany and Japan produced, not Detroit, at least not since the 1960s. It was something the old GM of Jack Smith and Rick Wagoner talked about, quarter after quarter, but never came close to achieving.
But even the most entrenched paradigm can be changed. All it takes is an existential crisis, timing, the right leadership (and an assist from the American taxpayers) to seize the opportunity to move in a new direction.
Detroit’s automakers are doing just that, each in their own way and at their own pace. Maintaining the momentum, and permanently altering outside perception, requires three things not frequently associated with this town’s automakers: discipline, stability and consistent execution.
Art meet science. Namely, how do GM and Ford maintain their edge, and Marchionne close the gap, when UAW bargainers see openings to enrich compensation formulas? Adjusted North American operating profits of more than $70 billion over the past four years of the contract expiring Sept. 14 can do that — and they probably will.
Detroit’s increasingly impressive profit-margin performance is raising expectations all around. Union members and salaried employees are likely to see the recent past as prologue, even as investors and industry analysts are poised to accept that the post-crash trio is on its way to achieving a new normal.
That would be something that looks more like a German luxury brand’s margins than the comparatively paltry showing of the mass-market kind built for way too long in Detroit.
We’re careening toward a big test. It will challenge auto executives and union leaders, salaried employees and the rank-and-file, Motown boosters and critics who believe these companies and the people who drive them are living on borrowed time, forever.
Can “the machine,” to borrow a favorite Marchionne riff, be tuned to perform and survive in good times and bad? Can its engineers in labor and management, the board room and the bargaining table, resist the impulse to make bad decisions in good times?
There are 70 billion reasons the answer to those questions are, “it depends.” The big bounce back to profitability from the edge of extinction creates a tension between old traditional expectations and a new competitive reality that demands flexibility and punishes those who don’t have it.
The global auto industry is not a cliche; it’s real. As much as the rich U.S. market is driving profitability and boosting margins here at home, the growth in market share and scale is coming increasingly from China, India, eastern Europe.
The best way for bargainers on both sides of the table to ensure strong margins is to use the prism of competitiveness — and to understand that the good times unspooling right now are not permanent markers of the new Detroit.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays and can be found at http://detroitnews.com/staff/27151.