Customers Still Clamor for Trucks

When the auto industry bailouts occurred, we heard much talk about the need for the automakers to shift their focus toward smaller, more environmentally friendly vehicles.   We heard that a focus on trucks and SUVs was the reason for the collapse.  Well, where do things stand now in 2013?  Ford and GM just reported September sales.  Pick-up trucks accounted for 29% of their total vehicle sales in the past month (that does not include SUVs).   The chart below, from Bespoke Investment Group, shows Ford pick-up truck sales reaching pre-recession levels:



In the end, companies produce what consumers demand.   The evidence suggests that consumers in the US still like their trucks.   Will things change if gas prices spike once again?  Surely, they will.  How are Ford and GM positioned to respond to such a future shock?  It appears Ford is in a better position, even though it actually has the leading market share in pick-up trucks.  Ford has higher margins in the US, and thus, more room for error.  Moreover, it has several well-regarded passenger vehicles that offer strong gas mileage.  Time will tell, but the story here certainly reinforces the notion that, in the end, the customer is boss.  Companies deliver what customers want, and like it or not, many American consumers still want their trucks.  

Does GM Lose Car Sales Because of the Bailout?

Joseph White of the Wall Street Journal reports today that the Obama administration and General Motors have announced plans for the firm to buy 200 million of the Treasury’s GM shares at $27.50 a piece.   That move will begin the process of unwinding the government's stake in the firm.  White explains that the move to eliminate the "Government Motors" stigma from the company may be quite beneficial:


Once the last government share is sold, GM also can get to work unloading the pejorative “Government Motors” image that has weighed on the company in the U.S. market. It’s not clear how many potential GM customers have turned to Ford Motor Co. or other rivals out of distaste for the federal bailout. But they’re out there.

Call me skeptical, but I wonder how much removing the "Government Motors" label will really help GM sell more cars.  Are customers unhappy with the government bailout, particularly given that taxpayers will not come close to breaking even on their "investment" in the firm?   Sure, the bailout has many opponents.  Does that mean the company was losing significant sales as a result of the bailout?  I'm not so sure.  As White acknowledges, no one really knows how many customers have turned to rival car companies as a result of distaste for the bailout?  One could argue that the firm hasn't delivered the kind of attractive, high quality vehicles that it needs to produce in order to generate stronger revenue growth.   At the end of the day, the bailout may have improved the balance sheet and cost structure.  However, GM will only survive and thrive if it makes products that customers want.  I don't see a ton of evidence that the firm has become significantly better at doing that since the bailout.   

Will Saab survive?

News reports indicate that Saab may not survive much longer. Spkyer Cars bought the firm from General Motors when the American automaker went bankrupt. By the time of the sale, Saab already had been experiencing years of decline. In North America, Saab had a small following in the northeast, but little brand presence elsewhere in the country.

Why will it be difficult for Saab to survive independently? First and foremost, the firm simply does not have enough scale. By most accounts, the minimum efficient scale (MES) for an automotive assembly plant is about 200,000 cars. MES is the point at which a firm has fully exploited scale economies. If a company operates below MES, its costs will be higher than more efficient competitors. Saab sold just over 30,000 automobiles last year - far below MES. It simply cannot remain cost competitive at these volumes.

Of course, some automotive experts believe that firms must be much larger than MES to survive in the auto industry. They argue that the development costs for a new auto platform often exceed $1 billion, and thus, firms need to be substantially larger than the simple MES for an assembly plant in order to be cost competitive. Fiat CEO Marchionne has argued that auto firms must achieve scale of 6 million units to survive in the long term. I believe Marchionne may be overestimating the need for scale. The economics seem suggest that firms can be quite profitable at below 6 million units. For instance, Ford became very profitable the past two years, operating below 6 million units of production. Honda also has been a very profitable automaker despite not exceeding 6 million units.

In the past, we have seen the drive for consolidation, based on a scale economy logic similar to that espoused by Marchionne. How did that work out? Well, the results of auto mergers and acquisitions in the 1990s look pretty ugly (think Daimler-Chrysler, Ford-Volvo, Ford-Jaguar, etc.). Apparently, consolidation isn't all that it's cracked up to be. For more on the risks of global mega-mergers, I highly recommend a classic article written several years ago by Pankaj Ghemawat, "The Dubious Logic of Global Mega-mergers."