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Competitive Challenges: Predicting 2008

Trying to figure out the future is a tricky thing, but here are some thoughts.

I generally avoid predicting the future, particularly as the automotive industry seems to be changing on a minute-by-minute basis.

I generally avoid predicting the future, particularly as the automotive industry seems to be changing on a minute-by-minute basis. But, with the past 12 to 24 months changing as it has, people are always asking me, “What is your prediction for the industry going forward?” So I thought I would explore some of the facts.

I never thought after 20 years in the business and growing up with Jim Harbour in the business that we would have an industry wherein one of the founding domestic auto companies is owned by a private equity firm. But in 2007, the role of private equity took on a whole new meaning. I am very positive about the future of Chrysler and the new ownership. They have a very strong team with Tom LaSorda and Jim Press. Private equity ownership affords Chrysler many opportunities nonexistent for Ford and GM, including rapid decision making on key critical issues because they don’t have to answer to Wall Street and shareholders. Also, the operations side of the business has improved dramatically due to LaSorda and his team’s efforts to improve quality and productivity. And now, with the new union agreement, they are better positioned to be more competitive. Also, landing Jim Press was a major coup for the company. He is quickly working to rationalize products, complete upgrades to current products, and pull forward new products in the dealer showrooms. This is Chrysler’s most important focus going forward—the design of “got-to-have” products for consumers. All of these positive factors should drive profitability.

General Motors is another company I’m very excited about. They are best positioned for success among the domestic three based on today’s results. The fact is, GM took action years ago to improve product development, process engineering and manufacturing efficiency. The results show in quality, productivity and cost reduction. Led by a deep bench of top-notch leaders starting with Rick Wagoner, GM pushed hard this year to forge a new contract with the union that makes the corporation more competitive. Additionally, of the domestic three, GM is the best positioned globally as it has operations in Southeast Asia, India, South America, North America, and Europe. GM is profitable in every region of the world with the exception of North America, where it had a small loss in 2006. Most importantly, of the domestic manufacturers, GM has launched and will be launching some more great products. These products are winning awards and delighting customers for the first time in a long time. One of GM’s biggest struggles is getting customers that were lost years ago back into the dealer showrooms.

The facts on Ford at this time are less positive in comparison. As I write this, they are negotiating a deal with the UAW that will likely be similar to those worked out with GM and Chrysler. This will, like the others, provide them with a much better base for competitiveness. Additionally, Ford is in the middle of implementing a major restructuring program that calls for plant closures and more job buyouts. Its market share has hit a significant low and volume is down. Ford is weak in Southeast Asia compared to GM, and must move quickly to gain market share. Alan Mulally appears to be a great leader and is, in fact, making progress converting Ford’s culture. However, we all know this cannot be done overnight. The fact remains the most significant challenges lie on the product side of the business. Ford needs to pull new and great programs forward and eliminate those that are unsuccessful. Additionally, they need to focus on product development efficiency to create savings for new programs. With private equity across town making decisions at lightning speed, Ford must execute the restructuring plan at a much faster pace to stop the market share slide. Otherwise, more plant closures will be needed than those already announced.

Many people believe the Japanese are flawless, but reality is very different. The fact is yes, Toyota and Honda are great companies, but they have had their struggles, and in recent months they have lost some very significant American leaders and middle management. Both companies have grown very quickly in the North American market and have more growth planned. That puts significant strain on any organization and their suppliers. True, they both have very high quality vehicles. However, many critics have discounted recent designs saying they are not as exciting as they could be. Nonetheless, they make a ton of money that is reinvested into more product features on a regular basis.

Nissan is not as successful and is facing some of its own challenges in this demanding market. Other companies like the German and Korean automakers continue to be major players in North America, but the facts indicate that they compete at a lower volume level with the exception of Hyundai/KIA, which I believe is still a company to watch. That said, they will not have a major impact in 2008. The bottom line is all of these foreign companies will be facing three relatively new domestic companies that will be hitting the market with a more competitive labor agreement and a plethora of new products to battle the competition.

Although it is impossible to identify specific companies at this point (and I wouldn’t anyway), the biggest impact will be on the supply base. The fact is, consolidation is real and coming at a speed none of us anticipated. Many suppliers are now owned or have some involvement by private equity and the future holds more of these transactions as the supplier community gets squeezed through consolidation.

One thing I can predict for sure. This industry and Detroit will never be the same again. The domestic companies will be dramatically smaller versions of their former selves, but I believe most of them will be profitable again and sooner rather than later. The old adage “things will get worse before they get better” is unfortunately my prediction for 2008 but said differently—“things will get worse in order to get better.” 

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