The Wall Street Journal
Last year's North American International Auto Show in Detroit was something of a danse macabre. The specter of recession haunted the displays. General Motors and Chrysler were weeks away from bankruptcy.
This week's show promises a bit more cheer. U.S. vehicle sales, while back to 1982 levels, appear to be stabilizing. Yet jubilation should be tempered. The industry's near-death experience didn't lead to the profound changes needed.
For car companies, and the investors buying into their recovery, this lost opportunity will shape the next decade. As was demonstrated by the salvation of General Motors and Chrysler, and the tussle over Opel, politicians still love their cars and the job-providing factories that make them.
In North America, there has been some progress, with capacity down from 18.3 million units in 2006 to about 16 million, says IHS Global Insight. That still is 17% more than forecast 2010 sales. Meanwhile, in Europe, political unwillingness to close factories is "more entrenched than ever," says Tim Urquhart, senior analyst at IHS. Globally, capacity to make 90 million vehicles compares with expected sales of 62 million this year, estimates Goldman Sachs.
This week's show promises a bit more cheer. U.S. vehicle sales, while back to 1982 levels, appear to be stabilizing. Yet jubilation should be tempered. The industry's near-death experience didn't lead to the profound changes needed.
For car companies, and the investors buying into their recovery, this lost opportunity will shape the next decade. As was demonstrated by the salvation of General Motors and Chrysler, and the tussle over Opel, politicians still love their cars and the job-providing factories that make them.
In North America, there has been some progress, with capacity down from 18.3 million units in 2006 to about 16 million, says IHS Global Insight. That still is 17% more than forecast 2010 sales. Meanwhile, in Europe, political unwillingness to close factories is "more entrenched than ever," says Tim Urquhart, senior analyst at IHS. Globally, capacity to make 90 million vehicles compares with expected sales of 62 million this year, estimates Goldman Sachs.
As in the airline industry, chronic overcapacity resulting from high barriers to exit has made for a dismal long-term investment. Shareholder returns for the global auto sector have lagged behind the market and have been on a downward trajectory for three decades. U.S. firms have struggled to adapt to deteriorating conditions in their home market, historically attractive because of a "unique" combination of size, wealth and low fuel prices, says John Casesa, managing partner at consultancy Casesa Shapiro Group.
One strategy has been to globalize. But few car companies are truly global. Ford Motor and GM have sizable positions in North America and Europe, but these are low-growth markets.
Emerging markets are the next big thing, with China alone expected to account for almost half of incremental vehicle sales by 2024, according to Casesa Shapiro. But turning a profit won't be easy, given China's fragmented industry and price-conscious consumers. Only the emerging Porsche-Volkswagen group enjoys a double-digit-percentage market share in China. Indeed, of the major global auto companies, it looks the best positioned in terms of geographic spread, particularly if it can win market share in North America.
As a whole, however, low returns mean the industry needs to take capital out of the production process. That should mean mergers, particularly cross-border ones. But few will want to risk repeating Daimler's disastrous experience with Chrysler. Technology-sharing joint ventures are more likely, with Toyota Motor and Hyundai Motor particularly attractive partners for others, according to Goldman.
Meanwhile, Ford, under Chief Executive Alan Mulally, has made a shift away from the old model of regional engineering fiefdoms to cost-saving, unified vehicle platforms sold around the world.
That sort of self-help will be critical to sorting winners from losers. Despite structural weaknesses, the industry will have to somehow accommodate the demands of climate-change legislation, changing vehicle tastes and new entrants, particularly exporters from China and India. Detroit 2020 promises to be a very different show, perhaps with fewer exhibitors. Hopefully for Detroit, that would result from consolidation, rather than merely the real action having moved elsewhere in the world.
One strategy has been to globalize. But few car companies are truly global. Ford Motor and GM have sizable positions in North America and Europe, but these are low-growth markets.
Emerging markets are the next big thing, with China alone expected to account for almost half of incremental vehicle sales by 2024, according to Casesa Shapiro. But turning a profit won't be easy, given China's fragmented industry and price-conscious consumers. Only the emerging Porsche-Volkswagen group enjoys a double-digit-percentage market share in China. Indeed, of the major global auto companies, it looks the best positioned in terms of geographic spread, particularly if it can win market share in North America.
As a whole, however, low returns mean the industry needs to take capital out of the production process. That should mean mergers, particularly cross-border ones. But few will want to risk repeating Daimler's disastrous experience with Chrysler. Technology-sharing joint ventures are more likely, with Toyota Motor and Hyundai Motor particularly attractive partners for others, according to Goldman.
Meanwhile, Ford, under Chief Executive Alan Mulally, has made a shift away from the old model of regional engineering fiefdoms to cost-saving, unified vehicle platforms sold around the world.
That sort of self-help will be critical to sorting winners from losers. Despite structural weaknesses, the industry will have to somehow accommodate the demands of climate-change legislation, changing vehicle tastes and new entrants, particularly exporters from China and India. Detroit 2020 promises to be a very different show, perhaps with fewer exhibitors. Hopefully for Detroit, that would result from consolidation, rather than merely the real action having moved elsewhere in the world.
