America's carmakers make a comeback

Rinsed and raring to go

After a terrible year there are signs of hope for Detroit

AMERICA’S carmakers appear to have returned from the grave. This week the three big ones—Ford, General Motors and Chrysler—all had good news to report. Ford recorded a wholly unexpected profit for the third quarter of nearly $1 billion, thanks in large part to a huge improvement in its North American operations. Sergio Marchionne, boss of Fiat and now Chrysler, laid out a detailed five-year plan for restoring the American company to health in a seven-hour presentation. Most sensationally, GM’s board, citing both the improving business environment and the firm’s own recovering financial health, reversed its decision to sell a majority stake in Opel/Vauxhall, its European subsidiary, to Magna International, an Austrian-Canadian partsmaker, and Sberbank, a Russian bank. Both GM and Ford were also able to post year-on-year increases in sales in October, of 4.7% and 3.3% respectively.

A year ago, such a turnaround seemed unimaginable. GM had declared losses of $4.2 billion in the third quarter and Ford of $2.7 billion. Both firms had burned their way through nearly $7 billion of cash each during the quarter. The smallest of the three, privately held Chrysler, did not say how much it had lost, but an educated guess was about $2 billion.

The rest is history. The government stepped in to prevent a potentially catastrophic collapse of GM and Chrysler with $62 billion of Treasury loans and then shepherded both firms through “quick-rinse” bankruptcies that shrank their debt, cut the cost of obligations to retired workers and pruned their sprawling dealer networks. Italy’s Fiat was recruited to take over the management of Chrysler and share its advanced technology for small cars in exchange for a 20% stake. Ford struggled on, completing its restructuring without help either from the taxpayer or bankruptcy, thanks to the $23.6 billion it had raised in 2006, before the credit markets froze, by pledging all its North American assets as collateral.

All three firms will now be helped by what may be a quicker and stronger recovery in car sales, particularly in America, than most people are expecting. It will be a long time before sales return to 17m a year, the level until recently regarded as “normal” by an industry accustomed to pumping up demand with cheap credit and suicidal pricing. But Adam Jonas, an analyst with Morgan Stanley, points out that previous recoveries in car sales have been “V-shaped” (see chart), and that this one is likely to be too.

After sales hit a low this year of only 10.5m, Mr Jonas is forecasting sales of 12.8m next year and 14.5m in 2011. He is relying on the combined effects of broadly based economic recovery, especially in the housing market, and the unprecedented age of the car fleet, which has typically peaked after seven years of consecutive increases in cycles going back to 1970 (the last inflection point was in 2001).

Since emerging from bankruptcy GM and Chrysler have reduced the level of annual sales at which they can break even from more than 16m to 10m. Assuming that neither loses much more market share, both should start making an operating profit next year. Meanwhile Ford’s chief executive, Alan Mulally, said this week that he was changing his guidance for 2011 from break-even to “solidly profitable”.

There the similarities end. Of the three, unquestionably the best performer has been Ford. In America its market share has leapt by 2.2 percentage points over the past year to 14.6%, helped by the acclaim it has earned by avoiding bail-out and bankruptcy and by the good reception given to new models such as the F-150 pickup, the Taurus and the Fusion Hybrid.

However, the decision to forgo the fresh start of bankruptcy means that Ford’s debt will rise to around $35 billion after payments are made to a retired workers’ health-care fund. Ford is also paying a price for its independence in another way. Under the terms of the overhaul of GM and Chrysler in bankruptcy, the autoworkers’ union made substantial cost-cutting concessions in return for a big share of the equity in both companies—concessions that the union this week voted heavily against extending to Ford.

As for GM, fears that bankruptcy might terminally undermine customer loyalty appear to have been overdone. GM’s product portfolio, although some two years behind Ford’s in competitiveness according to Mr Jonas, is steadily improving and has the potential to make a similar turnaround. Better quality, advertising targeted on only four brands and the improvement in used-vehicle values that is coming from no longer chasing volume at all costs should all speed GM’s revival.

The decision not to part with Opel/Vauxhall, although infuriating to the German government and the unions, is a sign of GM’s growing confidence. It had never wanted to sell Opel, which despite being lossmaking is GM’s main repository of expertise in technologies for smaller cars. But it felt it had no option until the European Commission forced the German government to promise that a proposed €4.5 billion ($6.7 billion) loan would be available to any investor, and not just Magna. Keeping Opel will allow GM to mimic Ford, which plans to meet growing demand for small and medium-sized cars by manufacturing in America products first developed in Europe, such as the new Fiesta.

Despite a typically bullish performance by Mr Marchionne on November 4th, doubts about the future of Chrysler will be harder to dispel. In contrast to Ford and GM, Chrysler’s sales last month were 30% down on a year ago. It is hamstrung by an absence of new models and negative reports on the quality of its vehicles.

Perhaps the best news that Mr Marchionne delivered was that Chrysler had $5.7 billion of cash at the end of September, compared with $4 billion when Fiat took over in June, and that it should make a small operating profit next year—testimony to phenomenal cost-cutting in bankruptcy. The relentlessly upbeat presentations by a succession of Chrysler executives (nearly all them new to their posts) provided a road-map of how the partnership with Fiat will transform the company and its ability to develop at speed cars that customers will want to buy.

Together they made Mr Marchionne’s target of doubling worldwide sales to 2.8m by 2014 sound almost achievable. The worry is that there is no quick fix for the lack of new products. For the next couple of years Chrysler will have to rely mainly on facelifts of existing models and urgently-needed improvements in quality. The biggest question is whether that will be enough to lift Chrysler’s market share well above its current 6% before a range of new products based on Fiat’s platforms and powertrains starts to appear in 2012. If Ford and GM are in the recovery ward, Chrysler remains on the critical list, for now at least.

(Source: From The Economist print edition)

Future dreaming

France, Germany and the European Union

French hopes for new Franco-German leadership in Europe may yet founder on disagreements about policies and priorities

TO MOST people, the prospect of an end to the European Union’s institutional navel-gazing is welcome. Once the Czech holdouts ratify the Lisbon treaty, goes the line, there should be no new grand schemes. Yet this is not how things are seen in France. Indeed, the French have been laying the ground for their next big idea: a deepening of the Franco-German axis to entrench their dual leadership and make Europe “one of the principal players of the 21st century”.

In a speech to his ambassadors in August, President Nicolas Sarkozy declared that he wanted “Europe once again to make history instead of enduring it”. His model was “Franco-German understanding” built on his friendship with Angela Merkel, the German chancellor. His Europe minister, Pierre Lellouche, is zealously spreading the message. “More than ever, the relationship between France and Germany will form the heart of what I would call the third phase of post-war European history,” he recently wrote in Le Monde.

The French are not suggesting a new EU treaty, but they have plenty of other wheezes. The celebration with Germany of the 20th anniversary of the fall of the Berlin Wall next month may make up for François Mitterrand’s lack of support for German unification. The French want a joint commemoration of Armistice Day on November 11th. There is talk of marking the 50th anniversary in 2013 of the Elysée treaty on Franco-German co-operation.

Plenty of policy ideas are being kicked around as well. The French want to persuade the Germans to back a new industrial strategy to promote European champions, a common investment in clean technology, a European plan for energy independence, greater tax co-ordination and more. They see common ground in opposition to Turkish membership of the EU, as well as reform of laissez-faire capitalism. There is talk of a joint Franco-German government minister. Mr Lellouche has asked his team to prepare “a new Franco-German agenda for Europe”, ahead of a joint cabinet meeting before the end of the year. “In the new European configuration,” he said last month, “the Franco-German relationship will be central, because only it combines both political will and the capacity to push grands projets forward.”

There are many impulses behind this new Gallic offensive. One is Europe’s changing politics. The French realise that the British are likely to be unhelpful friends if the Eurosceptical Conservatives win the election next spring. “David Cameron makes Maggie Thatcher look like a veritable federalist,” comments one aghast French politician. At the same time, the re-election of Ms Merkel at the head of a centre-right coalition, instead of her former unity government with the Social Democrats, boosts French hopes of a more decisive German government.

Another factor is the view that, when the French and the Germans agree, Europe makes its voice heard. The French list the G20 agreements to curb bank bonuses, strengthen bank capitalisation and squeeze tax havens as examples.
No bridge across the Rhine

As it happens, Mr Sarkozy, never an instinctive Germanophile, got off to a fractious start with Ms Merkel, falling out over French plans for a Mediterranean Union; and it took time for Ms Merkel to get used to Mr Sarkozy’s tactile chumminess. But Mr Sarkozy knows he cannot impose his ideas on Europe. Early on he spotted a chance to use the anti-capitalist mood against the “Anglo-Saxons”, and sought an ally. “There has been a spectacular conceptual rapprochement between Merkel and Sarkozy,” insists a French official.

Yet across the Rhine the preference is for plodding progress rather than grands projets. The German foreign ministry recently held a one-day meeting to discuss relations with France, but there was little debate about Mr Lellouche’s proposals. After all, there is still no new German government in place. The Social Democratic foreign minister, Frank-Walter Steinmeier, will go, but his successor, almost certainly Guido Westerwelle of the Free Democratic Party, has not yet arrived. If Mr Lellouche “honestly wanted his proposal to happen, he wouldn’t have launched it in an article in Le Monde,” noted one Berlin-based observer of Franco-German relations.

Nor is a new golden age likely when Ms Merkel and Mr Westerwelle take office. The EU’s biggest member has acquired a reputation for looking after itself—whether over saving the Opel carmaker or over euro-area bank rescues. Mr Westerwelle’s party will be charier of an activist industrial policy than were the Social Democrats.

Germany has other foreign-policy priorities besides France, such as improved relations with Poland and other central European countries. On nuclear power and Turkish membership of the EU, Ms Merkel’s new government is closer to French positions, although even here agreement may be elusive. It will keep nuclear-power stations open longer, but the two countries may not agree on a lot else over the EU’s energy policy. Nor is it clear that Ms Merkel will want to obstruct membership negotiations with Turkey.

Economic issues may be no easier. Germany’s new balanced-budget amendment to its constitution will force it to pursue a tight fiscal policy, unless the coalition circumvents it to permit tax cuts. France, on the other hand, plans to grow out of its deficit at a leisurely pace. Differences in debt and competitiveness will make it harder to manage the euro area. Germany will preach thrift and reforms to boost competitiveness. But if it just lectures its partners rather than co-ordinating policies, it risks aggravating tensions within the euro group rather than alleviating them.

Nor is there yet a Franco-German agreement on how to take the EU forward after Lisbon. A ruling in the summer by Germany’s constitutional court means the government must consult the legislature more often about EU initiatives. It is not clear if Germany means to give the EU greater scope for action or treat it, as many others do, as the mere servant of national governments. There is no sign of a bilateral deal on the allocation of the senior jobs being created by Lisbon.

The French are not starry-eyed. They know they are heading for possible rows over deficit-cutting. On industrial matters, the two countries often compete. The French are not happy that German trains, not French ones, will run on the soon-to-open high-speed link between Moscow and St Petersburg, nor that Siemens is pulling out of its nuclear joint venture with Areva. And the French are not blind to the need for other ties in Europe. They still hope to draw the British into a common European defence policy, even under a Conservative government. It is far harder for two countries to steer an EU of 27 members than one of 12. Yet the French expect the most from Germany—and it is not clear they will get much.

(Source: From The Economist print edition, BERLIN AND PARIS)