Sunday, February 05, 2006

Barron's Alan Abelson on Car Race

In a Januuary 24th post, Car Race, this blog commented on the US auto industry. Editor Alan Abelson picked up on this post in his column in the February 6th Barron's. Here's an excerpt.

Kibitzers on what the companies should do to drag themselves up from the morass are a dime a dozen, and that's about what most of the advice is worth. GM is being pressured to unload its profitable financing unit, GMAC, and a truly helpful suggestion is that the two fallen giants build cars that consumers like and build them more cheaply. That's like telling drowning people they should learn to swim.

Peter Cohan of Peter S. Cohan & Associates, who offers some interesting observations on the economy and kindred hair-raising subjects, weighs in with a different idea. He says the fundamental question facing GM and Ford is: Are they car companies or finance companies that happen to sell cars?

The U.S. auto producers are being eaten alive by the likes of Toyota, Honda and Nissan because finance, he contends, "has become the tail that wags the dog." By way of proof, he cites the fact that Ford earned $2 billion last year because it generated $6 billion in operating profits from its financing arm, while losing $4 billion turning out cars, SUVs, etc. GM limited a humongous loss to a merely eye-popping one by virtue of its financing activities.

GM and Ford, Peter goes on, "can't cut their way to success in the car business." Both are operating at roughly 80% of capacity and although the pitiable pair are busily shrinking their physical plant, he reckons that "at the rate they're losing market share," they'll find those capacity cuts simply won't do the trick.

Peter ticks off the usual culprits that have thrust Ford and GM into the abyss: Quality enables Toyota, for example, to charge higher prices, while efficiency enables it to build cars 7% faster and $300 to $500 cheaper. Moreover, the Japanese government picks up most of the sizable tab for health care that heavily burdens U.S. automakers.

To Peter, the answer is clear. He would like to think that "GM and Ford can transform themselves into makers of the world's highest quality vehicles." But, he sighs, that seems unrealistic. A more likely survival strategy, he proposes, "would be for GM and Ford to outsource vehicle manufacturing to China and India and focus exclusively on financing."

Man, would that ever get the natives howling. Somehow, we don't think it's going to happen anytime soon. But it could be an interesting bargaining ploy when the Detroit moguls next sit down with the UAW to hammer out a contract, provided, of course, there's still a Detroit.

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