“I want to fire a warning shot… Look, for God’s sake, time is running out.” ~ Frank Stronach
Frank Stonach, for those of you who don’t know, founded Magna International Inc., the world leader in automotive supplies to OEMs. Last year, the company’s total sales were a whopping $20.7 billion, and the company boasts a 10-year compounded annual growth rate in total sales of 22%. This company is huge!
In a lunch-time interview at the Magna Golf Club last week, Frank Stronach shared his serious concerns about the current state of the North American and European automotive industry.
His sentiment wasn’t subtle. “It’s possible the industry will crumble here,” he lamented.
Stronach’s message was loud and clear, representing another strong signal to auto manufacturers that if major changes aren’t seen in the immediate future, the industry could see a complete and utter collapse.
Market followers, including myself, have shared Stronach’s doom and gloom philosophy for some time. Just look at the writing on the wall:
— In the past five years, Detroit automakers have seen their market share drop from 66.2% to 57.5%. Each point equates to 160,000 drivers.
— Raw material costs for auto manufacturing continue to soar.
— The Center for Automobile Research estimates that U.S. auto manufacturers employees’ fully paid union health care benefits cost the companies approximately $2,000 to $2,500 per car made.
— In the past, GM and Ford have notoriously underestimated the strength of their competitors.
— Over 225,000 automotive manufacturing jobs have been lost in the Michigan area alone in the past six years.
The signs couldn’t be louder that the auto industry is in serious trouble.
From an investment point of view, the auto manufacturers should be more than a little worried. Standard and Poor’s and Fitch Ratings have labeled GM and GMAC (the financing branch of the automaker) with the lowest investment-grade rating there is. The next step would be junk status, at which point pension funds, mutual funds, and insurance companies would initiate a massive sell-off in the ailing automaker.
Junk status could be devastating for GM, whose stock has already lost 33% of its ground and whose bonds have lost 26%, not to mention the mounting $300 billion of total debt outstanding the company reported for the end of 2004.
Recent JPMorgan Chase & Co. market surveys reveal that most investors have already factored a downgrade to GM and Ford stock.
While the companies focus on gearing their product lines to customers’ changing tastes and trying to improve the safety and security of their vehicles to try to win government policy support, investors want to see nothing but massive changes in the companies’ cost structure.
With a shrinking market share, Ford and GM simply cannot continue to maintain their business with their current cost structure. It’s only a matter of time before the cost of each vehicle exceeds the market value consumers are willing to pay, even with incentives like no money down and zero-interest financing.
President Bush himself said, “(automakers) are going to have to learn to compete.” Of course, this is easier said than done in today’s economy. Considering the fact that over a million people rely on GM alone for their jobs, health care, and retirement, it’s easy to see what the aftershock would be like to the North American economy if the auto manufacturers collapse.
One thing is certain in this mess: things have got to change, and change quickly, or GM’s 100-year anniversary in 2008 will be welcoming more pallbearers than party-goers.