Is Detroit's Comeback for Real?
Share Prices and Profits Are Up. But Are Futures?
BY DAVID KILEY
Jeff Kowalsky/Bloomberg/Getty Images
Shares of Ford Motor Co. neared $20 before falling back to 16 as it posted $6.6 billion in earnings for 2010. Just two years ago, Ford's stock was trading at two bucks and the company was bleeding cash. The Chevy Volt earned North American Car of the Year, and parent company General Motors' market share is actually higher after exiting bankruptcy and closing four brands. Even Chrysler, the other Detroit company that almost failed, is making an operating profit, showing vastly improved products coming out of its marriage to Fiat and gearing up for its own stock offering later this year.
Is Detroit really roaring back? Are happy days here again? Will the streets of Detroit soon be paved with gold instead of lined with abandoned buildings?
"There is very clearly a momentum shift here," says James Farley, chief marketer at Ford Motor Co., whose perspective is worth considering. Born in Detroit, Farley spent more than 20 years at Toyota before arriving at Ford at the end of 2007. At the recent North American International Auto Show in Detroit, Farley was more than upbeat. "Look around here … the excitement is around the product from us, GM and Chrysler."
While Ford has roared back without the benefit of going through a financial car-wash of bankruptcy, that process liberated GM and Chrysler from billions of burdensome retiree and healthcare costs. The companies can now—reportedly—make a profit in a vastly smaller U.S. car market. The companies only need the industry to sell about 10.5 million vehicles in the U.S. to cover their fixed costs. With sales widely expected to crest 13 million this year, and 13.5 million next year, that's a lot of additional sales through which to book big profits.
But despite the optimistic projections, are the Big Three really out of the woods? Challenges remain in the form of higher raw-material costs prices, and increased competition from established players and the aggressive Korean automakers. The road ahead is smoother and straighter than it was, but it is hardly clear. More specifically, what obstacles do the Big Three face in the coming years and are they properly positioned to remain strong? In a special PM investigation, we delved into each of the Big Three to find out what they're doing right and the possible road blocks. Call it the PM auto-company report card.
The Pros:
This Dearborn automaker's prospects look excellent. Even in a year when auto sales were a mere 12.3 million, Ford posted earnings of $6.6 billion for all of 2010, it's best performance in 11 years. Ford's shares quadrupled in 2009, and rose 68 percent in 2010. And it passed Toyota as the No. 2vehicle seller in the U.S.
Consumer Reports has essentially said there is no quality gap between Toyota and Ford, with Ford poised to take the lead. Moreover, compare the quality and aesthetic appeal of Ford's interiors today versus Toyota's and it's no contest who is doing it better.
"Ford's challenge is keeping it up," said Jessica Caldwell, director of pricing and industry analysis for the auto buying site Edmunds.com. "When you're the underdog, it's easy to do well. Now they're seen as the leader and everyone is going after them."
The Questions:
Ford is making a big bet on a flurry of new cars—the 2011 Fiesta, an all new Focus, the Grand C-Max, and a Focus-based Lincoln. Meantime, the new Ford Taurus, Ford Flex and Lincoln MKT and Lincoln MKS have not been sales successes.
The Bottom Line:
Ford CEO Alan Mulally may be the best auto exec since Alfred Sloan. Why? He did nothing short of reinvent Ford, but more importantly got the whole company to focus on long term goals, not quarterly ones. He is a master of organizational discipline and motivation. Ford's fixed costs keep coming down, while product quality keeps going up. He is aggressively reducing Ford's debt. Look for Ford and the UAW to find creative profit-sharing paths, not a return to the bad old days when workers got paid for staring at their navels.
Is Detroit really roaring back? Are happy days here again? Will the streets of Detroit soon be paved with gold instead of lined with abandoned buildings?
"There is very clearly a momentum shift here," says James Farley, chief marketer at Ford Motor Co., whose perspective is worth considering. Born in Detroit, Farley spent more than 20 years at Toyota before arriving at Ford at the end of 2007. At the recent North American International Auto Show in Detroit, Farley was more than upbeat. "Look around here … the excitement is around the product from us, GM and Chrysler."
While Ford has roared back without the benefit of going through a financial car-wash of bankruptcy, that process liberated GM and Chrysler from billions of burdensome retiree and healthcare costs. The companies can now—reportedly—make a profit in a vastly smaller U.S. car market. The companies only need the industry to sell about 10.5 million vehicles in the U.S. to cover their fixed costs. With sales widely expected to crest 13 million this year, and 13.5 million next year, that's a lot of additional sales through which to book big profits.
But despite the optimistic projections, are the Big Three really out of the woods? Challenges remain in the form of higher raw-material costs prices, and increased competition from established players and the aggressive Korean automakers. The road ahead is smoother and straighter than it was, but it is hardly clear. More specifically, what obstacles do the Big Three face in the coming years and are they properly positioned to remain strong? In a special PM investigation, we delved into each of the Big Three to find out what they're doing right and the possible road blocks. Call it the PM auto-company report card.
Ford
The Pros:
This Dearborn automaker's prospects look excellent. Even in a year when auto sales were a mere 12.3 million, Ford posted earnings of $6.6 billion for all of 2010, it's best performance in 11 years. Ford's shares quadrupled in 2009, and rose 68 percent in 2010. And it passed Toyota as the No. 2vehicle seller in the U.S.
Consumer Reports has essentially said there is no quality gap between Toyota and Ford, with Ford poised to take the lead. Moreover, compare the quality and aesthetic appeal of Ford's interiors today versus Toyota's and it's no contest who is doing it better.
"Ford's challenge is keeping it up," said Jessica Caldwell, director of pricing and industry analysis for the auto buying site Edmunds.com. "When you're the underdog, it's easy to do well. Now they're seen as the leader and everyone is going after them."
The Questions:
Ford is making a big bet on a flurry of new cars—the 2011 Fiesta, an all new Focus, the Grand C-Max, and a Focus-based Lincoln. Meantime, the new Ford Taurus, Ford Flex and Lincoln MKT and Lincoln MKS have not been sales successes.
The Bottom Line:
Ford CEO Alan Mulally may be the best auto exec since Alfred Sloan. Why? He did nothing short of reinvent Ford, but more importantly got the whole company to focus on long term goals, not quarterly ones. He is a master of organizational discipline and motivation. Ford's fixed costs keep coming down, while product quality keeps going up. He is aggressively reducing Ford's debt. Look for Ford and the UAW to find creative profit-sharing paths, not a return to the bad old days when workers got paid for staring at their navels.
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