Link: http://www.macleans.ca/switchboard/columnists/article.jsp?content=20050404_103129_103129How Detroit lost its cool
By relying on incentives, GM and Ford have lost ground to the imports
A couple of summers ago, I was in the market for a new car. I really liked the Mazda Protegé, and the Volkswagen Golf. I considered a Toyota Matrix, looked at the Ford Focus and took a Dodge Neon for a spin. Eventually, I settled on an Oldsmobile Alero. It wasn't my favourite, but it was pretty good and the critics seemed to think it was a decent buy. For roughly the same cost as the others, the Olds came with more features -- never underestimate the appeal of power seats. Most importantly, it came with four years of interest-free financing. Free money always catches my eye.
It was worth enduring the unending stream of jokes about a guy in his 20s buying an Oldsmobile because I figured I had waded into the sea of automotive choice and plucked myself a bargain. Not sexy, but sensible.
I didn't know it at the time, but as I drove off the lot that day, I had unwittingly become a symptom of the disease that is killing General Motors. Millions of drivers, just like me, have bought mediocre GM cars over the past few years, mainly because the incentives made it so easy to do so. Ford and Chrysler have fallen into much the same trap: their cars didn't have to be great because they seemed so cheap.
Rather than promoting brands, quality and innovation, Detroit's Big Three carmakers promoted deals. Think the car looks boring or ugly? Have a cash rebate! Concerned about reliability? Look at our zero-per-cent financing! Don't like the handling? We'll throw in air conditioning at no extra cost! In the process, they managed to convince customers that American cars are an inferior product. These big companies, with their big unionized workforces and generous benefit packages, have seen their profit margins gradually crumble, and their prestige fade. Nobody brags about buying an Oldsmobile anymore, and that's a big reason why the Olds brand is being phased out. Last week, GM's vice-chairman warned that Pontiac or Buick could be the next brand to die if results don't improve soon.
Last year, for the first time, the Big Three sold less than 60 per cent of the new cars in the U.S. GM, which once controlled more than half of the U.S. market, saw its share drop below 25 per cent in the first few months of this year. Ford's share of the U.S. market slipped from 20.8 per cent in 2003 to 19.6 per cent in 2004, and sales are sliding again this year. Even in sport-utility vehicles and pickups, where the domestics have traditionally dominated, sales are slowing rapidly. Only Chrysler, thanks in part to the success of its 300 Series sedan, has managed to increase sales this year. But even it is losing ground to imports like Toyota, Hyundai and Nissan. Toyota passed Ford to become the world's No. 2 automaker last year, and most analysts think it's only a matter of time before it passes GM in global sales.
Banc of America Securities analyst Ronald Tadross rang the warning bell for Detroit in a recent report entitled Death of the Domestic Brands. He believes the problem goes far beyond Detroit's dependence on incentives to sell. North American cars are still significantly overpriced compared to the imports because they lose their resale value so much faster, he says. According to his research, GM, Ford and Chrysler cars lose about 19 per cent more of their value over three years than the imports do. Despite improved quality and reliability, American cars are still widely seen as ugly, boring and/or shabby.
Ford and Chrysler have already been through rounds of massive cost cuts, and now GM is going down the same path. The company is reducing production by about 10 per cent this year, and slashing its white-collar workforce by as much as 28 per cent. Tadross thinks even more layoffs will be needed to bring the company back to financial health.
But none of the cost savings will matter much in the long run unless the Big Three can produce cars that get buyers excited, and, so far, there's little progress on that front. GM is hoping that a new crop of models like the Chevy Cobalt and Pontiac Solstice will turn heads. Ford has introduced a new, retro-inspired Mustang with much fanfare. But the reaction in the automotive press has been ho-hum. Most agree Detroit has produced some good new cars, but what the Big Three need are great cars. Once buyers have been conditioned to think the only reason to buy domestic is to save money, it's tough to convince them otherwise.
Canadians have a lot riding on this race. According to the Canadian Autoworkers Union, about 57,500 people in this country are directly employed by carmakers. Of those, about 85 per cent, or 49,000, work for the Big Three. Ontario produced more vehicles than Michigan for the first time last year, so it's not surprising that we've already felt the effects of the industry's woes. Since 1998, about 10,000 auto assembly jobs have disappeared in Canada, and with major staff reductions now beginning at GM, that number is sure to grow.
In early March, GM unveiled a $2.5-billion investment in its Canadian facilities, including about $435-million in taxpayer money. The news was greeted with joy in the auto sector, but the rest of us have reason to worry about it. That money represents a major bet, with public funds, on a horse that's looking old and tired. Until the domestics can attract buyers like me with products rather than promotions, it'll be hard to get excited about our automotive future.
Read Steve Maich's weblog All Business