Tweet
Ford and GM have no vision for the future. The're done. The're just going to cut costs until their aren't anymore to cut and then their going to look for buyers.
The incredible shrinking car companies
GM and Ford aren't just cutting costs, they are deliberately cutting their market share, too. Is this a smart move?
By Alex Taylor III, FORTUNE senior editor
May 3, 2006: 10:56 AM EDT
(FORTUNE) - As Detroit continues to writhe in agony, the headline writers who emphasize jobs lost, factories closed and benefits slashed are getting it all wrong.
What's really happening is that General Motors (Research) and Ford (Research) are shrinking to survive. Both companies have now adopted downsizing as a conscious strategy. The latest evidence is in the report on U.S. vehicle sales for April. As they have all year, GM and Ford watched their sales fall more than the rest of the industry. While overall sales were up .1 percent on an adjusted basis, GM was off 7.3 percent and Ford down 2.7 percent.
The declines continue a long tradition. GM has been dropping market share since it commanded 50 percent in the 1960s, while Ford has been losing about a point of share annually for the past decade. For a long time the losses were unintentional, the result of new entrants from Japan and Korea taking sales away. More recently, though, market share loss has become an explicit strategy -- and a potentially risky one.
The Ford approach
Ford was the first to publicly embrace the shrink-to-survive maneuver. Since Bill Ford became CEO in October 2001, the company has consistently stated that it would pursue profits over market share. Since Big Three sales usually rise and fall depending on the level of incentive spending, the decision made sense: Sell fewer cars but make more on each one. But Ford's share has fallen so far that it now must attempt to halt the slide.
Earlier this year, Bill Ford declared his intention to slow the rate of decline with a goal of eventually stabilizing it (though he didn't set a target or a date).
So far, he seems to be succeeding. Despite a precipitous fall-off in sales of compact SUVs like Explorer and full-size SUVs like Lincoln Navigator, Ford has boosted sales of passenger cars with the support of the new Fusion and has only lost half as much share this year as it did last year.
GM's strategy
GM has taken a different course. After 9/11, it followed an explicit strategy of incentivizing the market to sell every last car and truck it could. It needed to run its factories to keep its active workers off layoff and to support the pension and retiree benefits of its retired workers.
But after losing more than $10 billion last year, GM has decided to switch gears. By reducing incentives and emphasizing everyday low prices instead, at the same time that it tries to pull back from low-margin fleet sales, it is attempting to let its sales fall to a more natural level, one where GM can make a decent profit without relying on extraordinary measures.
Unlike Ford, however, GM has not made its policy explicit, leaving observers to speculate about its intentions. On Wall Street, some analysts figure that GM's natural market share is a full five points lower than the 24.1 percent it achieved in 2006's first quarter. GM insiders believe the company will wind up with around 21 percent or 22 percent of the market.
The end results?
So what happens if GM shrinks to a size closer to Ford, and Ford declines to a level similar to Chrysler's? For one thing, market share declines quickly become a slippery slope, so the companies have to make sure that they can stop the slide.
Second, they have to get their costs in line so they can operate profitably at those levels. That means not only the obvious ones like labor and assembly capacity but also expenditures like capital spending, which will have to be reduced because of the lower volume.
The biggest impact will be on each company's dealers. Smaller market share means less new car volume for each of them, so their ranks will have to be pruned. Then GM and Ford will have to consider whether they can maintain separate channels for marginal brands like Buick, Pontiac, Saab, Lincoln, and Mercury. What made some sense when you controlled the market makes less when you are just one of many players. The changes roiling the domestic auto industry are just beginning.
GM and Ford aren't just cutting costs, they are deliberately cutting their market share, too. Is this a smart move?
By Alex Taylor III, FORTUNE senior editor
May 3, 2006: 10:56 AM EDT
(FORTUNE) - As Detroit continues to writhe in agony, the headline writers who emphasize jobs lost, factories closed and benefits slashed are getting it all wrong.
What's really happening is that General Motors (Research) and Ford (Research) are shrinking to survive. Both companies have now adopted downsizing as a conscious strategy. The latest evidence is in the report on U.S. vehicle sales for April. As they have all year, GM and Ford watched their sales fall more than the rest of the industry. While overall sales were up .1 percent on an adjusted basis, GM was off 7.3 percent and Ford down 2.7 percent.
The declines continue a long tradition. GM has been dropping market share since it commanded 50 percent in the 1960s, while Ford has been losing about a point of share annually for the past decade. For a long time the losses were unintentional, the result of new entrants from Japan and Korea taking sales away. More recently, though, market share loss has become an explicit strategy -- and a potentially risky one.
The Ford approach
Ford was the first to publicly embrace the shrink-to-survive maneuver. Since Bill Ford became CEO in October 2001, the company has consistently stated that it would pursue profits over market share. Since Big Three sales usually rise and fall depending on the level of incentive spending, the decision made sense: Sell fewer cars but make more on each one. But Ford's share has fallen so far that it now must attempt to halt the slide.
Earlier this year, Bill Ford declared his intention to slow the rate of decline with a goal of eventually stabilizing it (though he didn't set a target or a date).
So far, he seems to be succeeding. Despite a precipitous fall-off in sales of compact SUVs like Explorer and full-size SUVs like Lincoln Navigator, Ford has boosted sales of passenger cars with the support of the new Fusion and has only lost half as much share this year as it did last year.
GM's strategy
GM has taken a different course. After 9/11, it followed an explicit strategy of incentivizing the market to sell every last car and truck it could. It needed to run its factories to keep its active workers off layoff and to support the pension and retiree benefits of its retired workers.
But after losing more than $10 billion last year, GM has decided to switch gears. By reducing incentives and emphasizing everyday low prices instead, at the same time that it tries to pull back from low-margin fleet sales, it is attempting to let its sales fall to a more natural level, one where GM can make a decent profit without relying on extraordinary measures.
Unlike Ford, however, GM has not made its policy explicit, leaving observers to speculate about its intentions. On Wall Street, some analysts figure that GM's natural market share is a full five points lower than the 24.1 percent it achieved in 2006's first quarter. GM insiders believe the company will wind up with around 21 percent or 22 percent of the market.
The end results?
So what happens if GM shrinks to a size closer to Ford, and Ford declines to a level similar to Chrysler's? For one thing, market share declines quickly become a slippery slope, so the companies have to make sure that they can stop the slide.
Second, they have to get their costs in line so they can operate profitably at those levels. That means not only the obvious ones like labor and assembly capacity but also expenditures like capital spending, which will have to be reduced because of the lower volume.
The biggest impact will be on each company's dealers. Smaller market share means less new car volume for each of them, so their ranks will have to be pruned. Then GM and Ford will have to consider whether they can maintain separate channels for marginal brands like Buick, Pontiac, Saab, Lincoln, and Mercury. What made some sense when you controlled the market makes less when you are just one of many players. The changes roiling the domestic auto industry are just beginning.
Comment