From The Big Three to the Not-So-Big Two?
THE ECONOMIST -- So just how bad are things for the Big Three? This is hardly the first time that their survival has been questioned, of course. But two aspects of the current crisis are new. Carmakers’ finance arms used to bring in cash even during cyclical downswings in the vehicle market. That is not the case now. Not only have they been infected by the contagion from the home-mortgage market, but the value of SUVs and pick-ups has collapsed so catastrophically that they are losing big money on vehicles returned after lease.
It also seems increasingly unlikely that consumers will eventually shrug off the high price of fuel and return to their old buying habits, which means that Detroit’s old business model is now obsolete. The problem is that the smaller, more efficient cars that buyers now want, and which will come on stream in a year or two, are inherently far less profitable for both manufacturers and dealers.
GM and Ford can at least take some comfort from their well-run foreign operations, which are benefiting from growing demand in China, Russia and Brazil. But Chrysler has no such cushion. Worse, it is planning to replace only half its fleet in the four years after the 2009 model year (compared with Honda’s 72% replacement and Nissan’s 80%). John Murphy of Merrill Lynch believes this is “an active decision by the new owners to rationalise the product portfolio in advance of a break-up or sale.” It may not be long before the Big Three become the Not-So-Big Two.