Wednesday, July 02, 2008

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.


At 7/02/2008 3:15 PM, Blogger Marko said...

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At 7/02/2008 3:19 PM, Blogger Marko said...

If some economists are correct, and this oil price thing is a bubble, then the Big Three are really going to be hosed, since they are retooling to make little cars instead of their more profitable trucks.

Anyone remember how well the Datsun B210 did after the gas crisis in the 70s? I remember our neighbors bought one, and then sold it at a big loss a few years later when gast came back to .50 a gallon, or whatever it was.

At 7/02/2008 8:39 PM, Blogger OBloodyHell said...

> since they are retooling to make little cars instead of their more profitable trucks.

I think this would be smart, anyway -- a certain percentage of people may return to buying large vehicles, but I suspect that a large chunk won't buy them for no good reason, as most SUV buyers have... they'll hold off for at least several years on going for the giant behemoth vehicle. I suspect now is a good time to short Hummer stock...


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