Toyota Trips Up: Posts Bigger Loss than GM in Q1

I just read two interesting articles regarding Toyota's financial performance in Q1, 2009. The first was published in the Wall Street Journal on 5/9 and the other in the New York Times on 5/13.

Toyota posted a loss of $7.7 billion in Q1, 2009. This exceeded the loss by GM in the same period. Luckily Toyota has the cash to survive, unlike GM which will probably file for bankruptcy by the end of this month.

There are many factors for the miscues which caused Toyota to incur it's first annual loss in 59 years:

• Toyota failed to recognize and exploit the growth of the small car market in China. GM is the dominant auto company in the Chinese market where it has partnered with two local OEM's.
• A mistaken belief that demand would continue to increase in the US car market. Toyota chose to increase it's presence in the light truck market just as the market collapsed. This has led the company to idle lines at several plants and place construction of a new plant in Mississippi on hold. Sales for the Toyota Tundra are down by 55% compared to the same period last year.
• The price of gasoline, which was up to $4 per gallon last year, has decreased to $2 per gallon, based on the latest prices in Michigan. This has meant that US consumers have lost interest in paying the extra premium for hybrids or in buying smaller vehicles. As an example, the Toyota Prius is now selling at a discount whereas last year it sold for full sticker price. Sales of Toyota's Yaris small car are also down by 50% compared to the same period last year.
• Toyota was not as aggressive as the big three in offering incentives to sell vehicles. Consequently the company slipped to third place, behind Ford, in US new vehicle sales for Q1.

Toyota management has taken several steps in attempting to remedy this situation. Vehicle inventory, which had increased to 100 days on hand is being reduced to 60 days. Toyota accomplished this by closing its plants in late 2008 and early 2009. This is in line with similar inventory levels at the big three. Toyota is also offering more sales incentives to boost sales. A new model of the Prius hybrid is also being launched and this is expected to increase customer traffic at sales rooms. Toyota's assembly plants are also engaged in cost cutting to help boost its bottom line.

The fact that Toyota, which is experienced in small vehicle and hybrid manufacture, should stumble in today's eco friendly atmosphere is a somber reminder to the big three on how big their task really is. Since gas prices continue to fluctuate, US consumers feel no real compulsion to buy hybrids or small vehicles. The big three must build small vehicles that are attractive and competitively priced if they are to take market share from the transplant OEM's.

Ford takes a Gamble on an Electric Focus

Ford announced this week that they would invest $550 million to retool the Michigan Truck Plant in Westland (MI) and Louisville (KY) to build an all electric Ford Focus. The North American version of the Focus is currently produced by Ford at the Wayne Stamping Assembly plant. While this is very encouraging news, since it will save and create jobs in Detroit, I have several concerns with Ford's strategy.

Firstly, Ford does not currently make any profit on the current Focus. This is generally true for all small cars produced by the big three and explains why the big three have never been keen on the small car market until the increase in oil prices forced them to rethink their strategy.

Ford is counting on economies of scale to reduce the cost of the Focus by simultaneously launching the Focus in the US, Asia and Europe. However, launching global programs can be problematical. Extra coordination is required for ensuring tooling is the same, materials are consistent and all suppliers must work in tandem to ensure a smooth launch. Changes will also require more coordination. This will add cost and complexity to the launch. Ford management is also negotiating with the UAW to further reduce labor costs and benefits. These negotiations also involve introducing flexible manufacturing and work practises so that several models can be assembled on the same line.

The typical north American consumer will also need to be enticed to buy an electric Focus since they regularly like to buy larger vehicles such as SUV's and pick-ups instead. This would have been an easier sell with gas at $4 per gallon rather $2 per gallon as it is today. Ford will need to add features to up-sell the Focus as they do in Europe. But, the European version of the Focus is more expensive than the north American version. Europeans are also more used to driving smaller vehicles since the price of gas is substantially higher (due to government taxation) and the cost of living is higher.

Ford also needs to prove to consumers that their Focus can compete on the same level as the compacts from Toyota and Honda. They will have to show that they can produce at an equivalent or higher quality standard than the transplants.

While Ford has my vote as the most likely of the Detroit big three to survive, I remain skeptical of their new car strategy. Bottom line US consumers will never seriously look at small cars unless the price of gas remains consistently high (as in Europe). Last year when the price of gas went to $4 per gallon, sales of the Focus increased. While I am against a new government tax on gas to promote energy conservation, we do need sustained government programs to promote the sale of small fuel efficient vehicles.

Chrysler Bankruptcy Filing Impacts Suppliers and Dealers

As many of you are aware Chrysler LLC filed for bankruptcy in New York on Friday, 5/1/09. Per the reports in the news, deals had been worked out with the UAW, Fiat and most of the creditors and bondholders in order avoid the chapter 11 filing. However, a small group of hedge funds held out for a better deal for their investors, and refused to accept the offer from Chrysler. Unable to resolve this issue before a government imposed deadline of 4/30/09, Chrysler had no choice but to file for bankruptcy.



This filing has several ramifications:

1. Chrysler will shutdown all its plants starting Monday, 5/4/09. They will not reopen until the company re-emerges from bankruptcy.

2. The supply base will be significantly impacted. Existing bills will be paid by the federal government. But the suppliers, who are already hurting due to falling sales, will now have to idle their plants until Chryslers plants re-start. The President stated on Friday that he wants a quick bankruptcy. However experts are stating that given the size of Chrysler and its issues a 30-60 day bankruptcy may not be feasible. With this loss of revenue there are likely to be many suppliers forced into bankruptcy. This could have a ripple effect on GM and Ford since they rely on many of the same suppliers for their parts also.

3. Dealers have inventory on hand at this time. The chapter 11 reorganization will force many of the dealerships to close as Chrysler consolidates its operations. Those dealers that are forced out of business will also sell inventory at fire sales prices depressing new car sales for the other OEM's.

4. Fiat will take a 20% stake in the re-organized Chrysler. They will contribute technology and new fuel efficient models to boost Chryslers sales. But this process will take at least 2 -3 years in order to transfer designs from Europe and launch the vehicles in North America.

Bottom line I am skeptical about the chances for Chrysler to emerge from Chapter 11 within 30-60 days. I think the issues that must be resolved have been over simplified. All I see is more pain to the automotive supply base before things start to turn around.

Ford Appears Likely to Survive

I just read an article that appeared in the New York Times on Saturday, 4/25/09, about the latest quarterly financial results posted by Ford Motor Co.

Ford lost $1.4 billion and new car sales fell by 43% in the 1st quarter of 2009 and it burned through $3.7 billion of its cash. Even though Ford lost money, investors took the latest quarterly report as a good sign since Ford now appears unlikely to need government financial assistance. Unlike GM and Chrysler which are under close government supervision and may file for bankruptcy in a few weeks, Ford has started to distance itself through better financial management.

I must admit I was very skeptical when, 2 years ago right after he joined Ford as their new CEO, Allan Mulally leveraged all the factory assets of Ford. Through this action Ford obtained the cash that may help them survive through at least 2010 according to Patrick Archambault of Goldman Sachs. This has so far saved Ford from approaching the government for a bailout.

The rate at which Ford is burning through its cash is now less than half what it was a year ago. Ford management is counting on its new products to help pull it through the current situation.

Even though Ford may avoid bankruptcy, a possible chapter 11 filing at GM or Chrysler will have a hugh ripple effect on the automotive supply base. Ford relies on many of the same suppliers as GM and Chrysler. If these suppliers are forced into bankruptcy them they could hurt production at Ford if they fail to ship parts. Ford management is working with their supply base to track the situation and source parts to alternate suppliers if this becomes necessary. The government has already offered to step in and fund suppliers in order to keep them running. One concern I have is that even though $5 billion in aid funds have been promised this may not be enough to keep all the suppliers running until sales stabilize.

Another issue that threatens Ford is that GM and Chrysler will have to shutdown dealerships as they eliminate brands and downsize. As dealers close they will hold "fire" sales in order to clear inventory prior to liquidation. These sales will depress prices and will hurt Ford's sales. Some analysts are concerned that Ford may not have enough cash to withstand this slump in new car sales.

Despite these issues I remain bullish on Ford and expect them to weather this storm and emerge as a leaner company with some great fuel efficient vehicles.

2009 SAE World Congress

I just spent the last two days visiting the 2009 SAE World Congress at Cobo Hall in Detroit, Michigan. Overall it was a very enriching experience for my professional development.

The first day that I attended (4/21) I spent most of the time talking to the recruiters at the career fair. I talked to four local recruiters that were looking for people (aerotek, delta staffing, GTA and superior staffing). I also talked to recruiters from BAE Systems, TATA Motors and Maruti. It was interesting that both TATA and Maruti were looking for automotive professionals to work in Pune and New Delhi in India. SAE had also set aside a small area for people to post their resumes so that recruiters and employers could review them at their leisure.

Separate to the career fair, there are several presentations that were running at the same time on job searching and professional development. I caught two of these presentations. The first was on becoming a consultant by Ralph Wilhelm and provided a lot of detailed information to help people get started. The next presentation was on enhancing your value while you are laid off by Masha Petrova. Masha's presentation provided 10 ways to increase professional value and I intend to follow her advice to beef up my job prospects. Their presentations will be available on SAE's website by the end of next week. One area that I intend to pursue is to become and instructor for SAE and teach development classes. I also intend to volunteer on their committee's to network with other industry professionals.

Today I attended the show again (4/22) and met solely with the companies that had come to exhibit their products. This is an excellent way to keep with the latest developments in my field and meet and talk to other automotive suppliers. I took the opportunity to discuss the state of industry and possible job openings with several suppliers.

What is the "No Worker Left Behind Program"?

Yesterday I took the initial orientation for the "No Worker Left Behind Program" or NWLB. This is a great program that I was told about by a friend who is already enrolled.

This program was initiated by the Michigan's Governor Jennifer Granholm in her 2007 State of the State Address. The purpose of the program is to train and place unemployed workers, in Michigan, so that they can get jobs in high demand occupations. The eligibility criteria seems to be very board. Any person who is currently unemployed or has received notice of termination from employment is eligible. Additionally any employed person with a family income of $40K is also eligible.

Participants in this program can receive free tuition in any Michigan community college, university, or other approved training program. The Michigan Works Agency assigns councillors to work with each participant to identify "high demand" occupations in which to pursue training and jobs. Participants have three years to sign up for this program starting August 1st, 2007 and need to complete the training within 4 years of enrollment. Tuition of up to $5000 per year is paid for two years and covers costs including books, materials and fees (such as application and registration costs). The program is offered on a first come first served basis and is a one time offer.

I began the application process to join the program yesterday. I attended a mandatory orientation at the Michigan Works office in Livonia. The orientation included an introduction to the program and an assessment test to ensure that all the candidates had high school level math and reading skills. After this we filled out several forms to determine our eligibility and were asked to return for a followup meeting on May 16th.

My goals in joining this program are as follows:
1. Work with a councillor to find a full time job in the renewable energy field within the state of Michigan.
2. Join the U.S. green building council and get my LEED AP energy audit certification. I understand that this is a "high demand" field. If there are other programs offered that will help my career I will also pursue those.

This is an excellent program that can help those of you who are displaced and need additional skills to get jobs in "high demand" occupations. Additionally I welcome the opportunity to work with a councillor in finding a full time job. If anyone needs additional information they should contact their local Michigan Works office. For those of you from out of state, don't fear, the NWLB is a federal program (so I was told) and is available in all states. I would check with your state's employment agency.

I will keep everyone posted on what happens at my next meeting and what courses I elect to pursue.

Is there a 100% American Made Car?

Welcome! This is my first installment to this blog. As the comments in the introductory section of this blog state, my name is Dan Kulkarni. I have lived and worked in the metro Detroit area for the last 17 years. I am a degreed Mechanical Engineer with experience in design, product launch, sales and project management. I have worked for tier 1 automotive suppliers and the OEM's. I have started this blog to share my views and opinions on developments the U.S. automotive industry. Your feedback is always appreciated.

This first blog is on the subject of "is there a 100% American made car?". I decided to review this subject due to an incident that happened to me recently. I had pulled in to get gas at my local Meijer supermarket, when an older gentlemen at the next pump asked how I liked my car. I was driving my five year old Toyota Camry SE at the time. I told him that I liked my car and it performed just fine. He then proceeded to tell me that driving my "foreign" made vehicle was costing people in Detroit jobs. Now, being currently unemployed myself, I don't need to be lectured by anyone on the issues plaguing the auto industry and Detroit in particular. So I decided to look into this issue in greater detail.

As many of you are probably aware, in order to remain competitive automotive OEM's and their suppliers have been cutting costs. This relentless pressure to squeeze every last penny out of each part and out of every vehicle, without compromising quality, safety or comfort, has already driven many suppliers bankrupt. The surviving suppliers have sourced the manufacturing of their parts globally in order to remain competitive. The passage of the North American Free Trade Agreement (NAFTA), by the Clinton administration, has also eased the barriers to free trade in North America.

In order to chase the cheapest labor costs, automotive suppliers and the OEMs have sourced parts manufacturing and vehicle assembly overseas. In North America, this has meant that the supply base and the OEMs have established manufacturing plants in Mexico and Canada to build vehicles for the U.S. market.

I did a very rough survey to check this out. I looked at the U.S. versus foreign content on three vehicles. These are the Toyota Camry LS, the Ford Fusion SE and the Chevy Malibu LS. These vehicles are all comparable in pricing and features and are 2009 model year vehicles. I choose the Toyota Camry LE as that is the most popular vehicle in terms of sales in the U.S. at this time. I visited three dealerships in the Canton and Westland area in Detroit and found the following information:
(a.) Toyota Camry - Manufactured in the U.S. at Georgetown (KY) and Lafayette (IN). The car is built with 75% U.S. made parts and 25% Japanese made parts.
(b.) Ford Fusion - Manufactured in Hermsillo, Mexico. The vehicle is made with 55% U.S. made parts and 40% Mexican made parts.
(c.) Chevy Malibu - Manufactured in Kansas City, KS. The vehicle has 80% U.S. content.

As you can see, the U.S. versus foreign content varies on each vehicle. Of the three OEM's, the Chevy Malibu came closest to being 100% U.S. made. Toyota, even though a Japanese OEM, assembles its vehicles in the US and has higher domestic content that the comparable vehicle from Ford. Tier 1 suppliers are also themselves multi-nationals who will supply an OEM in one country and manufacture the parts in another country.

In my view there is no such thing as a 100% U.S. made vehicle. The decision on how and where to build a vehicle is an operations management decision that will be driven by cost competitiveness and logistics amongst many other factors. The globalization of the automotive industry has made it more cost effective to base manufacturing and assembly operations overseas rather than within the U.S. Prior to the current recession this had been credited with creating jobs and expanding trade. This means that we need to revise our views of what constitutes a U.S. made vehicle.