For the last quarter of a century General Motors, Ford and Chrysler destroyed billions of dollars in shareholder equity. They wasted billions on product investments that never earned a nickel. And they stayed committed to regional markets where they had no hope of ever being profitable.
Those days are over.
We are witnessing the auto industry enter a new phase, one of steely-eyed, hard-nosed business decisions, where shareholder money only will be invested in ways that provide double digit returns, including the cost of capital. While this industry always has been brutally competitive, we’re entering an era that is going to disrupt or destroy the automotive world as we’ve known it. The forward-thinking automakers know they better be in supreme fighting shape if they are going to survive.
GM dumped Opel and pulled out of Australia, Russia, South Africa, India and Indonesia. It’s why Ford and FCA are eliminating most of their sedans and soon will take other drastic actions.
Nostalgia counts for nothing in this new reality. The old rules no longer apply. It makes people uncomfortable, but that doesn’t matter.
Ford’s announcement it’s phasing out its money-losing models in the U.S. market triggered bombshell headlines. Ford fans feel betrayed and denounced the company for a variety of perceived sins. Some accused the automaker of being greedy. Others said it’s abandoning entry-level buyers. Many believe the company will get killed by the next spike in oil prices.
But Ford’s decision is logical. It’s going to replace those cars with CUVs. And what are CUVs? They are pseudo-SUVs built on car platforms, with car powertrains, fitted with interiors using the very same bits and pieces that go into cars. In other words, they are cars with different top hats.
But there is a key difference. People are running away from cars and lining up to buy CUVs. That’s what they want. And they’ll pay more for CUVs, meaning Ford can make a profit on them.
For those waiting for the next oil spike, you’re going to wait a long time. Fracking, a new technology that is enabling oil companies to unlock huge new oil and gas reserves, is a game changer that is going to keep oil prices within a reasonable range for years. That’s not an endorsement of fracking, it’s simply a statement of fact.
Besides, Ford will offer hybrid, plug-in hybrid and battery-electric versions of its SUVs and pickups. Electrification is starting to make the idea of cars being much more fuel efficient than trucks obsolete. So, dropping cars becomes an even more reasonable risk.
Here’s the new reality. Automakers must pour billions into developing BEVs, even though they know consumer demand for them is miniscule. They would never make such huge investments, except government mandates around the world are forcing their hands. In time BEVs will catch on, but automakers will lose a lot of money on them for most of the next decade.
Automakers also must invest heavily to develop autonomous cars and mobility services. They wouldn’t make such big investments either, except there’s a lineup of tech companies and startups eager to elbow them out of the way and take over their business. It’s an existential threat they must counter. And that’s why we are entering an era that is going to disrupt the industry as we know it.
To survive, automakers need profitable operations, solid cash flow and fortress-like balance sheets. Anything that impedes this has got to go. So, get ready to see other operations get the axe.
In a way, this uproar reminds me of the Lincoln penny. It costs the U.S. government 1.6 cents to make each 1-cent penny, so it’s a money loser. These days, almost no one uses pennies. But every time anyone says it’s time to get rid of the penny, people cry out in protest. We are creatures of habit who don’t like change. But in the auto industry, change is a-coming.