The Blueprint for the Auto Industry's Revival: Detroit Needs to Reinvent Its Wheels

by Martin Denholm

The Blueprint for the Auto Industry's Revival: Detroit Needs to Reinvent Its Wheels

This analysis is from Martin Denholm, Senior Editor, Investment U

Wednesday, January 13, 2010

Well, it was only a matter of time before it happened - and it's not surprising that it did in 2009.

Profiting from the economic mess and soaring unemployment in the United States, plus the bankruptcy of two of Detroit's "Big Three" automakers, China surpassed the U.S. as the world's top-selling auto market last year.

The 13.6 million vehicles sold in China easily beat out the 10 million sold in the U.S., thanks mainly to a 53% surge in car sales, compared with 2008.

Clearly, Detroit needs to refuel. And the auto industry got its chance this week at the 2010 Detroit Motor Show...

Michigan Auto Industry Misery

"The old Michigan economy is gone - and it's not coming back."

So said Michigan Governor Jennifer Granholm in a downbeat end-of-year address a couple of weeks ago.

And the "unimaginable" failure of General Motors and Chrysler (plus Ford's woes) is squarely to blame in a blue-collar, manufacturing-heavy state that relies on the auto industry for its economic growth and employment.

But Detroit's plunge from automotive hub to debt-laden sad-sack is evident in the state's sobering statistics...

  • Having lost a record 283,000 jobs in 2009, Michigan's unemployment rate is projected to hit 15.8% this year - 5.8% higher than the national rate and a 40-year high.

  • The state has lost one in five jobs since 2000. Not only that, but wages have dropped by one-tenth over the same period. The average wage is now 11% below the U.S. average.

  • The state of Michigan is $2.8 billion in the red.

  • General Motors' workforce is now just one-tenth what it was in 1979.

  • Its fellow bankrupt firm, Chrysler, sold just 931,000 vehicles in 2009 - the company's worst sales performance since 1962.

  • A survey of Michigan executives shows that the majority of them expect the state's economic conditions to stagnate or worsen over the short-term.

But you know what they say: From crisis springs opportunity. And while the prevailing mood is certainly depressed, there is some hope...

Can the Auto Industry Build On Its Late-2009 Resilience?

While 2009 will be remembered as the worst year for the American auto industry in history, it did at least end the year on a more positive note.

For example, Ford notched up a 33% jump in December sales, compared with December 2008. That helped the firm grab its first gain in U.S. market share since 1995.

Meanwhile, General Motors and Chrysler narrowed their losses, posting sales declines of 5.7% and 4%, respectively.

But what about the future? Current estimates call for U.S. auto sales to hit 11.4 million this year, rising as high as 13 million in 2011. A decent start, yes. But Detroit needs to do more. And that means more investment and innovation...

Detroit Plugs Into the Future

It's no secret that Detroit's love affair with the "gas guzzler" has played a big part in its downfall. Despite a drop in consumer demand, as the U.S. economy and employment situation worsened, the Big Three were still busy cranking out expensive SUVs and other small tanks.

By contrast, countries like Japan and South Korea were adopting a much more strategic and nimble approach, placing emphasis on smaller, cheaper, more economical cars.

And while they prospered, the Big Three floundered. Now, Detroit has finally realized that its future survival may depend on a similar approach. And quoted on the BBC, Aaron Bragman, an auto analyst at IHS Global Insight, sums up that new approach: "This is truly the start of the electrification of the American auto industry."

With around 60 new models on display at the Motor Show this week, the focus has shifted to hybrid and electric cars. This aims to capitalize on a rise in popularity among American consumers, as they look for greater fuel-efficiency and cost savings on gasoline. Consider that...

  • In 2008, Americans bought around 480,000 hybrid vehicles - with that number expected to grow when the 2009 numbers are released. And by 2020, that number is projected to hit 11.28 million.

  • The Obama administration's goal is to get one million hybrid electric cars on the road by 2015, and is kicking in billions of dollars to fund research and production of hybrid, fuel-efficient cars that cut carbon emissions, too.

And the Motor Show is the best place for manufacturers to showcase their new offerings...

Detroit's New Electric World

Having dumped underperforming brands like Land Rover and Jaguar during the downturn, Ford is undoubtedly in the best shape of the Detroit automakers. As CEO Alan Mulally told the BBC, "All our products returned to profitability during the third quarter of 2009." What's more, the firm didn't need a Washington bailout.

The company used this week's event to unveil its new Focus model, which will go into production in the U.S. and Europe later this year. Electric models on show include GM's Chevrolet Spark, the Fiat/Chrysler "electrified" Fiat 500, the Volvo C30 and an electric version of the BMW 1-series.

If you're looking for investments that could capitalize on this new trend, it might pay to shift away from regular "man on the street" thinking - i.e. car manufacturers - and onto battery manufacturers instead.

This industry is also receiving a substantial amount of federal funds, with current estimates suggesting that it could leap from an $875.6 million industry today to around $8 billion by 2015. And as we noted here recently, the Department of Energy says this only accounts for about 25% of the hybrids projected to be on the market by then.

Michigan is making moves here, too. General Motors just opened a new lithium-ion battery factory in the state, while the firm also poured $336 million into a new production line for its Chevrolet Volt at one of its Detroit assembly plants.

There's no question that Detroit has a long way to go in terms of both recovering from last year's crippling auto mess and putting itself on the map with a new wave of hybrid and electric vehicles. It's got some catching up to do, with Asian and European manufacturers already well on the way - and it won't be easy, given the current tight financial situation at the city's automakers.

But the funding and incentives for such progress seems available. And for a city and industry that has always prided itself on innovation, this shift towards cleaner, more economical cars could not only repair the damage done to the industry and allow it to move forward, but could also improve the crippling economic and employment situation in Michigan.

Best regards,

Martin Denholm

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