08 June 2009

The Auto Industry Breakup

The weekend brought news that Saturn, rather than being shut down, will be spun off from GM to Penske, who is currently the distributor for the Smart Car, runs a rental truck business and has a high profile car racing team. Initially, the cars will be manufactured on a contract basis with existing designs from GM, but eventually, the plan is to outsource Saturn vehicle construction from somebody in the international automobile manufacturing industry. The two dealership networks and brands seem like good compliments for other in terms of potential buyers.

A deal to sell the Hummer brand to a Chinese cement truck manufacturing company is in the works (and honestly, Hummer is a very small line, producing a little more than 70,000 vehicles in for the commercial market in its peak year, just four models, not all of which are in production so far as I can tell, and far fewer vehicles, 27,485 in 2008, since fuel economy and thrift have returned to the market as consumer values). GM would do contract manufacturing for the first few couple years, after which the buyer would have to set up its own manufacturing process.

A deal to sell GM's Opel division to a consortium led by a Canadian auto parts company and a Russian bank, with German government support, appears to be well under way. This involves a unit that produces about 2 million vehicles a year.

The GM Pontiac brand remains slated for decommissioning.

Jaguar and Land Rover were sold by Ford to Tata Motors of India in May, 2008.

Saab (owned by GM which sold about 21,000 vehicles in North America in 2008) and Volvo (acquired by Ford on February 4, 1999 for $6,45 billion and had the fastest falling sales of any brand sold in the U.S. in February) are both being pitched to potential buyers. The Dodge Viper model within Chrysler (which produces under 2000 vehicles a year) was also purportedly the subject of a sale to a third party buyer other than Fiat.

Chrysler, less its financing arm, is on the verge of being sold to a consortium led by Italian automaker Fiat, with Justice Ginsberg of the U.S. Supreme Court ruling on an emergency motion to challenge the deal today after all lower federal courts had signed off on the deal by Friday.

GMAC and Chrysler's financing company appear to have been spun off from their respective automobile manufacturing groups and also appear to be slated to be merged into each other.

When the dust settles Chrysler will have three brands (Dodge, Chrysler and Jeep), and perhaps a fourth (Fiat), while Ford will have three once it can rid itself of Volvo (Ford, Mercury, Lincoln), and GM will have four (Chevrolet, Cadillac, GMC and Buick), with the GMC-Buick dealership channel consolidated into a single channel. Hummer, Viper, Saab, Volvo, Opel and Saturn may all end up as free standing car companies for now. Jaguar and Land Rover are part of Tata Motors. And, the remainder of the foreign car companies look likkely to survive. One or two small electric car producing companies (like Tesla) are also emerging into the market.

The flood of smaller newly independent or niche car companies is remarkable. It is hard to believe that they will avoid acquisition or survive on their own, but perhaps the economies of scale in the automobile market are not as great as they were in the past.

For the time being, the conglomerate business model appears to be dead in the automobile industry. Is it only a matter of time before brands like Jeep, GMC and Cadillac, which have vehicle models fairly distinct from the other brands in their companies, go out on their own? Has the problem been that the big automobile manufacturers have simply grown too ungainly to manage?

If the industry remains deconsolidated, the result could also cure the "too big to fail" issue that spurred bailouts in the first place. One little automobile manufacturer in trouble among a dozen is a far less attractive government bailout candidate than two of the three companies that make up the entire domestic industry. Smaller companies would also be under greater pressure to respond more quickly to consumer demand shocks impacting their part of the industry.

The line between foreign and domestic also continues to be confusing in the automobile industry. Many foreign companies have some North American factories: Toyota and Subaru (7 + 2 joint venutres), Honda (3), Nissan (4), BMW (2), Hyundai (1 + 3 design facilities), Mitsubishi (1), Suzuki (1 joint venture with GM). Chrysler has spent much of of recent history owned by Daimler Chrysler, a German automaking venture, and after a brief period of ownership by a Canadian hedge fund, will now be under Italian automakingg venture Fiat, despite having few non-North American activities. General Motors will have stepped by from the international market, but still have substantial foreign operations. As the Big Three decline in scale, the North American production of some of the foreign companies is starting to rival that of the domestics, and spin offs will also immediately impact the market share of the Big Three, although sometimes not dramatically.

(Some of the older developments are recapped here.)


Andrew Oh-Willeke said...

Update: Ginsberg has temporarily stayed the 4th Circuit order.

Andrew Oh-Willeke said...

The Order was from the 2nd Circuit. Apology for the error.