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General Motors & Ford-It’s the cars “Stupid” part II

We’ve already stated our belief that that 2007 will see Americans buying several hundred thousand less cars than they will purchase in 2006. We are looking for 16.8 million vehicle sales this year. Let’s get into the numbers, and see what the implications are. When you, or I buy a car for our personal use, we pay on average about ,000 per car. The car rental companies in the United States purchase more cars than any other group. They buy American cars, and pay an average of ,000 per car. We don’t see any big profits from this market segment.

Let’s look at the dealerships, and sort out how the Japanese do against the Americans. A Chrysler dealer last year on average sold about 225 cars. If you were a Ford dealer, you averaged almost 700 cars per dealer. GM’s Chevrolet dealerships came in under 650 cars per dealer. Would you be surprised to learn that Toyota sold more than 1600 cars per dealership last year?

Now you know why American car dealers are complaining and going out of business. In the last year GM lost 200 plus dealers while Ford lost 40, and Chrysler lost more than 110. This is happening on our home turf, folks. This is not the Japanese and the Americans slugging it out on European soil for control of European markets. This is the American consumer choosing to buy Japanese over American made products on American soil. People are voting with their feet.

Here’s the next big question. If American car dealers are closing their doors at this rate, what kind of shape can the rest of them be in? Can the owners be putting big bucks into their dealerships while their friend’s dealerships are folding up? We think not. Will the friendly banker be willing to finance their car inventories when the bank sees other domestic dealers closing their doors? We don’t see it. This means that American car dealers can only finance through the car manufacturer’s financing arm, and that’s not good when the dealer has only one choice. We estimate that half of Ford’s dealers are not making a penny. We think for General Motors, it could be as high as 25% are unprofitable. What’s the customer experience going to be like in a dealer that’s losing money on every car he sells? Is anybody listening in Detroit?

Every time GM loses a point of market share, they have to implement plans to dismiss 20,000 people from their jobs. We see the necessity for GM to cut another 60,000 jobs that they haven’t announced to establish break-even 12 to 18 months from today. With all the talk about GM in the news in the last 60 days, has anybody at GM or Ford uttered a word about their real problem, QUALITY? The American consumer does not want to buy American made cars in any quantity that would allow Detroit to make money.

We believe that GM will be unprofitable until 2008 at a minimum, and 08 can only be profitable if they maintain market share, and we see continued declining market share. The Chairman has verbalized nothing that deals with the issue of quality, and upgrading the consumer’s consciousness to consider GM cars when it comes to quality. Even Mercedes marvels at Japan’s ability to produce the quality they do for the dollar it costs. Mercedes doesn’t understand how Japan does it at their price points.

We took a close look at Ford (where “Quality is number 1”, and “Ford has a better idea”), and found their restructuring plan isn’t substantial enough to get the job done. They call it the “Way Forward Plan”. We call it the “Lost in the Wind” plan. They are taking total charges of .4 billion in 06. They expect to be profitable in 08, why, we ask? What’s going to change between now and 08? They believe they can save almost billion in costs. We don’t see it, and if they were able to do it, don’t you think Japan would jump on the bandwagon and do whatever they have to do to drag their already low costs lower.

Did you know that when GM, or Ford produce an interesting car, Japan buys the car immediately, rips it apart, part by part in Japan, and than takes any interesting technology and applies it to their cars almost immediately. Japan can put out a car in one-third the time it takes GM, or Ford to design a car by committee. South Korea can go from design to showroom in even a shorter time span.

Ford’s restructuring efforts in our opinion are clearly overstating the bottom-line results. We see a headwind coming, where Ford thinks it’s got a tailwind at its back. It’s going to get tougher for Ford, and this is being overlooked because GM and its troubles are getting the headlines. With the employees departing from both companies how do you think the guy down on the assembly line is feeling? Do you think he’s a loyal, lets get it done type of individual? Do you think he’s wondering if he’s going to be there 2 or 3 years down the road? Will his pension benefits be safe? Will he ever get a pension? Will he even have a future at either of these two companies that were once the unquestioned leaders of American managerial know how?

Henry Ford wrote the book on manufacturing, and GM’s Alfred P. Sloan wrote the book on building a company that is still studied at Harvard Business School, and MIT today. Somehow in the last 3 decades, the bean counters in Detroit forgot how to make cars. They literally forgot what business they were in. They instead thought only about the money. Labor became a cog in the wheel, not an integral meaningful partner in the process. To turn this American industry around will involve a different level of intelligence than the intelligence (used advisedly) that got them into trouble in the first place. Einstein was right.

Goodbye and good luck

Richard C. Stoyeck
August 3, 2006

About the Author: Richard Stoyeck’s background includes being a limited partner at Bear Stearns, Senior VP at Lehman Brothers, Kuhn Loeb, Arthur Andersen, and KPMG. Educated at Pace University, NYU, and Harvard University, today he runs Rockefeller Capital Partners and

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