If the US auto industry is to survive, it will have to undergo a major transformation—slashing operations, focusing on fewer models, shedding dealerships and making better cars than those produced by Asian manufacturers, analysts say.
Getting there will be painful, requiring tough changes that management has so far been unable to impose on its own.
But those changes may be the price of any new money Congress comes up with, possibly as early as this week.
US auto executives will take their case for a $25 billion industry bailout to Congress later today, hoping to overcome political opposition from influential congressional Republicans and the White House. CNBC.com will stream the hearings live, starting at 3 pm EST.
But even if the industry gets the money, it will come with considerable strings attached, an approach favored by president-elect Barack Obama.
A collapse of the US car industry would be “a disaster in this kind of environment” Obama told CBS' 60 Minutes on Sunday, but assistance “can not be a blank check.”
Here's a look at some of the major changes facing the auto makers.
First, they have to bring their huge costs and debt under control.
"General Motors has an unsustainable debt load, including both what it owes for health care—even after the haircut they have taken—and their traditional bonds outstanding,” says Brian Johnson, an auto analyst at Barclays Capital. “Restructuring the balance sheet we would argue is a key part of restoring health.”
A key part of that effort is containing labor and health care costs that have been a huge drag on GM’s competitiveness, particularly with Asian car makers.
Recent labor contracts are gradually bringing those costs into rough alignment, including the landmark 2007 deal reached with the United Auto Workers (UAW), which cuts $1,000 of costs from each car.
Video: Ford CEO Alan Mulally says one failure could imperil the entire car industry.
When that contract comes into force in 2010, UAW members will be making roughly the same as—or possibly even less than—their counterparts in non-unionized plans run by Toyota and Honda, says Tom Libby, an auto analyst at J.D. Powers.
Health care costs are also to be unloaded to a UAW-managed fund.
Libby says that the industry’s high cost structure compounds the industry's problem by compelling US carmakers to produce gas-guzzling SUVS and pick-ups, which offer higher profit margins that help absorb these extra costs.
“They get a lot of criticism for building SUVs and pick-ups, but they have building those because they can’t make any money on the small cars," Libby says. "That will change with this new UAW situation.”
With as much as $2,000 of production costs slashed from each new vehicles in recent years, domestic manufactuers will now be able to afford to build a wider variety of smaller vehicles, which has not been a realistic option for decades.
While US auto makers have improved the quality and efficiency of the manufacturing in recent years, there is unanimity on the need for a long list of additional improvements.
One of the biggest needed improvements is to go higher-tech, especially installing more flexible assembly production lines, that employ more robots, to allow manufacturers to quickly switch output from brand to brand.
That’s critical to meet market demand fluctuations which are pronounced in the US market.
In its most modern plants Toyota can do this in minutes, while it can take days or weeks in some of Detroit’s Big Three older plants.
Video: Sen. Kay Bailey argues that automakers already have the money they need.
Retooling plants is expensive, and Congress has set aside $25 billion to help facilitate the transition to mass producing fuel-efficient vehicles.
Asian manufacturers have another advantage in that they regularly refresh their entire product portfolio every five or six years, which keeps the new product development process limber and keeps the pipeline stoked with new models.
Fewer Brands and Models
This feeds into another problem that haunts Detroit: too many brands and models, that all too often overlap. This makes for a marketing muddle, making it more difficult to maintain separate and distinct identify for any one brand, but draining advertising dollars in the process.
GM has eight brands with a market share of 22 percent, while Toyota has three brands with 17 percent market share.
“GM, in my mind, has three or four brands that have to go—maybe more, I mean GM could end up being Chevrolet and Cadillac,” says Keith Crain, publisher of Automotive News, a leading industry tradswe publication.
“They do it for production reasons, basically to keep plans open but it is not a customer-driven strategy—they need to move towards that,” adds Libby.
Reduce Dealer Networks
Related to this is the need for Detroit to significantly reduce its dealer networks, which are bloated—and far less profitable—compared to foreign competitors. GM has some 4,000 dealers, compared to Toyota, which has 1,200.
“You need a profitable dealer network, with an unprofitable deader network it creates alls kinds of additional problems for manufacturers,” says Libby.
“They are trying to reduce their dealer count but it is not easy as one might think [because of legal contracts between dealers and makers], but they have to, not just for Ford and Chevrolet but the other domestic brands – they all have to come down on the dealer count.”
Improve Image With Car Buyers
With all these problems, that had dragged on for decades of hemorrahging market, it is little wonder that Detroit has an image problem.
In fact, most analysts say the quality of domestic cars is actually improved far better than generally appreciated by the public.
That’s true domestically but also in emerging countries, such as China, Russia, Brazil, and India, where US automakers have a strong presence, and where growth has been robust. As much of 50 percent of GM andFord’s overall production is now outside the country.
Make Better Cars
But reversing this perception lag about quality will take time to correct—and continued high performance.
“In order to win back owners of Asian vehicles they are actually going to have to produce vehicles that are not only as good as the Asians but better than the Asians," Libby says. "Because right now there is really no reason for the millions of Accord, Camry, Accord and Civics owners out there to go back to the domestics. They are going to have to offer models that offer something over and above the Asians.”
But this will be tough, especially in an industry poised for downsizing from the 17 million units per annum, in recent years, to something closer to 12 million units per year, which is also the number of vehicles that are scrapped every year.