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Intruders Save The Day for Detroit
The dose of Fresh Energy and The Ability of their CEOs to think differently has worked well So Far for The “Detroit Three’. But can these so called ‘Ousiders’ continue to spell Magic for them in The Long run as well?
Issue Date - 17/03/2011
It has been more than 20 months since the Detroit majors General Motors (GM) and Chrysler took the Chapter 11 route to overcome their woes that stemmed from the devastating recession that had hit the world in 2008 unlike Ford that chose to chart its own comeback. Today, while Ford has surprised many by coming out of the woods at an astounding pace, GM is taking its share of time via planned restructuring, and is doing well. No doubt, Chrysler is still striving hard to regain its past stature, but it has certainly managed to come a long way since then.

Though, some of the growth, especially in Ford’s case, came at the expense of Toyota, which stumbled throughout much of the last year as it struggled to deal with numerous safety recalls that damaged its reputation and led to record fines by federal officials, overall it was the cost-cutting measures taken up by the ‘Detroit Three’ that worked off well for them in 2010. While Ford and Chrysler have reported their largest growth rates in 2010 (a 17% increase in unit sales each), GM’s unit sales increased by 7%. What’s more? Two of the three companies even reported a profitable 2010, their first profitable year since 2005, with combined unit sales of cars and light trucks by all three topping 5.6 million (a 19% increase from 2009, the worst year for these auto giants since 1982).

Sounds astounding at a time when Detroit’s three top bosses – Alan Mulally, CEO, Ford Motor Co., Dan Akerson, CEO, GM and Sergio Marchionne, CEO, Chrysler are not the real ‘car-guys’ who have ruled the Detroit in the past. Coming from totally different backgrounds (except Sergio Marchionne who has the experience of running FIAT before he got to Chrysler) they are not the veterans who live and breathe automotive engineering & design. While GM’s top boss is a former naval officer and private equity boss, Mulally joined Ford as chief executive only in 2006 after spending 37 long years at Boeing. Even the Canadian-Italian chief executive of Chrysler was trained in accounting and rose through a series of jobs outside carmaking, before being recruited by the Agnelli family to run FIAT in 2004. “There are several advantages of having people with such diverse experience at the helm of affairs. Not only do they bring experience from other industries, having no past record with auto companies also allows them to try new things to drive growth,” Laurie A. Harbour, President, Harbour Results, a US based operational and financial advisory firm tells B&E.

While with Akerson at the top GM is now following the consumer focused approach, Ford under the leadership of Mulally has enhanced its focus on new markets with its “One Ford” strategy. As far as Chrysler is concerned, Marchionne’s magic may take more time than initially expected to reflect in the balance sheet of the company, but he has ensured that Chrysler sustains and makes a quick comeback.

In fact, the injection of fresh energy and the ability of these CEOs to think differently has worked so far for the Motown automakers. While GM has reported a net income of $4.7 billion for 2010, Ford has earned $6.6 billion (the most since 1999). Even Marchionne’s confidence of turning Chrysler (which for the year 2010 reported a net loss of $652 million) profitable sooner than later too has attracted a positive response from both investors and critics.

Though the trio has ensured that Detroit no longer remains a laughing stock as it was close to two years back, the numbers are still one of the lowest in the recent history of the ‘Detroit Three’. Moreover, experts have now started cautioning that the low-cost focus and lean approach by the ‘Detroit Three’ might take its toll on product focus and in turn may put further pressure on their current portfolios, which necessarily need a revamp.

While Akerson accepts that there is a gap in the product pipeline of GM caused by what he calls a lost year due to the bankruptcy, analyst feel that Chrysler too faces a gaping hole in product development. No doubt, Marchionne had added a new Jeep Grand Cherokee (a midsize SUV) to Chrysler’s existing portfolio in 2010 and will soon be launching the tiny Fiat 500 subcompact as well. But then, the majority of its new models are nothing but holdovers that have been part of the company’s lineup for years. However, unlike its crosstown rivals, Ford has been benefited in part because it didn’t submit to the government-sponsored bailout in 2009. Instead, Mullay decided to take on a massive debt, betting on a turnaround plan that reduced its number of divisions and focused on the core Ford brand. And so far, Mulally hasn’t regretted his decision. While GM and Chrysler were working through their bankruptcies, Ford was designing new models and moving ahead with plans to improve its business.

Further, Ford, GM and Chrysler, all three have been able to recover in part due to low and steady oil prices that have made crossover vehicles & trucks desirable once again. But there lies the challenge for the all three to bosses of the ‘Detroit Three’. If oil prices surge to more than $4 a gallon and stay there, consumers will perhaps likely begin looking for more fuel-efficient alternatives. Agrees Michelle Krebs, automotive analyst at Edmunds as she tells B&E, “All three are making money on very low levels of vehicle sales.The test will be, can they make money going forward by keeping overhead costs and inventories in line and developing vehicles that consumers are clamouring for.”

There is no doubt that all three companies have impressive new fuel-efficient small cars (Chevy Cruze & Sonic, Ford Focus & Fiesta, ChryslerFiat 500), and new electric cars (GM Volt, Ford Focus Electric), but then Detroit still remains more dependent on fuel-inefficient pickups and SUVs than their eastern counterparts like Toyota. This is certainly one area on which the trio now needs to work on if it wants to sustain recovery. Further, they now need to ensure that the ‘car-guys’ at their headquarters stay closely knitted into the product development process as it is finally the product that will create the buzz for them in the market and keep them afloat.

As it has gone so far there is little scope for complacency in any of the automakers’ office. But then, the emergence of a new Detroit has given them the much-needed edge – to look at things differently – and that’s for sure going to keep them afloat in the near future!

Pawan Chabra           

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