EDITOR'S NOTE: The table on this story has been fixed to compare days supply 1/1/09 with days supply for 1/1/10
DETROIT -- Mike Jackson saw it coming, the tsunami that would wash over the Detroit 3 thanks to their push production system -- a system that would spawn multibillion-dollar losses even in big sales years.
The model, he publicly lamented since 2005, was based on factory overproduction, high dealer throughput, huge incentives and soaring costs. Automakers cranked out cars to keep factories running whether or not there were buyers, forcing discounts and killing residual values.
And now, the AutoNation CEO says with pleasure, that push model finally may be dead. The proof: the dwindling number of cars and trucks on AutoNation lots.
Outsider CEOs Alan Mulally at Ford Motor Co. and Sergio Marchionne at Chrysler Group are imposing discipline that traditional Detroit CEOs lacked. Even General Motors, under new leadership, appears to be pulling away from push.
"It's the most exciting thing we've ever seen," Jackson told Automotive News in January. "I've lived for this day to come. The inventories for the industry are the cleanest and in the best shape ever -- ever."
When automakers push vehicles to keep factories running, the unneeded or incorrectly configured vehicles don't match "real" demand. That leads to discounting by retailers, incentives by manufacturers, and brand image erosion. Manufacturers' payments actually reward retailers who ordered or accepted the wrong vehicles, further eroding the brand and reinforcing the "push" behavior.
The Detroit 3 entered 2010 with the lowest Jan. 1 days supply and fewest vehicles in stock since Automotive News began recording complete inventory data in 1992. GM, for instance, started the year with a 52-day supply, comfortably below the traditional goal of 60 days.
It's a far cry from the heyday of push. From 2004 through 2007, GM and Ford collectively lost $59 billion -- even as the U.S. market boomed with more than 16 million annual vehicle sales. For much of that period, GM, Ford and Chrysler tried frantically to keep factories running at a level far beyond demand.
|Drastic drops in inventory|
|Automakers slashed vehicle inventory dramatically in 2009.|
| ||12-month unit decline||% change||days supply 1/1/2009||1/1/2010|
|Source: Automotive News Data Center |
Chrysler CEO Sergio Marchionne vows to avoid the "cheap practices of volume acquisition."
A new era?
But the push model now may be relegated to history's dustbin as a new group of Detroit 3 leaders vow to build only as many vehicles as consumers want. It's far too early to declare success. But so far, they're doing it.
Supplies for the entire industry -- the Detroit 3 as well as the import brands -- have been at 63 days or below for six straight months, helped in part by last summer's cash-for-clunkers program. As of Jan. 1, industry supply stood at an impressively slim 53 days. In the prior five years, the Jan. 1 figure for the industry ranged from 61 to 94 days.
The stakes are high to get this right. The profit potential for manufacturers is huge if they can stabilize production and reduce incentives. GM says its December incentives dropped $2,500 per vehicle compared with December 2008, to $3,900.
Leaders at GM, Ford and Chrysler say their bad habits are over. Last summer, both Chrysler and GM intentionally underproduced. Ford already had checked its overbuilding.
Sergio Marchionne, in charge at Chrysler since last June, says he refuses to engage in what he calls the "cheap practices of volume acquisition."
That's a dramatic change from 2006, when Chrysler was the worst offender, forcing bloated inventories on angry dealers and playing a role in DaimlerChrysler's decision to sell the company. Excess Dodge Ram pickups and Jeep Cherokees jammed stray parking lots around metro Detroit as dealers fended off factory pressure to order more vehicles than they could sell.
Now, Marchionne says, Chrysler must find its natural level of demand and grow from there. Chrysler Group's U.S. market share slid from 12.9 percent in 2006 to 8.9 percent last year.
"The traction on this Chrysler Group is the number you're seeing now, unaided by doping exercises, by overincentivized programs, by other things," Marchionne told Automotive News last month.
Lithia Motors CEO Sid DeBoer said Marchionne told the public dealership group that he wants a 45-day supply for Chrysler.
DeBoer said: "I think they can do it, but it takes rigid discipline. You can't be starved for cash and do it." Lithia's dealerships already are short of good Chrysler products, he said.
From 2004 through 2007, Ford lost a cumulative $11 billion -- though its executives stopped the factory churn sooner than crosstown rivals.
Big production cuts began in August 2006, just before CEO Alan Mulally arrived from Boeing. Seeing the futility of keeping factories running to cover fixed costs -- only to overload dealers with too many vehicles and have to slash prices and forgo profits -- Mulally kept trimming output.
"We'd end up discounting the vehicles; we'd ruin or trash the resale values, and then we'd actually delay the economic recovery," Mulally recalled in January. "So we chose to act boldly and actually reduce the production to the real demand."
From 2005 to 2009, Ford's North American production dropped 43 percent, roughly in line with its sales decline during the period.
And Mulally's discipline is starting to pay off.
Ford now has posted two straight quarters of operating profits. It is reporting higher net pricing for its vehicles. Its incentives are still higher than the industry average, according to Edmunds.com, but the gap has narrowed considerably. For instance, that gap ranged from $1,000 to $1,500 the last six months of 2006, vs. a range of $300 to $700 the last six months of 2009.
GM lost the most money -- a cumulative $48 billion from 2004 to 2007 -- and fell perhaps the furthest by clinging to the push model.
In the wake of Sept. 11, 2001, the company's heavy discounting and continued production were credited with helping to revive the shell-shocked U.S. economy. Former CEO Rick Wagoner famously told his competitors to "stop whining" about GM's incentives.
Fast forward to 2010: Post-bankruptcy and under the dictates of new leadership, executives at the world's once-largest automaker now say they will produce strictly to match consumer demand.
"No more pushing inventory into rental sales, overproducing and turning to huge incentives, losing money on leasing," Mike DiGiovanni, GM's head of sales analysis, said recently. "We're a company that's now more focused on profitability."
Along with Chrysler, GM has shown the biggest change in the last year, slashing inventories by 56 percent.
Dealers now have a tough time getting GM's big SUVs, the one-time poster children for the push model's ills. The Chevrolet Tahoe began the year at a 26-day supply, and its sibling, the GMC Yukon, was at 33 days.
"I don't like it, but I guess I understand it," said Greg Heinrich, who owns four GM dealerships in Nevada. His inventory has fallen by as much as 70 percent in the past year, not entirely by choice. He says he's not too long on any vehicles right now but named nine nameplates -- including the Tahoe -- that he would like more of.
"You have to be skeptical after 30, 40 years of doing it the wrong way. But I will say: So far, so good," says Mike Jackson, AutoNation CEO.
The goal: One short
Heinrich's experience emphasizes the challenge ahead. How do the Detroit 3 maintain discipline even when that might mean saying no to potential sales? The old industry joke is you always want to be just one vehicle short. But in an imperfect world, that's hard to achieve.
With the Tahoe and Yukon, GM just added overtime at its plant in Arlington, Texas.
But "the one thing we want to make sure is we don't fall back into bad habits," GM sales boss Susan Docherty told Automotive News. "I'd rather have the dealers clamoring for more product than having a big boatload of product that we don't know what to do with."
GM, Ford and Chrysler all closed plants and slashed excess production capacity during the industry's crisis. Manned production capacity -- the number of vehicles a plant can produce with its existing work force and shift schedule -- and actual assembly volume in the North American industry bottomed out at 20-year lows in 2009, according to Autofacts, a unit of PricewaterhouseCoopers.
"I give the industry credit for doing a fairly efficient job of removing excess capacity, to the extent that they were able to," said Dan Montague, North America lead analyst for Autofacts. "The real challenge right now is to be very vigilant about adding back manufacturing capacity."
By 2012, manned capacity will rise to just below 16 million vehicles, up from 14 million in 2009, according to Autofacts' forecast. But volume will rebound even more, leaving projected excess capacity in 2012 at the lowest level since at least 2002.
But even then, the industry will be sized to produce 2 million more vehicles than it's likely to sell, according to Autofacts.
The Detroit 3 will be tested if and when new products prove unpopular.
They will face the continued temptation of running factories to realize at least some revenue from the fixed costs of plants and workers. Unavoidable fixed costs were the main driver of the push model.
With today's modified union contracts, the Detroit 3 no longer are saddled with the costs of paying laid-off workers indefinitely. And the automakers are improving production flexibility to build multiple models at their plants. But it remains difficult to switch a factory over to a more popular vehicle in just a few days.
A bit of skepticism
The leader of another large dealership group feels both caution and optimism.
"I've seen the ills from both sides," said Earl Hesterberg, who became CEO of Group 1 Automotive Inc. in 2005 after four months as Ford's U.S. sales chief. "I hope it's dead. I doubt it's completely dead just because of the fixed cost pressure on manufacturers."
It's a historic chance for the industry, AutoNation's Jackson says. But he's not entirely convinced that the automakers will stick to their newfound principles.
"You have to be skeptical after 30, 40 years of doing it the wrong way," Jackson said. "But I will say: So far, so good."
Chrissie Thompson, Jesse Snyder, Bradford Wernle and Jamie LaReau contributed to this report