Has the worm turned for the Big Three?
Well, that would be premature, to say the least, but one well-known investment bank sees somewhat smoother sailing on the horizon for U.S. automakers. Deutsche Bank Friday upgraded its investment rating on both General Motors and Ford, saying it saw a potential “game changer” for the industry: an agreement on healthcare-cost burdens.
Deutsche Bank analyst Rod Lache notes that GM’s healthcare cost burden is about $1,300 per vehicle made in North America (it’s about $1,000 for Ford), and he said the company spent $6 billion on healthcare for its employees ($1.8 billion) and retirees ($4.2 billion), which could balloon to $7.4 billion by 2011.
But, the analyst now believes that the United Auto Workers union actually proposed a deal to GM that would have essentially gotten the company out of the retiree healthcare insurance business, much in the way the United Steelworkers did with Goodyear.
“Unfortunately, GM did not pursue this at the time,” Lache said in a research note, upgrading to “buy” from “hold” both GM and Ford. “We nonetheless believe the fact that the UAW was open to this concept speaks volumes,” and he expects at least one U.S. automaker to pursue that kind of solution.
In doing so, the companies would find it easier to re-size their business for the future, as they wouldn’t have the albatross of a skyrocketing fixed cost to constantly worry about.
Lache also noted that auto manufacturing is an extremely capital-intensive endeavor, and any increased flexibility should make it easier for the car makers to obtain the funding needed to remain competitive.
But Deutsche Bank’s call on GM and Ford is about more than their healthcare costs. Lache says that, after 10 years of deflationary pricing, he expects the North American market to enjoy a period of increased discipline, with the supply/demand equation stabilizing over the next couple of years.
“We project a modest recovery for U.S. demand in 2008 (16.7 million units versus 16.3 million in 2007),” Lache said. “More importantly, we believe that the 1.9 million unit capacity reduction being implemented by the U.S. Big Three will more than offset incremental capacity additions.”
Meanwhile, Lache says Ford has the best opportunity among global automakers to cut costs and, with industry consolidation increasingly likely, Ford could be a major player.
Of course, there is no guarantee that the UAW and the automakers will reach a deal this year, which could prove to be a knockout blow to Lache’s theory. Indeed, he points to a stunning fact that shows just how important it is for the automakers to get something done on the healthcare front: every 1 percent increase in healthcare inflation adds $8 billion to GM’s post-employment benefits liability.
Even should the healthcare issue get resolved favorably, there's no getting around the fact that, over the last decade, the Big Three have lost almost 19 points of market share in the U.S - from 73.8 percent in 1996 to about 55 percent today.
"We are particularly concerned about Ford’s near-term market share prospects, given our belief that Ford’s product pipeline is weaker than competitors’," Lache said. "For 2007 we have assumed that GM’s U.S. market share declines by 40 basis points and that Ford’s share declines by 90 basis points."
So, even if the healthcare burden is eased dramatically, Detroit still needs to start making cars that folks want to buy.
Lache’s call comes at an interesting time; it was learned this week that industry-darling Toyota is more than a little worried about its manufacturing costs in the U.S., looking to knock one-third off what is expected to be a $900 million increase in U.S. manufacturing compensation by 2011.
The battle for the Big Three is far from over – in many ways it’s just begun – but after years of stalemate, it seems safe to say that unions appear more willing than ever to listen to creative solutions. Maybe there is just enough goodwill on both sides to get the ongoing crisis resolved.
The alternative works out well for no one.
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