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General Motors CFO Ray Young will soon be headed for the door. Sources in the company said he has been looking to leave for some time. But he was also under pressure following a review of the company’s finance operations that was completed for the new board by the Treasury Department’s Auto Task Force in early August. He hasn’t even left the company. But he is already exploring other opportunities.
Sources say Young was not fired, but he was certainly feeling the heat and decided to look outside. There could be even more departures coming. Company insiders say that executive headhunters are combing the company for talented veterans who may want to leave for greener pastures. One headhunter, who asked that he not be named, says he has received plenty of resumes from GM executives. Why not? Certainly many companies with publicly-traded stocks and better prospects can offer fatter salaries, bonuses and stock options.
Plus, GM managers are under a lot of pressure these days. GM’s new board wants to see that the company is moving to change its insular culture. They also want to see signs of growth fast. New Chairman Ed Whitacre has said in internal meetings with GM executives and staffers that he wants to see better sales results in a few months, say sources briefed on the meetings. If not, some managers may be booted out. The company has to demonstrate that it has a plan to grow market share and revenue. GM’s board is also pressuring management to get its new products to market faster. There is concern among the new directors that GM doesn’t have enough new cars in the pipeline to hit sales and profit targets, says one executive briefed on the board’s discussions. In recent reviews of GM’s future models, board members said they liked what they saw but can’t understand why it takes the company so long to get the cars to market. “If it’s a 48-month program they want it done in 36 months. If it’s 36 months, they want it in 24 months,” says one GM manager. “It’s being suggested that we have to work faster than ever.”
As the board watches over the current crop of managers and faces the possibility of more departures, Young’s case may show how much allure GM has to the budding executive. At 47, Young has to start making big money now. But with pay being limited and the stock still not listed, GM won’t give anyone a big payout for years, if ever. Sources say he was looking for a different situation that at least could offer a chance for a better payout. GM has already hired a search firm to find a replacement. But unless they can offer more money, getting top talent will be a challenge. GM may go public some time next year. That would at least create a stock that executives can cash in if their labors spark a turnaround. But that will be a gamble for anyone who will sign on.
Chinese automaker Geely has made its intentions clear that it wants to buy Swedish automaker Volvo from Ford Motor Co.
Ford has been formally exploring a sale of the unit since last year, through CEO Alan Mulally had decided very early in his tenure, which began in 2006, that he wanted to sell all the brands in what was Ford’s Premier Auto Group. They included Volvo, Land Rover, Jaguar and Aston Martin. The other brands have all been sold.
Volvo has been losing money for Ford for the past few years as sales have plummeted in the U.S. and abroad. Costs remain high. And the company has no manufacturing footprint in North America, leaving it vulnerable to currency swings. Also, the current product line is aging and has been short of investment in new products.
Geely is a small, independent automaker in China. Its privately held parent, Geely Holding Group Co., would make a bid for Volvo with a government-backed investor, CEO Gui Shengyue told Reuters. “I believe if Volvo is for sale and Ford has a global announcement, then our parent company will participate,” Gui said.
Gui added that Geely’s parent is waiting for Ford to decide whether to sell the Swedish car maker. Rather than merely taking a stake in Volvo, Geely’s parent would seek full ownership, Gui said, adding that Ford will make a decision on whether to sell Volvo within a month.
That Ford intends to sell Volvo is hardly in question. At an industry conference last month, Ford chief financial officer Lewis Booth told BusinessWeek that the company’s plan had not changed and that “Ford is in negotiation with a buyer.” A Ford spokesman said, however, that the automaker has not narrowed the field to one buyer yet.
Geely, which once sold the cheapest cars in China, has been upgrading its models to tap the country’s increasingly affluent drivers. And the company has exhibited cars at the North American International Auto Show in Detroit.
The Chinese automakers have been rumbling about entering the U.S. market for years. And major Chinese automakers, including Beijing Automotive Industry Holding Corp., have attempted several overseas acquisitions in recent years with mixed results.
“Chinese automakers are not short of capacity or equipment, so an acquisition is meaningless for us if we cannot fully acquire intellectual property rights,” Xu Heyi, chairman of Beijing Auto, said in an interview with Reuters.
“Currently, Chinese companies are not welcome in global acquisitions partly due to political reasons, as some people discriminate against us because China is a socialist country led by the Communist Party,” he said.
There is another side of the story, though. Some Westerners who have tried to negotiate deals with Chinese automakers point to executives who are difficult to deal with from the standpoint of culture and language, as well as the absence of Western-style contract law in China. “Talks I have had with Chinese businesses in the past often break down because their idea of a contract, or even a commitment, and ours are two very different things,” says Los Angeles-based marketing consultant Dennis Keene.
Chery Automobile, Hunan Changfeng Motors Co. and several other Chinese automakers have held initial talks with European and U.S. auto brands, but refrained from making any commitments, industry executives have said.
China’s largest automaker, SAIC Motor group, may take a passive stake in Saab Automobile by teaming up with Koenigsegg Group AB, a source with knowledge of the situation told Reuters on Tuesday. Chinese battery maker BYD seems far along with a plan to bring vehicles under its own brand into the U.S., and the company has received some investment from Berkshire Hathaway chairman Warren Buffett.
Sichuan Tengzhong Heavy Industrial Machinery, a little-known heavy machinery maker, is the only Chinese firm to have announced a significant overseas auto buy, agreeing to acquire GM’s premier off-road brand, Hummer. That deal is still pending.
Chrysler is potentially headed for a brand problem that will rival the pickle that GM is trying to extricate itself from.
Here is the deal. Chrysler has three main brands at the moment: Chrysler, Dodge and Jeep. But it has made it clear to the ad agencies pitching its ad account that it is splitting off its pickup truck and commercial vehicle business off to a new brand—Ram.
That’s right. Going forward, and as soon as Chrysler has the idea to run with, the pickup it sells now won’t be sold as Dodge Ram, but rather….Ram. Other vehicles that will come from the Fiat-Chrysler tie up in the commercial segment will also be called Ram.
So, now we are up to four brands to support. Now, add the Fiat 500, which will be sold as a Fiat when it arrives in Chrysler showrooms in 2011. And, don’t forget Alfa Romeo, which Fiat will sell through Chrysler distribution in key markets that make sense for the Italian sport car maker.
This seems like a lot of brand differentiation to manage and support by a company that has been poor at both.
As I look at auto sales numbers through August, I see a 9.2% market share for Chrysler spread among the three brands it has. That share is inevitably going to go down as the company pares models. Indeed, Merrill Lynch projects that Chrysler loses a whopping five to six points of share in the next four years unless it comes up with some product surprises from the Fiat alliance.
If you consider it likely that Fiat and Alfa-Romeo combine for less than 1 point of share, then you have five brands potentially carving up something between 4 and 6 points of share, and that is if the company over-achieves. Also…four brands at a single showroom, while we wait to see how the company sort out the distribution real estate for Alfa at Chrysler dealerships.
This goes to brand/distribution/marketing efficiency. Toyota has 16.5% of the market spread across three brands. GM has 16.7% of the market with the four brands it plans to go forward with—Chevy, Cadillac, Buick, GMC.
If Chrysler isn’t clever beyonid all expectations, it is going to have a brand jumble that will make people look to GM as a benchmark of brand/marketing efficiency.
In the politically-correct world of corporate America, rarely do you see an executive throw down the gauntlet or talk a little trash. But then, Audi of America President Johan de Nysschen isn’t American and he proudly speaks his mind. Thus was the case when he reportedly called the Chevrolet Volt “a car for idiots” at a recent press event. I give him credit for taking off the mitts before he takes a swing. That kind of honesty is refreshing. Other than General Motors Maverick-in-Chief Bob Lutz and Tesla Motors hip shooter Elon Musk, it’s a prim and proper bunch occupying the C-suites.
But after admiring his moxie, I part company with de Nysschen on this one. First of all, he gets 10 demerits for back pedaling. On Audi’s Facebook page, de Nysschen later wrote, “I do not specifically recall using the term ‘car for idiots.’” Well, the journalist who was present did, and an Audi spokesman told me that they aren’t fighting it. Johan, if you think the car won’t sell or that its business case is a big-time loser, stick to your story.
More to the point, de Nysschen’s comments about the Volt are off the mark. On Facebook, he wrote: “Returning to the Volt, my point was simply one of its economic feasibility today. The 50% or so price increase that the Volt represents over a similar gasoline car cannot be offset through the savings from reduced fuel consumption. The only way to offset the extreme premium for the Volt is through taxpayer-funded subsidies. So I question if that makes economic sense.” Of course it doesn’t make economic sense. But the Toyota Prius didn’t make money from day one, either. New technology rarely does. What the Volt will do is spark interest in electric cars and help get more real-world driving with lithium ion batteries so carmakers can make improvements and reduce costs.
It will also get cities thinking about an putting up charging stations so urban dwellers can charge their cars even if they don’t own a garage. Power utilities will think about grid capacity and setting consumers up with the right charging equipment in their homes. In short, it will help electric-drive technology get from cocoon to flight. Whether it succeeds or not, the Volt and other profit-challenged cars like the Tesla Roadster and Nissan Leaf will at least be necessary steps toward the electrification of the car. That sounds far from idiotic.
What defines most intriguing? To us, that means new enterprises that make you say, “Wow, that’s fascinating.” To identify these new businesses, we’re inviting our readers and the public at large to send us suggestions. For more details, or to submit a candidate, please fill out our poll. The deadline for submissions is Friday Sept. 25.
Thanks in advance for your interest and help.
Every luxury brand eventually faces a quandary. Growth is good but how much is too much? If you sell too many, then the brand becomes ubiquitous and loses its exclusivity. Mini isn’t at risk of selling to the point where it becomes common. Not yet. But the way parent BMW is growing it, the question is valid. OK, Mini is not a luxury brand in the traditional sense, but when a company sells subcompacts at prices that can top $40,000 then it is luxury among its peers. The brand also thrives on its exclusive nature. Mini owners tend to be individualists and even a bit eccentric, says Mini USA Vice President Jim McDowell.
Before the car market tanked this year, Mini sales were soaring. The brand grew 29% last year to 54,000, which is more than double its first year back in the U.S. in 2002.
First they added a convertible, then the stretched Clubman. A crossover suv (it’s only a few inches taller than a Clubman) is on the way in early 2011, McDowell says. Mini is also looking at a sporty, two-seat hatch that looks like the brand’s answer to an Audi TT. Sources say it’s all but a done deal that the coupe is coming.
As a Mini owner myself, I can tell you that I don’t want to see these cars coming around every bend like, say, a Ford F-150 or Toyota Camry. But McDowell says he thinks the brand could easily grow from its current rate of about 50,000 cars a year to 80,000 or more without doing any damage. If he added a few niche cars beyond the crossover suv that is on the drawing board, he thinks Mini could surpass 100,000 without giving away its exclusivity. But getting upwards of 160,000 could be problematic, he says.
To that raises another question? If Mini has its namesake car, a stretch, a convertible and a crossover and coupe on the way, what’s next? McDowell says he’d love to bring back a modern interpretation of the Mini Moke. See the original Moke above. It would be the fun but potentially gangly offspring of a Mini and a Jeep Wrangler. Mini is seriously looking at it. Let us know what you think.
If there’s any lesson from the downfall of Detroit’s carmakers over the past several years, it’s that it’s that the smart money can’t find an easy solution to Motown’s woes. When private equity giant Cerberus Capital Management said it would buy Chrysler and its lending arm, Chrysler Financial Services, from former parent Daimler AG of Germany in May 2007, the idea was that the financier could bring better management and turn it around. With better cash flow management and the cost-cutting eye of former General Electric executive Robert L. Nardelli, Cerberus could strip out the excess and flip a healthier company a few years later for a profit. As a backstop, Cerberus bosses figured that the loan portfolio at Chrysler Financial alone was worth nearly the $7.4 billion they invested in Chrysler. If the carmaker was a loser, they could make up some losses with the lender.
But it’s been a disaster. The government sponsored bankruptcy at Chrysler has wiped out the investment in the carmaker. Cerberus also bought 51% of GMAC Financial Services from General Motors. GMAC is becoming a lender for Chrysler dealers and customers, so Chrysler Financial is in a wind down phase. Sources close to Cerberus say that the Chrysler investment will cost Cerberus about $1.5 billion even after it brings in the income from the remaining car loans on Chrysler Financial’s books. And GMAC? The Treasury Department has given assistance to GMAC, so Cerberus no longer has controlling ownership. The lender had a massive mortgage business that was hammered with the housing bubble burst.
Couple those problems with a recent report in the Wall Street Journal that investors are fleeing, and it’s clear that Cerberus has fallen on tough times. The WSJ reported that investors are withdrawing $4.77 billion, or 71%, of assets in the firm’s hedge funds. And its main hedge fund, Cerberus Partners, was down 24.5%, the WSJ reported. For its part, Cerberus says that the race to withdraw funds from its hedge fund was due to liquidity issues on the part of some investors, not because of its poor auto investments. But clearly, Cerberus is in the dog house with some of its investors.
Helped by Cash for Clunkers, which ended Monday, the annualized selling rate for the auto industry in August is expected to be about 15.5 million, according to Wall Street firm Goldman Sachs.
That would be a 16% improvement year over year, and nearly a 40% increase from July.
Goldman fully expects a “pay back effect” in September following the program. The firm also expects the monthly selling rate to remain above 10 million for the rest of the year, with a final sales tally of about 10.5 million, with a tally of 12 million next year. Some other analysts have pegged next year’s selling rate at 12.5 million to 13 million.
Consumer spending edged up 0.2 percent in July with help from the popular Cash for Clunkers program, but household incomes, the fuel for future spending increases, were flat.
Despite the big bump, including for General Motors, Goldman says it expects the automaker, just coming out of bankruptcy, to see a 16% drop in sales, compared with August of last year in part because of a pretty robust selling month last summer for the automaker. Ford is expected to see a 37% increase in sales for August, while Chrysler sales should be up about 5% for the month.
There has been much analyzing, debating and arguing over whether Cash for Clunkers was a good idea or good policy.
One stat I saw contrasted Clunkers with the German scrappage program, pointing out that we bumped up sales by maybe 3%, while Germany saw much bigger sales gains.
One of the flaws in comparing the program too closely with that of Germany is that that Germans have had a far greater personal savings rate than the U.S., and that country has not had nearly the housing bubble we have had, crushing home values and setting off a flurry of foreclosures in the U.S.
That is why Germany, whose citizens have been much wiser in terms of savings and personal debt levels, is coming out of the global downturn faster than the U.S. When the government kicked off its “clunkers” program, citizens were not nearly as strapped and savings poor to buy a new car.
When assessing Clunkers, you can look at some cold hard numbers. As colleague David Welch points out in his blog post, J.D. Power and Associates reckons that 70% of the sales made within the Clunkers program “may” have happened before the end of the year anyway.
Given the growing deficit, was the $3 billion spent wisely? Did we just augment or replace incentives that the automakers would have spent anyway? Libertarians really don’t like Clunkers and programs like it.
My position is that “Clunkers” was good policy for a number of reasons.
1. There is no question that the program brought many car buyers off the sidelines, and gave automakers, and dealers, a shot in the arm not only in terms of sales of the vehicles that qualified, but in vehicle sales in general as the program brought lots of new eyeballs to the entire showroom, not just the models that qualified.
2. The $3 billion had direct impact on the economy, keeping people working, increasing production and shift work at auto companies and parts makers. Unlike other pieces of economic stimulus, the money was allocated and went directly into the economy. The money isn’t sitting on a shelf waiting for building permits to make it through local bureaucracies.
3. Clunkers put a spotlight on the whole idea of trading up in fuel economy. Lots of old Explorers got swapped for Ford Focuses and Toyota Corollas. I believe U.S. public policy must move toward engineering a substantial change in transportation. There needs to be more policy that persuades people to choose their vehicles in a smarter way, to leave a smaller carbon imprint. This Clunkers bill was, perhaps, a start of a recurring series of moves that will create a more fertile atmosphere and public discussion about this.
4. Toyota was the biggest beneficiary, topping GM and Ford, when you consider sales of vehicles subsidized. This was no surprise in that GM had lower inventories of qualifying vehicles. Also, there is a fact of life and public perception linking the Toyota brand with fuel economy in a way that GM’s brands have not achieved yet despite solid gains in fuel economy and the fact that Chevy vehicles beat most of their Toyota rivals in fuel economy model for model.
5. Perhaps the undeniable efficiency of Clunkers will influence policy-makers and lawmakers the next time they draft a stimulus package. Economist Martin Feldstein warned us when the stimulus was being debated that it was not targeted nearly enough to consumer spending. His notion, which I agreed with, was that money should have been highly targeted to spending on specific high-impact sectors—cars, major appliances, home improvement.
Toyota Motor Corp. said that it will shutter its New United Motor Manufacturing Inc. plant in Fremont, Calif, in 2010. The move came almost two months after General Motors decided to pull out of the 25-year-old joint venture. It should come as no surprise.
NUMMI already had everything going against it when GM decided to kill Pontiac and pull out of the venture in July. Its United Auto Workers contract guarantees workers $28 an hour compared with $24 an hour in other Toyota plants. Higher electric rates in California made it undesirable. Throw in shipping costs to get parts from the Midwest and to send finished Toyota Tacoma pickups and Corolla compacts across the U.S., and it was one of the Japanese giant’s most expensive factories, if not the most expensive. Without the Pontiac Vibe, keeping the plant running full tilt would have been an even bigger challenge for a Toyota that already has too much production.
Toyota will move Tacoma production to its underused Tundra pickup plant in San Antonio and the Corolla will go to Cambridge, Ontario. Both make strategic sense since the assembly lines can be quickly retooled to make the vehicles. But they also have cost advantages over a place like NUMMI. San Antonio has lower wages. It’s a newer plant, so not all of the workers are up to top wage scale. There are lower healthcare costs in Canada and both are near the I-75 corridor where the parts making infrastructure lies. Cambridge isn’t on I-75, but it’s just a jaunt down Canada’s 401 into Detroit to get on the highway.
There’s one bigger point to be made. Toyota doesn’t close plants. The company hasn’t had to in recent times despite rapidly falling sales. Toyota has kept the dust flying with new plants going up and even has a shell of a new factory in Mississippi that is waiting for something to build. Shuttering NUMMI is an acknowledgement that Toyota overbuilt during the good times and even an economic recovery won’t justify all of its factories. Now, Toyota has to hang tight like everyone else. Its big growth days appear to be in the rearview mirror.
The government’s Cash for Clunkers program is over and still the spiff is getting more post-event coverage than any Super Bowl I can remember. The Transportation Department, not surprisingly, has labeled the program a great success. Some analysts have been far less effusive. They say the program was effective in selling cars, but the boost won’t last long enough to really help the car industry for very long. Edmunds.com also shows different data than the government, claiming that pickup trucks sold better than the Transportation Department is letting on.
While the program did its job, its real contribution has been less than the hype. Cash for clunkers did spur sales. It sold 690,000 cars and many were compacts like the Ford Focus and Honda Civic. So it did accomplish the mission of scrapping some old iron and selling some more efficient cars. That said, the boost will amount to less than a 3% increase for the year. That’s hardly the windfall that Germany achieved from a similar program, which pushed sales up an average of 30% a month since March. There may also be a hangover in car sales in the U.S. Edmunds says that purchase intent is now down 11% from June, meaning that fewer people are looking at new cars. So sales could slump in the coming months. In fact, J.D. Power says that more than 70% of sales may have happened later this year even if the government hadn’t spent $3 billion on the clunker program. One other point: Toyota was the biggest beneficiary, getting 19.4% of sales, with General Motors getting 17.6% and Ford getting 14.4% of sales from the program.
Then there’s a minor tussle over the most popular cars. The government’s figures say that the top 10 seller were all compact cars and small suvs. Without all the data in, Edmunds says the Ford F-150 pickup and Chevy Silverado were also in the top 10. We may get a final call on that when all the data is in.
The bottom line: The program did its job, but with just $3 billion in funding its mission was always going to be limited. Cash for clunkers came and went in about two months. But now automakers must sell in an economy whose fundamentals are still weak. It will be a tough road for some time to come.
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