Detroit’s Big 3 on the Precipice…….Again: (Part 1)

How Desperation Stimulates Short-term Rational Thinking…. and Long-term Demise

NOTE: This blog was written in the first two weeks of April, 2020. As such, it cannot and does not anticipate the full effect of the COVID-19 pandemic on the US and global auto industry. Stay tuned…..

In this series of eleven blogs, we will discuss the current situation in Detroit with the traditional “Big 3” – Ford, GM, and Fiat Chrysler (FCAU) – and their upstart rival Tesla. The series will end with specific recommendations as to what the Big 3 must do to survive against Tesla and other electric vehicle manufacturers. The eleven blogs in this series are:

• The Detroit Big 3’s current woes, Part 1
• The Detroit Big 3’s current woes, Part 2
•  A brief history of the Big 3’s electric vehicle attempts, Part 1, GM
•  A brief history of the Big 3’s electric vehicle attempts, Part 2, Ford
•  A brief history of the Big 3’s electric vehicle attempts, Part 3, FCAU and General Big 3 Summary
•  What’s so special about Tesla — Part 1, financials and battery performance
•  What’s so special about Tesla –  Part 2, manufacturing, and cost/time reduction
•  What’s so special about Tesla –  Part 3, coming Tesla models, etc.
•  What’s so special about Tesla –  Part 4, Tesla versus emerging competitors
•  Why Tesla so successful……..the Company; the Cars
•  What’s a poor Big 3 auto company to do now?

The Detroit Big 3’s current woes:

Several major forces are working inexorably to permanently disrupt the US and Global automotive industry. Accelerating technological change and newly emerging business models are two such forces that have been with us for a while. However, two more recent disruptions are bringing unprecedented agony to Detroit’s traditional “Big 3” – Ford, General Motors, and FCA’s Fiat Chrysler Automobiles US: the global Coronavirus pandemic, and the accelerating adoption of electric vehicles, dominated by Elon Musk’s Tesla Motors.

Things have not been going well for Ford and GM especially, as well as FCA North America (FCAU) the past few months. For example, on March 23, 2020, the combined stock price of Ford ($4.01), GM ($17.60), and FCAU ($6.35) was $27.96, and their respective market caps at the close that day were $21.185 B, $25.15 B, and $12.82 B. That same day’s close saw Tesla’s stock price at $434.29, and its resulting market cap was $80.08 B. One week later on March 30, 2020, Tesla’s stock price had risen some 15.6 % to $502.13, while the combined Ford, GM, and FCA’s stock prices had risen only 6.5 %. Stock prices and market caps are investors’ measures of a company’s future profit and growth expectations, as well as a vote of confidence (or not) in each company’s management. The message here seems obvious.

To make this above comparison even more dramatic, I could have cited stock numbers from February 19, 2020, when Tesla’s stock price closed at an all-time high of $917.42, resulting in a market cap for Tesla of $169.16 B.

Perhaps these stock prices were a reflection of the poor financial results Ford and GM especially have exhibited recently. But no, on Dec 28, 2015, these companies’ stocks closed at $14.09 for Ford, $34.01 for GM, and $8.91 for FCA. From that date to March 30, 2020, Ford’s stock was down 64%, GM’s stock was down 37%, and FCA’s stock was down 28%. Clearly the recent four plus year trend for all three Big 3 companies is significantly negative.

It seems that these iconic American car and truck companies are going nowhere – strictly status quo. Ford revenues declined 2.8% in 2019. For the same year, GM’s revenues declined 6.7%, and FCA’s declined 2.0%. Every year the Big 3 raise their vehicles’ MSRP prices and then give bigger discounts to sell them. At best the Detroit big 3 have functioned as dividend machines. Note however, that Ford just announced the cessation of their stock dividends – much to the ire of the extensive Ford family’s members. Furthermore, on March 25, 2020, following an earlier downgrade by Moody’s, S&P Global downgraded Ford’s credit to junk status.

Both Ford and GM have recently made huge commitments to the electric vehicle market – – announcing forthcoming all-electric pickup trucks, SUVs, and large cars. At the Detroit Auto Show two years ago, Ford’s Executive Chairman, Bill Ford said: “We are all in on this. We’re taking our mainstream vehicles, our most iconic vehicles, and we’re electrifying them.” Ford has really been publicizing its forthcoming Mustang Mach-E, due out in the fall of 2020.

On March 4, 2020, GM held a widely-covered “EV” press day with its CEO Mary Barra and members of her senior executive team plugging GM’s ongoing $20 Billion investment in electric vehicles and battery technology, as well as previewing 11 out of 20 new electric vehicles GM would be bringing out over the next three to five years.

These announcements made a big splash, and obtained lots of fawning press coverage, but didn’t move the needle much on Ford’s or GM’s stock prices (GM up 2% on 3/5/20). Maybe people who follow the automotive industry weren’t that impressed, or was it that they just either didn’t believe these developments were real, or that either company would accomplish them? Apparently, they had seen these movies before. More on that later……………

In any case, Reuters news service soon revealed which shell the pea was under in their March 26, 2020 article “Detroit’s Near Future Based on SUVs, not EVs, Production Plans Show”. The article pointed out that despite their splashy pronouncements, that Ford and GM would in 2026 (!) only produce a combined total of about 320,000 electric vehicles, in marked contrast to their planned production of more than 5 million SUVs and pickup trucks. By 2026, five years from now! And, buried in the production plan numbers as GM later admitted, it would be selling many of those vehicles in China!

Last year, Tesla sold 376,000 electric vehicles. This year, despite the Coronavirus, Tesla seems capable of selling over 500,000 vehicles. It could be more, but they are constrained by a lack of plants for battery and vehicle production, not by a lack of customer orders. By 2026, they will likely be selling a minimum of two million electric vehicles a year, perhaps double that.

So these recent press conferences by Ford and GM executives touting their electric vehicle commitments were a shell game. “Look over here” while we go on (over there) pumping out our usual fleets of huge fuel guzzling and extraordinarily profitable pickups and SUVs, and continue to push them through our (outmoded) dealer network and a sales process most customers find highly unpleasant.

As Sandy Munro, a taciturn veteran of the auto industry and a brilliant manufacturing expert explained, the senior management of Detroit auto companies still consider electric vehicles as a science experiment. What piercing and priceless commentary!

Blog #2 in this series is: The Detroit Big 3’s current woes, Part 2

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