B&E’s Karan Mehrishi dives deep into the auto quagmire and gasps for breath...
This August 2008 couldn’t have been more ironic. Here I was supposed to file in the most devastating report I have ever made on the global auto industry, and there I had Audi’s offices requesting me to help them understand how Audi compares with other international auto players and the challenges Audi faces. Ironic because my research on America’s ‘greatest’ companies was complete, and the list of American idols – that is, the biggest five loss making companies America had created in the last year – was staring me on the face! These five stalwarts had a combined loss above $80 billion in the year 2007. What stunned me was that the leader of this bunch was clearly General Motors, with an individual loss touching close to a sickening $39 billion!!! Well, when I’d met Rick Wagoner, Chairman, GM, last year to get his exclusive quotes with respect to his $750 million investment in India, I had had no inkling of the times to come, and he’d also been quite confident that “GM wanted to leverage its global resources” to succeed in “such a high growth market.”
Strangely, nobody’s been picking up my phones in GM’s Detroit office since then. But Fritz Henderson, GM President and COO, Detroit, on August 20, 2008, writes in a rare letter to the editor in Wall Street Journal, “In the editorial ‘Can America’s Auto Makers Survive?’, Paul Ingrassia asks whether Detroit’s auto makers can survive. In the case of General Motors, the answer is, emphatically, yes. And not only survive, but thrive... At GM, we’re taking the difficult and necessary steps to reduce our cost structure to be more competitive and build a stronger foundation for our future.” I was stumped. It wasn’t that I was going to analyse the close to $2 billion loss GM suffered in 2005. The fact is that the last six months of GM (January to June 2008) has seen it rake up losses close to another $19 billion. In the last three months (April to June 2008), GM had losses of $15.5 billion! I really couldn’t see where the improvement, that GM President Henderson was referring to, was.
But it’s not as if GM’s alone in the bloodbath. Ford is not too far behind when it comes to sharing in the scathing hits. When William Clay Ford Jr. gave an interview to Planman Media a couple of years back, he had just entered India and was typically gung-ho about cutting it clean very soon. In the first week of August 2008, Ford reported the biggest and worst one quarter loss (April to June 2008) in the history of the corporation! $8.7 billion! Year 2007 loss: $2.7 billion! Year 2006 loss: $12.6 billion!
Not surprisingly, while annual sales have regularly fallen or remained stagnant at GM (2006: $205 billion sales; 2007: $181 billion; 2008 six months: $80.6 billion) and Ford (2006: $160 billion; 2007: $172 billion; 2008 six months: $85 billion), the sales at Toyota (2006: $179 billion; 2007: $202 billion; 2008 six months: $118 billion) and Honda (2006: $84 billion; 2007: $94 billion; 2008 six months: $54 billion) have been constantly rising. But more importantly, companies like Toyota and Honda have raked up humungous profits year after year! Toyota had profits of $11.6 billion, $14 billion and $6.18 billion in 2006, 2007 and the first six months of 2008. While Honda, during the same periods, had profits of $5 billion, $5 billion and close to $2 billion!
Compared to the accumulated profits of $44 billion in the last three years of the fuel-efficient focused Japanese Big 2, the Detroit Big 2 had accumulated losses of a mind numbing $82 billion!!! What gives?!?! That’s when I came across four extremely critical issues that could surely define the reasons why the global auto industry dies sooner than later...
The no-brainer auto issue #1
Understanding the first is unbelievably simple! Fuel-efficient cars [in other words, cars that run on traditional petroleum and give increasing miles per gallon]! The reality is that companies that have focused less on providing high level quality (in terms of say, styling, driving, luxury, SUV experience) and more on providing flat fuel efficiency have succeeded beyond anybody’s expectations. The corollary is that companies that have focused on the opposite have tasted devastating billion dollar losses. It’s obvious that the solution was not something hidden away in strategic thingamajigs. And to say all this as an afterthought is, like I wrote above, a no-brainer. But in truth, the concept that fuel efficient cars are the future, was for every auto major across the world to see. Sadly, the only ones that focused on it with passion were the Japanese giants.
This August 2008 couldn’t have been more ironic. Here I was supposed to file in the most devastating report I have ever made on the global auto industry, and there I had Audi’s offices requesting me to help them understand how Audi compares with other international auto players and the challenges Audi faces. Ironic because my research on America’s ‘greatest’ companies was complete, and the list of American idols – that is, the biggest five loss making companies America had created in the last year – was staring me on the face! These five stalwarts had a combined loss above $80 billion in the year 2007. What stunned me was that the leader of this bunch was clearly General Motors, with an individual loss touching close to a sickening $39 billion!!! Well, when I’d met Rick Wagoner, Chairman, GM, last year to get his exclusive quotes with respect to his $750 million investment in India, I had had no inkling of the times to come, and he’d also been quite confident that “GM wanted to leverage its global resources” to succeed in “such a high growth market.”
Strangely, nobody’s been picking up my phones in GM’s Detroit office since then. But Fritz Henderson, GM President and COO, Detroit, on August 20, 2008, writes in a rare letter to the editor in Wall Street Journal, “In the editorial ‘Can America’s Auto Makers Survive?’, Paul Ingrassia asks whether Detroit’s auto makers can survive. In the case of General Motors, the answer is, emphatically, yes. And not only survive, but thrive... At GM, we’re taking the difficult and necessary steps to reduce our cost structure to be more competitive and build a stronger foundation for our future.” I was stumped. It wasn’t that I was going to analyse the close to $2 billion loss GM suffered in 2005. The fact is that the last six months of GM (January to June 2008) has seen it rake up losses close to another $19 billion. In the last three months (April to June 2008), GM had losses of $15.5 billion! I really couldn’t see where the improvement, that GM President Henderson was referring to, was.
But it’s not as if GM’s alone in the bloodbath. Ford is not too far behind when it comes to sharing in the scathing hits. When William Clay Ford Jr. gave an interview to Planman Media a couple of years back, he had just entered India and was typically gung-ho about cutting it clean very soon. In the first week of August 2008, Ford reported the biggest and worst one quarter loss (April to June 2008) in the history of the corporation! $8.7 billion! Year 2007 loss: $2.7 billion! Year 2006 loss: $12.6 billion!
Not surprisingly, while annual sales have regularly fallen or remained stagnant at GM (2006: $205 billion sales; 2007: $181 billion; 2008 six months: $80.6 billion) and Ford (2006: $160 billion; 2007: $172 billion; 2008 six months: $85 billion), the sales at Toyota (2006: $179 billion; 2007: $202 billion; 2008 six months: $118 billion) and Honda (2006: $84 billion; 2007: $94 billion; 2008 six months: $54 billion) have been constantly rising. But more importantly, companies like Toyota and Honda have raked up humungous profits year after year! Toyota had profits of $11.6 billion, $14 billion and $6.18 billion in 2006, 2007 and the first six months of 2008. While Honda, during the same periods, had profits of $5 billion, $5 billion and close to $2 billion!
Compared to the accumulated profits of $44 billion in the last three years of the fuel-efficient focused Japanese Big 2, the Detroit Big 2 had accumulated losses of a mind numbing $82 billion!!! What gives?!?! That’s when I came across four extremely critical issues that could surely define the reasons why the global auto industry dies sooner than later...
The no-brainer auto issue #1
Understanding the first is unbelievably simple! Fuel-efficient cars [in other words, cars that run on traditional petroleum and give increasing miles per gallon]! The reality is that companies that have focused less on providing high level quality (in terms of say, styling, driving, luxury, SUV experience) and more on providing flat fuel efficiency have succeeded beyond anybody’s expectations. The corollary is that companies that have focused on the opposite have tasted devastating billion dollar losses. It’s obvious that the solution was not something hidden away in strategic thingamajigs. And to say all this as an afterthought is, like I wrote above, a no-brainer. But in truth, the concept that fuel efficient cars are the future, was for every auto major across the world to see. Sadly, the only ones that focused on it with passion were the Japanese giants.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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