'A Car For Every Purse And Purpose' Gives Way To 'Maximize Shareholder Returns At All Costs'

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Good morning! Welcome to The Morning Shift, your roundup of the auto news you crave, all in one place every weekday morning. Here are the important stories you need to know.

1st Gear: Times Are Changing

Bloomberg starts us off with some good analysis on the Ford decision to kill small cars and what it means for the American industry as a whole, and it doesn’t pull punches with the headline: “Detroit Is Back in Retrench Mode, This Time to Make Real Money.”


I mentioned this in my thoughts on the situation yesterday too, but the primary motivator behind Ford’s decision to axe sedans and small cars seems to be immense pressure from Wall Street to maximize shareholder returns. Ford’s earnings jumped to $7.6 billion in 2017, but the company has predicted a downturn for 2018 thanks to exchange rates and rising commodities prices, and investors aren’t happy about that. So the tactic is to kill everything that isn’t making money, even if it means losing market share and abandoning customers in some segments. After all, if car sales are expected to decline from their record highs over the past few years, it makes sense to double-down on the most profitable models.

Yet this is a pretty drastic change from how the American automakers have long done business, which is to chase every possible segment and global market possible. “A car for every purse and purpose,” as was the case in General Motors’ early days. But now, getting returns for investors is what matters most.


From Bloomberg’s story:

The General Motors slogan that ushered in an era of Detroit’s ascendancy in corporate America — “a car for every purse and purpose” — is looking a lot like a relic.

Take Ford Motor Co.’s decision to eventually exit the business of making sedans for the North American market. While it’s one of the more drastic steps a Detroit automaker has taken to retrench lately, it’s hardly the first. General Motors Co. and Fiat Chrysler Automobiles NV also are in retreat, not due to financial peril, but because of a simple goal:

Stick to the businesses and regions that are making them money.

GM, Ford and Fiat Chrysler are racing one another to make the kind of returns that get investors in a lather. All three have concluded this means they no longer should make every type of model for all markets.

“When they were trying to be all things to all people, they made a plethora of cars and maybe a third of them made money,” said Ron Harbour, the partner in charge of global automotive manufacturing at Oliver Wyman. “They felt like it was their responsibility. Now they want to show returns and profit growth.”


Also from Bloomberg:

“The passenger car rationalization plan is just the sort of bold and decisive action we believe investors have been waiting for,” Ryan Brinkman, an auto analyst at JPMorgan Chase & Co. wrote in a report Thursday. “It is indicative of a management team for whom there are no sacred cows and which seems increasingly likely to pull other such levers to aggressively improve earnings and shareholder value.”


(By the way, a few years ago the Washington Post did a good story on this business ethos—a fairly recent one, all told—and its effects on communities and consumers. It’s worth a read.)

As I said yesterday, I have my doubts, especially in the event of an oil spike or another economic downturn. But we will see what happens.


2nd Gear: Meanwhile, Over At GM

Now with all of that investor pressure facing automakers in mind, let us turn now to GM and the pressures facing CEO Mary Barra. She has promised investors steady earnings, but at the same time the company has to retool its plants for updated trucks and SUVs. From Bloomberg once more:

Pausing output of Chevrolet Silverado and GMC Sierra and retooling their plants to build updated versions of the lucrative pickups dragged on profitability in GM’s most important market last quarter. The automaker posted an 8 percent profit margin in North America, its worst showing in almost four years.

Barra began 2018 saying GM would be able to sustain record earnings per share despite a slowing U.S. auto market. While hot-selling new crossovers like the Chevrolet Equinox are helping her cause, lost production of 47,000 full-size pickups in the first quarter and rising cost of steel and other commodities were stiff early-year headwinds.

Another challenge will be keeping Wall Street interested in its story over Ford Motor Co.’s. While GM continued to out-earn its cross-town rival in the first quarter, Ford won plaudits from analysts by almost doubling its planned cost cuts through 2022 and slashing investment in most of its passenger cars.

“It may be a case of buy Ford and sell GM,” said Morningstar Inc. analyst David Whiston. “I don’t think it’s deserved because the company is being set up to do quite well. The stock is still pretty cheap.”


Sometimes you just can’t win, huh?

3rd Gear: Someone Still Believes In Small Cars

And that someone (well, something, car companies aren’t people) is Toyota, which is making a big investment in its Mississippi plant to build the next-generation Corolla. Even if small car sales are on the decline, including with the Corolla, Toyota still sells some 30,000 of them a month in the U.S. alone. That’s a lot. Via The Japan Times:

Toyota Motor Corp. announced Thursday that it will invest $170 million and add 400 jobs at its Mississippi assembly plant as it shifts some production of the Corolla sedan from Canada.

The company said it will retool the Blue Springs plant beginning later this year to make its next-generation Corolla sedan. Such changeovers are frequent at auto plants, but this one will also increase the plant’s capacity.

Spokeswoman Kathryn Ragsdale said Toyota now can make 170,000 vehicles yearly at the northeast Mississippi plant. Ragsdale didn’t say how much capacity would increase after production lines are replaced.

The spending brings Toyota’s total investment in Mississippi to $1.16 billion. Although Corolla sales are declining right now, Ragsdale said the company believes a 2020 redesign will boost sales. More importantly, the company is pulling Corolla production from its Cambridge, Ontario, plant to build more RAV4 SUVs there.


I think of all the small cars, the Corolla will be just fine.

4th Gear: The Yen Fucks Over Honda And Mazda, Again

Mazda’s teaming up with Toyota for a new plant in Alabama and that will be a godsend for the smaller Japanese automaker. It has no American manufacturing base, and that means that more than other companies it gets screwed by currency fluctuations. Anytime the yen gets stronger, it hurts their profits here.


That’s what happened recently, and to Honda as well, which at least has the benefit of making tons of cars stateside to cushion the blow. Via Reuters:

Honda Motor Co. and Mazda Motor Corp. issued profit warnings for the current financial year on worries a stronger yen would erode their operating earnings, wiping out the impact of record high global vehicle sales.

The outlook highlights fears of a rising yen disrupting an export-led recovery of Japan’s economy. For the country’s automakers, it is a double whammy: they have to battle currency fluctuations even as they navigate mounting competition in their biggest markets, China and the United States.

Honda on Friday forecast a surprise 16 percent drop in operating profit to 700 billion yen ($6.40 billion) for the fiscal year ending in March 2019, versus a consensus estimate for a rise, while Mazda Motor Corp. projected a wider-than-expected drop of 28 percent to 105 billion yen.


Good luck everyone!

5th Gear: Tesla Needs Cash

Speaking of investors, let’s turn to the industry golden boy, Tesla, which is struggling with Model 3 output and rapidly burning cash. It could use an infusion of capital for sure, but that could be taken as a bad sign by investors as well. Via Reuters:

A capital raise would raise alarm bells with investors as the company continues to burn money. Tesla reports first-quarter results on May 2.

Understanding Musk’s bullish prediction is a complex accounting exercise that relies on multiple best-case scenarios. These include: building a promised 5,000 Model 3 sedans per week by the end of the second quarter; curtailing or deferring high spending that added up to $3.4 billion in capital expenditures in 2017; and improving gross margins.

The dearth of information about Tesla’s multiple capital-intensive projects — from the Model Y crossover this year, the partially built battery Gigafactory in Nevada, and the Semi truck and Roadster, forecast to begin production in 2019 and 2020 — complicates the task.

“There are a lot of moving parts there,” Andrew Walker of Rangeley Capital, which holds a small short position in Tesla, said on Wednesday. “It’s just so many questions and such a black box, it’s very difficult to determine going forward.” Shorts bet that a share price will fall.


It’s almost like making cars is hard.

Reverse: RIP Pontiac


Neutral: What Do You Think Of These Industry Shifts?

Who has the right strategy in all of this?