It has been nearly 18 months since the first of several Federal Government loans were made available to allow both General Motors and Chrysler to survive. The billions of dollars that followed still weren’t enough to keep the companies out of bankruptcy. In April, 2009, Chrysler filed for bankruptcy protection, and in June, 2009, General Motors followed suit. As the U.S. and world economies slipped into recession, many wondered if the government bailout just delayed the inevitable. Fortunately, it appears that the process has helped stabilize the companies. The question still remains – are the big three back? The following is a summary of the current status of General Motors, Ford and Chrysler.
General Motors – Due to its size and reputation, GM garnered the brunt of publicity and scrutiny. It may also be due to the fact that the Federal Government had to inject $50 billion to keep the company afloat. As most are aware, GM CEO Ed Whitacre was proud to publicly announce that GM had repaid its debt to the Federal Government earlier than required with interest, but conveniently omitted the fact that most of the government funds had been converted to equity. Yet it appears that the restructuring has allowed GM to make the changes necessary to breathe new life into its business. In the first quarter of 2010, GM reported profits of $865 million on sales of $31.5 billion compared to the $6 billion loss on $22.4 billion of sales for the same period in 2009. In spite of its own personal increases, GM’s market share dropped from 18.6% in the fourth quarter to 18.1% in the first quarter of 2010. There have been various theories as to the drop in market share ranging from the paring down of the number of brands under the GM umbrella (less units to sell) to the aggressive approach by other manufacturers, especially Toyota, to market their products. While it is unclear if the American taxpayer will ever fully recoup the investment made in GM (it was recently announced that the Federal Government was investing another $800 million to redevelop closed GM plants), without the bailout funds, GM most likely would have not survived.
Ford – As GM and Chrysler stood on Capitol Hill pleading with Congress for funds to keep the doors open, Ford was able to stay out of the spotlight as it did not require Federal bailout funds. This cast Ford in a positive light to the American public. However, it should not be forgotten that it was not too long ago that Ford was dealing with its own financial difficulties. But the combination of public perception, new product introduction and solid reviews has allowed Ford to produce four consecutive profitable quarters. Its sales increased over 34% comparing YTD 2010 to 2009 and market share has increased from 15.8% to 16.6%. In spite of all the positives, Ford must continue to manage the debt it accumulated during its down period.
Chrysler – Chrysler always seems to find itself relegated to number three when it comes to discussion of the Big Three. It certainly has not helped itself in the court of public opinion with the way it handled the termination of 789 dealers, or with the fact that it was a privately held company requesting Federal bailout funds. As with GM, bankruptcy has allowed the company to shed debt and obtain concessions from unions. The Federal Government allowed Fiat to acquire a 35% stake in the company in exchange for access to Fiat’s technology, especially with regard to smaller vehicles and its European distribution market. In year to year comparison, April sales increased by nearly 25%, but year to date sales and market share have been comparatively flat. In spite of the flat sales for the first quarter, Chrysler announced a $143 million operating profit (excluding one time charges) and has steadily begun to build its cash reserves. Chrysler, which had exited the leasing market in 2008, has begun again to lease vehicles, though it is not expected to ever reach the heights it once maintained. Chrysler must also face the continued litigation resulting from its franchise terminations and lack of fresh product. In spite of the obstacles, it appears that Chrysler has emerged from bankruptcy as a company with a future.
While all three manufacturers have made great strides, each has unique issues that need to be addressed in order to move forward. A hopeful improvement in the economy, development of products to suit the needs of the consumer, along with continued positive perceptions about quality and the stability of the companies will go a long way towards sustaining profitability. Are the Big Three back? While they will probably never reach the heights seen when they dominated the auto and truck market, each has the ability to survive and prosper.
If you have any dealership management questions, please contact Paul McGovern at pmcgovern@downeycocpa.com.
