“We’re back. And now the world knows it,” proclaimed local Detroit talk show host Paul W. Smith, as he addressed a gathering of industry insiders and dealers who had gathered in the back of Detroit’s Cobo Hall to celebrate the debut of the 2013 North American International Auto Show earlier this week.
Only a few years earlier, in the same room, many of the same people had come together to nurse their wounds with whiskey and cigars and ignore the desperate mood on a show floor where it wasn’t clear which carmakers might survive the U.S. automotive market’s worse downturn since the Great Depression.
But this year, momentum is clearly in the industry’s favor. Sales surged to 14.5 million in 2012, ending with a burst of showroom activity few had expected. And while a small minority of manufacturers, notably Toyota, predict 2013 will be relatively flat, most experts are rapidly ratcheting their numbers upward, General Motors CEO Dan Akerson this week predicting demand could reach 15.5 million. That would be the best tally since the industry hit its last peak.
Ironically, that leaves some within the industry worried.
“The illness” that sent two of the Detroit Big Three automakers into bankruptcy and nearly wrecked the third “was horrible and brought on by ourselves,” stresses Sergio Marchionne, the blunt-talking CEO of Chrysler and its Italian partner Fiat.
Automakers had added far too much capacity, he says, to meet sales levels that wouldn’t have been necessary – or possible -- if the industry was actually responding to consumer demand. That meant companies like General Motors and Chrysler – as well as many of their foreign-owned rivals – had to lavish massive incentives on the market to lure buyers into showrooms. The great irony is that in the boom years during the middle of the last decade, the industry was already in serious trouble. The 2005 U.S. record of 17.5 million vehicles was an “artificial” high, concurs senior industry analyst Tom Libby, of data tracking firm R.L. Polk.
Laurel Hess, a Detroit TV host, recalls leasing a Chrysler Town & Country minivan for just $120 a month, barely half what it should have gone for.
Ironically, the higher sales went, the more some companies lost. GM was already running up billions of dollars in red ink even as the industry hit its all-time peak. And as the market collapsed, it became increasingly clear the giant maker – along with cross-town rival Chrysler – would plunge into bankruptcy, eventually surviving only with the help of a massive U.S. government bailout.
The third domestic maker, Ford Motor Co., was able to squeak by on its own, but only because it lined up tens of billions of dollars in credit before such lifelines were cut off by the banking industry’s own disaster. And even then, Ford had to mortgage everything, from its plants to the familiar blue Ford oval logo.
Today, Ford’s North American operations are generating 11% profit margins, according to the maker’s most recent financial report. And it would be doing better, overall, were it not for the losses run up in Europe, where the auto industry is expected to this year report its worst sales in nearly two decades.
To come through the downturn, Ford’s then-new CEO Alan Mulally radically reshaped the maker, combining typically autonomous international subsidiaries into a more cohesive global operation. At home, the maker radically slashed its production capacity to bring it more in line with likely demand.
GM and Chrysler took similar steps, acknowledging that they’d emerge from the downturn smaller companies with lower sales and market share.
In all, perhaps 100 assembly, component and support plants were closed, a move that resulted in the painful elimination of 10s of thousands of jobs. But it also radically reduced the industry’s costs as it shifted the business model to one based more on demand than supply.
When Detroit’s Hess went back to replace her Chrysler minivan recently, the dealer laughed when she asked if she could another one for $120. The price he quoted, “wasn’t even close.”
Industry incentives, on the whole, have fallen sharply over the last year, according to tracking firm TrueCar.com, and could plunge even further in 2013.
If anything, some makers are fretting that they won’t be able to meet demand this year. “Our biggest problem is we may not have enough capacity,” says Mark Fields, Ford’s new Chief Operating Officer.
Ford has been looking for ways to squeeze out more product from existing plants, rather than add more brick-and-mortar. So have its domestic rivals. Chrysler has added third shifts at a number of plants, including the sprawling Jeep factory near the Detroit River. General Motors officials this week noted they have added more than 26,000 jobs since emerging from bankruptcy, much of that to meet increased demand.
Yet, despite the high-fiving among industry insiders, there’s still a certain sense of fear that often follows making it through a disaster. And, as a result, one heard the word, “discipline,” a lot during the media preview days at the Detroit Auto Show.
“I hope we learned a lot” from the bankruptcy process, says Mark Reuss, GM’s president for North American operations. “It’s tempting,” he says, to “do some bad things” to try to regain sales and market share the way the company did in the past, overbuilding and then offering profit-busting incentives.
“If we get greedy and try to blow the industry away, that’s a dangerous place to be,” Reuss suggests.
So, it might mean missing a few sales as the industry rebounds. But by more closely tying production to demand, the industry is likely to see prices reflect reality and that is all but certain to boost margins. Most analysts expect the industry to post record earnings over the next few years without having to come close to the record sales levels of the past.