A story you probably thought you’d never see

Douglas A. McIntyre:

Fiat Chrysler Automobiles proposed a merger with Renault that would create the world’s third-largest carmaker. The eroding economics of the industry make such deal more likely by the day. Deep trouble at Ford Motor and General Motors’ need for more heft to compete with rivals Toyota and Volkswagen make a marriage between the two largest car companies increasingly probable.

Fiat Chrysler argues that a tie-up with Renault will lead to $5.5 billion in savings. As car sales have flattened in the United States and started to drop in China, the two largest markets in the world offer less hope for revenue improvement. Neither company has much of a sales footprint in China. Renault has none at all. Both have a strong market share in Europe, but it is one of the most competitive markets in the world. At the low end of the market, VW is the dominant force. At the high end, it is BMW and Mercedes.

While GM and Ford both have a strong market share in the United States, Ford has stumbled. It has withdrawn most of its sedans in the American market because sales have shifted from cars to sport utility vehicles, crossovers and pickups. Ford’s only bright spot in the United States is its F-Series full-sized pickup, which is the top-selling vehicle in the nation. Ford’s sales in China are abysmal and falling. GM’s are strong, but it is up against other car companies, both local and global, that need the largest car market to be successful.

Ford’s management, under CEO Jim Hackett and Executive Chair William Ford, has shown it can cut costs. It recently cut 7,000 white-collar workers. That will save $600 million. Hackett has set total savings of $14 billion for the five-year period that began last year. He also said the company will invest $11 billion to have 40 electric and hybrid cars by 2022. Not many outsiders believe he can make his goal. Ford may build more electric cars and hybrids, but selling them is another matter. The competition in this market runs from tech companies like Alphabet’s Waymo to Tesla, startups and every major manufacturer in the world. There is no evidence Ford is ahead of this wave, and so far, it appears the company is behind it. Confidence in Hackett, in particular, is low.

GM is better regarded than Ford, primarily because of the work of CEO Mary Barra. She has been CEO of GM since 2014. It also has cut costs. However, many outsiders believe it is ahead of most of its rivals in both the electric and self-driving car businesses. GM owns 75% of Cruise Automation, a leader in artificial intelligence of future cars.

GM has two other advantages over most global manufacturers. It is among the leaders in car sales in China. With its joint venture partners, it sold 813,973 vehicles in the first quarter. GM is also the leader in U.S. car sales, with about 17% of the market.

One of the primary hurdles GM would have if it took over Ford is that the market share of the two in the United States would be close to 30%. Either U.S. regulators would need to accept that, or the combined company would need to sell or spin out some of its brands. The most likely of these are GM’s Buick or GMC truck business.

While GM may have a future as a standalone car company over the next decade, Ford does not. Its market cap is down 42% over the past five years, while GM’s is close to flat. The savings in a combination would be well into the billions of dollars. A marriage of the two also could compete effectively with Toyota, VW and perhaps the new Fiat Chrysler and Renault combo. GM also has the advantage that it is considered to make among the most dependable American cars.

Who would have predicted a GM–Ford merger at any point?

The possible irony here is that GM has fallen out of favor with many car buyers due to its bailout in 2008. And GM clearly has issues with those not turned off by the bailout, as GM Authority reports:

During GM’s Q1 2019 earnings call, a Barclays Capital analyst asked GM CEO Mary Barra a rather interesting question: whether the automaker’s products lack the desirability of key rivals, particularly when it comes to vehicle design and effective marketing tactics that attract buyers.

“We’ve talked over the years about the cultural change you did at GM and a greater focus on cost accountability, making sure you’re in the right product and geographies to drive profit,” asked Brian Arthur Johnson of Barclays Capital. “But one thing I do hear from investors is, if they look at GM design, broadly speaking, both the vehicles, the interiors, the advertising it just doesn’t, in some people’s view, have the kind of pizzazz as you might see. I don’t always like going back to Tesla, but it’s not lost on some of us that one of your designers created Elon’s vehicle lineup.

So just, how are you thinking about the state of design overall at GM? Is it an important differentiator? Or do you think it’s more important to get capable vehicles out there and kind of play it more on the profit and the cost game? And if it is more important, what would you — what are you trying to do to kind of move it to the next level?”

GM CEO Mary Barra responded with the following, providing some insight into the automaker’s thinking and processes:

“I think it’s incredibly important. You have to do everything to win in this market. And design is a very important piece of it. I think we have a very disciplined process where we clinic data and understand the customers in segment and what they’re looking for, how they view products. Full-size truck is different than a Cadillac is different than a compact SUV like the Chevrolet Equinox. And so, we have a very rigorous process on how we develop trucks and really focus on putting the customer at the center as we do those designs.

But all aspects are critically important. I think if you – you mentioned advertising as well. I think Cadillac is a really good example as you’ve seen the shift that we’ve made. And Steve Carlisle can do a better job of telling you, but the list that we’ve had with Cruise, with the right campaign has been very very successful. And I would also say, when you look at brand building, there’s been tremendous improvement across all of our brands and strengthening from the key brand metrics.

So we’re focused on having beautifully designed products that people want and desire and got to have to having the right contenting, so we could have the right package and efficiency and affordability for the customer and winning in the marketplace and then having advertising that breaks through. But sometimes the advertising that breaks through and is most effective with the customers isn’t the one that wins all the awards.”

That seems like a nice reply, but it still doesn’t really explain what the automaker will do to solve the elephant in the room, which is that a significant amount of U.S. car buyers do not desire GM, its brands or products when shopping for a car – whether due to prior quality or reliability issues, image-related factors, or an entire list of other potential reasons. It’s a serious problem, one that leaves GM competing for a smaller portion of buyers.

Meanwhile, some of the automaker’s newest vehicle designs have been critiqued for being bland or unattractive, including such models as the all-new 2019 Chevrolet Silverado, refreshed 2019 Camaro, and the all-new 2020 Cadillac CT5.

In addition, the Super Cruise campaign mentioned by Barra might make for a good talking point, but its success is very limited. The spot in question – called Pioneers – isn’t focused on Super Cruise, but rather mentions it in passing, while also bringing up a whole bunch of other Cadillac attributes. But apparently, it’s effective.

Or not if it’s not actually selling GM cars.

This will be really interesting to watch.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s