The Future of the American Car Industry

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The Future of the American Car Industry: The Guard Dog of Hell?: 

The Future of the American Car Industry: The Guard Dog of Hell? Leon C. LaBrecque JD, CPA, CFP™, CFA LJPR, LLC

Main Issues: 

Main Issues Big three → Big two → Big one? Fuel efficiency Alternative Fuels Fuel Cells Advanced Technology India/China SUV/Trucks Wireless/Telematics

Big Three (two, one?): 

Big Three (two, one?) 16.5M units in US in 2006 (49M global) 240M vehicles in US (800M global) 250B gallons of fuel annually Market Share: 1995: US 73.5% 2005: US 57% July 2006: US 52% Source: Scotiabank

The Big Five: 

The Big Five US Market Share of Cars & Light Trucks: GM 26% Toyota 16.2% Ford 15.9% Honda 10.1% Chrysler Group 10% Source: Wards

Legacy Costs: 

Legacy Costs GM health care costs = $5.6B Ford health care costs = $3.4B Toyota retiree health care costs = $0 GM health and pension costs: $1,600 per car GM changes: Retiree co-pay on medical ($370/y single $753/y family); $1 of earnings plus 2¢ an hour = $1B Source: Plunkett

Cuts: 

Cuts GM: trimmed 38% of hourly workforce (40,000 workers at GM and Delphi) Ford: 6,000 salaried, 38,000 hourly DCX: cutting 2,000 salaried and 11,000 hourly Toyota job increases

Sales: 

Sales GM sold Fuji Heavy in 2005 GM selling Suzuki GM sold 51% GMAC to Cerberus GM selling Isuzu DCX sold Mitsubishi DCX selling Chrysler to Cerberus? Source: Plunkett, WSJ

Capital Spending & R&D: 

Capital Spending & R&D 2004: GM with much bigger mkt share, spent $7B. $8B in 2006 Toyota spent $15.3B in 2004 Toyota spends more than GM or Ford on R&D and increased R&D by 8.4% (3.2% for F and 4.25% for GM)

Fuel Efficiency: 

Fuel Efficiency Retail price gal unleaded gasoline 03/31/1997: $1.23 Retail price gal unleaded gasoline 03/26/2007: $2.58 Pickup sales off 17% in 2006 SUV sales off 9% Cars up 3% Source : eia.doe.gov, edmunds.com

Fuel Efficiency: 

Fuel Efficiency Honda Insight: 61/66 mpg Toyota Prius: 60/61 mpg Ford Focus station wagon: 27/37 Lincoln Navigator: 13/18 Jeep Grand Cherokee: 12/15

CAFE: 

CAFE Current rule is fleet average of 27.5 on passenger cars and 20.7 on pickups, minivans and SUVs New rules based on vehicle size, resets trucks up to 28.4 mpg (by 2011 on small trucks) and 21.2 (for large trucks) California requires fuel economy increase of 40% by 2016 and 30% of greenhouse gas emissions

Fuel Economy: 

Fuel Economy Cost projections on emission reductions range from $1,960 per vehicle (Environmental groups) to $4,360 per vehicle (manufacturers) Technology increases in emissions and fuel economy: 2/3 Powertrain: 6 speed (1-2MPG) Cylinder deactivations (6-12%) HCCI (20%) 1/3 from weight, air resistance, and rolling resistance Artificial Neural (Ford Econoline Van)

Hydraulic Hybrids: 

Hydraulic Hybrids Diesel/hydraulic hybrid Increases efficiency by 60% CO emissions reduced by 40% $7,000 cost $50,000 fuel savings over 20 years Source: EPA, UPS

Ethanol: 

Ethanol E10 is used widely now for about 30% of gasoline E85 is 85% ethanol Brazil: 80% of cars were dual-fuel Brazil gas consumption down 40% Climate and economics Export markets

Ethanol: 

Ethanol US Ethanol production is corn-based (v. sugarcane in Brazil) $10B of subsidies Very high price of corn ethanol Cellulosic (lignosic) ethanol is the future Iogen; Straw/cornstalks

Alternative fuels: 

Alternative fuels Hybrid gas/electrics CNG Electric cars Clean diesel Hydrogen

Diesel: 

Diesel VW Lupo gets 100 MPG Opel (GM) Astra 1.7 gets 64 MPG BlueTec gains 40% efficiency over gasoline McGraw Hill forecasts rise from 3.5% in 2006 to 11.8% in 2015 Source: Plunkett

Biodiesel: 

Biodiesel B20 and B100 reduce emissions 10% more NOX 50% less soot 60-90% less air toxics 75% less CO2 Expensive: supply is soybeans and yellow grease: est $2.06 -2.32 for soybean/ $1.21 for yellow grease

Fuel Cells: 

Fuel Cells Invented in 1839 Hydrogen & Oxygen separated by a catalyst Hydrogen is very volatile All of big 5 are in fuel cell projects China

India: 

India Tata RS 1 lahk sells for about $2,346 Marutti 800 is a little more India sales up 47% in February ’07 Up 26% on annum Sales estimated to grow 10% a year

China: 

China China sales up (domestic) 46% in 2006 (26% in 2005) Total vehicle sales 7.22 M Chinese car mfg made 76.8 B yuan ($10B dollars) 8M units projected for 2008

More China: 

More China Geely started as a refrigerator manufacturer, made 200 cars in 1998, sold around 170,000 units in ’06 (Good Luck) Malcolm Bricklin (remember the Yugo!?) is teaming with Chery to import 250,000 units to US by 2007

Still More China: 

Still More China Chinese auto workers make about $2 an hour (Koreans make $22, Americans make $60-78 with benefits) China is one of the world’s largest importers of oil: look for alternate fuels and hydrogen Watch 2008 Olympics and CNG buses, hybrids

UAW: 

UAW Loss of over 80,000 jobs in 2006 Membership in 1969 was 1.53M 2007 membership is about 500,000 Transplants make 4.9M units in US in 2005 Estimated transplant production 5.8M in 2009 This contract will be miserable Health Care Job Security Pensions/Supplements

Suppliers: 

Suppliers Bankrupt: Dana Collins & Aikman Delphi Hastings Dura Federal Mogul Tower (just bought by Cerberus) Not Bankrupt: Visteon (pursued by Cerberus?) Lear (Icahn?) Johnson controls American Axle Magna (teaming with Cerberus?) Source: WSJ

Globalization: 

Globalization Globalization is a two-way street: American carmakers can leverage overseas investments and sharing component designs. GM is globalizing engineering, styling and manufacturing and has reported saving 20% on components and 40% in development costs. Ford is attempting to cut global suppliers from 2,500 to 1,500 Nissan March (Renault) shared design project saves both companies 20%

SUV: (Simply Unsellable Vehicle): 

SUV: (Simply Unsellable Vehicle) 2000, 3M large SUVs sold 2005, 2.4M large SUVs 2006: worse Big 3 overexposed to SUV/truck market: 78% of DCX, 68% of F, and 59% of GM CUV sales up 13.5% Hybrid sales up 52% Source; Plunkett, Ward’s, DOT

Telematics: 

Telematics On-board Software, wireless communications, GPS ITS (Intelligent Transportation Systems) Advanced onboard Traffic Information XM Nav Traffic: GPS/WM combo Source: Plunkett

Who the heck is Cerberus?: 

Who the heck is Cerberus? Cerberus Capital bought: 51% of GMAC Tower Automotive NABI (CNG producer) GDX automotive Blue Bird (buses) CTA acoustics (auto soundproofing and insulation) Guilford Mills (seating) Peguform (interior plastics) Vanguard (Alamo and National) Source: Cerberus Capital

Future Shock?: 

Future Shock? Chrysler is for sale: GM’s offer rebuffed, apparently. Magna and Cerberus are vying for it, with more components for sale. GM is apparently in the fray for assets. Ford is behind GM in globalization, is trying to restructure capital with convertibles. GM is still moving to leaner more profitable. UAW is in trouble Toyota is winning

What’s Going to Happen?: 

What’s Going to Happen? What happens to Michigan? What happens to my portfolio? What does an auto downturn do to the National economy? What about the UAW?