The Top 3 Problems for American Automakers

When it comes to cars, there's no doubt about it: Detroit is back. American-brand cars and trucks are better than ever, and sales have been strong.

But this Detroit is different. The companies that used to be known as The Big Three are leaner, sharper, and wiser for the hard experiences of the last decade.

But for all of their recent success here at home, all three are facing big challenges. Here are three of the biggest.

Problem one: Green pressures will force big changes
Ford (NYSE: F  ) is a huge company, with massive operations around the world. It's Europe's second-biggest automaker, and it's investing a fortune to grow quickly in Asia. But ask any Ford executive about the company's most important product, and they'll tell you without hesitation: pickup trucks.

The all-new 2014 Chevy Silverado is GM's most important new product in years. Photo credit: General Motors Co.

You'll get the same answer at General Motors (NYSE: GM  ) , which is starting a huge ad blitz today for its all-new Chevy Silverado, and at Chrysler, too. That's a good thing right now, because pickup sales are booming. But the whole industry is under massive pressure to create products that use less and less gas, and full-sized pickups are very thirsty vehicles. How can Ford and GM and Chrysler continue to make pickups that buyers will like while making the radical improvements in fuel economy that the government is demanding?

For that matter, how will ordinary cars meet the stringent new fuel-economy and emissions rules that will be in place around the world in the next decade? Are electric cars the way forward, as Tesla Motors is trying to demonstrate?

Maybe, maybe not. Right now, Ford is betting on hybrids. And big automakers are teaming up: The Blue Oval has partnered with Toyota (NYSE: TM  ) to create a hybrid system that will work in its big pickups. Meanwhile, GM just announced that it will work with Honda (NYSE: HMC  ) to create affordable cars that run on hydrogen fuel cells -- and Toyota, the hybrid leader, says it will launch its first fuel-cell car next year.

And all of those automakers, and most of the rest, are also dabbling in battery-electric cars -- even though batteries remain expensive, heavy, and cumbersome.

How will they solve this puzzle? What will power the cars of the future? Good questions. But one thing's clear: The companies that don't solve it will be in a lot of trouble before long.

Problem two: Big losses and hard times in Europe
Why should American automakers care about Europe? Because they're all losing a lot of money there, that's why. Steep recessions in key European countries have driven new-car sales to a 20-year low. Ford and GM each lost over $1.7 billion in Europe last year, and Chrysler's partner/owner Fiat (NASDAQOTH: FIATY  ) would be in dire straits if it weren't for Chrysler's recent success here in the U.S.

Ford's Fiesta is one of Europe's top-selling cars. Photo credit: Ford Motor Co.

All three need the European market, for the scale it adds to their global operations. Ford and GM are pushing ahead with elaborate turnaround plans that aim to get their European operations back to break-even by the end of 2015. And Fiat's CEO is pushing ahead with a plan to merge fully with Chrysler, which will give both companies the scale they need to cut costs and be more competitive around the world.

But in the meantime, Europe is a money pit for all three. Analysts expect new-car sales in Europe to stay low until late in this decade. That means all of the Detroit Three will have to find creative ways to profit in the Old World -- or risk more and bigger losses in years to come.

Problem three: The Japanese government could make it harder to compete
Why should Detroit care about the Japanese government? No, it's not because of Japan's trade barriers, which are actually pretty modest despite what you may have heard. It's because of exchange rates, specifically, because the current Japanese government is trying to jump-start the country's economy by making its currency cheaper.

Who cares? Ford, GM, and Chrysler sure do, and here's why.

When we say the yen is getting cheaper, what we mean is that the exchange rates have moved in such a way that you get more yen for your dollar. Instead of 86 yen for the dollar, as it was at the beginning of the year, now it's around 99 for the dollar.

That means every dollar earned by a Japanese company here in the U.S. is worth more money at home. And that means that the Japanese companies can charge fewer dollars for their products and still have a nice profit when those dollars are converted to yen.

That's a big worry for Detroit. After years of struggling, Detroit has finally reached the point where its best products can compete head-on with the likes of Toyota and Honda, with no excuses (or profit-sucking discounts) needed. Just look at the hot new Ford Fusion, which has been selling like hotcakes -- and gaining on Toyota's Camry in a big way.

Ford's Fusion is going head-to-head with Japan's best -- and winning. Photo credit: Ford Motor Co.

The worry now is that if the yen slips far enough, the Japanese brands will be able to cut their U.S. prices without hurting their profits at home. Nissan already made some price cuts at the beginning of May that gave their sales a big boost.

If the other big names follow suit, then Ford and GM and Chrysler will face a tough choice: Cut their own prices (and profits) to compete, or risk losing a lot of sales. That's why the Japanese government has to be high on Detroit's list of worries right now.

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Read/Post Comments (12) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 04, 2013, at 10:21 AM, jimatmad wrote:

    The very, very rare Motley automotive article that is moderately informative.

    I almost didn't click on it.

  • Report this Comment On July 04, 2013, at 11:15 AM, petediscrete wrote:

    I'm 6'5" tall and discriminated against by automakers so long I have no sympathy for their demise. Only fit in gas sucking trucks or large SUVs. Us 1% of tallest drivers nobody fckn cares about and vice versa! On separate note, anyone who would own an overpriced european status car should have a "Fool" tattoo on their foreheads. There is a reason they all get 6 weeks vacation and retire after LT 20 years over there. Quality? WTF is that?

  • Report this Comment On July 04, 2013, at 3:00 PM, imDanielle2 wrote:

    Always love to hear the opinion of a hate filled idiot like Pete! Sounds like someone is seriously jealous of how things are done in other countries!

  • Report this Comment On July 04, 2013, at 4:47 PM, CrazyDocAl wrote:

    Ford make trucks in the US, that's about it. The Fusion, made in Mexico. The Focus, most of it is made with non us parts like engines from Spain and transmissions from Mexico and put together in the states. I just can't understand why some people will show favor to a company just because it's head quarters are in the US.

    What that means to me and buying a new vehicle is I buy what I think is best for me. That's the biggest problem with US made cars. I base my future decisions on past vehicles and if I felt like they were a good deal. I really can't say I had a great American vehicle in the past while I have owned several Japanese vehicles that were a step above anything else on the market when I bought them.

    My first vehicle that passed 200k was a Toyota. My first car to pass 250k was a Honda. Neither required any work. My first, and only, American car to pass 200k was a Plymouth that was made by Mitsubishi with a Plymouth badge.

    Others I know have had better luck with the big 3 but not me. For $30k, the price of a new vehicle, I'm not willing to find out if they are better now. That's their real problem.

  • Report this Comment On July 04, 2013, at 5:19 PM, TMFMarlowe wrote:

    @jimatmad: Thanks, I think. I try to make everything I publish informative. I've been doing this a long time, and I only write about the auto business.

    Thanks for reading.

    John Rosevear

  • Report this Comment On July 05, 2013, at 9:14 AM, Jazzenjohn1 wrote:

    <Why should Detroit care about the Japanese government? No, it's not because of Japan's trade barriers, which are actually pretty modest despite what you may have heard. >

    Boloney. Japans trade barriers are bigger than you seem to believe, and they span all levels of government. They include the fact that Japan requires every single car sold in Japan to be individually inspected and the cost added to the price of the car. When we called foul years ago, they allowed some sales of vehicles as "uncertified" so now all U.S car are uncertified. That opens the door for the next level of protectionism. Restriction of the sale of uncertified cars. That's the trick they used to insure no American cars qualified for their cash for clunkers program. They also have zoning restrictions to make it nearly impossible to open a viable dealership, as well as rules to block sales via alternative methods etc. etc. Doing a simple Google search to find out the levy on Japanese cars is not anywhere close to an adequate investigation of the extreme protectionism the Japanese use in their home market.

  • Report this Comment On July 06, 2013, at 6:50 AM, TMFMarlowe wrote:

    @Jazzenjohn1, I have in fact heard all of that before. But I remain convinced that the only real "trade barrier" that matters is that Japanese consumers don't seem to be interested in American-brand vehicles, except for the few who want one as a novelty.

    John Rosevear

  • Report this Comment On July 07, 2013, at 3:30 AM, autoguys wrote:

    Well, the U.S. is the only country that produces over 10% of the worlds oil and over 10% of the world's autos. So as long as they are the only key player in the auto oil market they control the fuel mileage and production of new vehicle standards. We have been writing about this on buyherepayherelistings.com for some time and know that it is impossible to have the best of both world's.

  • Report this Comment On July 08, 2013, at 2:49 PM, remmdawg wrote:

    The top three problems? Unions, unions and unions.

  • Report this Comment On July 08, 2013, at 3:53 PM, SkepikI wrote:

    ^ Perhaps. As they relate to govt interference and taxpayer fleecing, certainly. The grudges that many of us hold for Chrysler, um I mean Fiat.... and GM as a result of that interference and continued fleece activity (200 or 300 million sh still with Treasury) will last a long time.

    John, I have been expecting and been so far disappointed that you or some other writer will provide a cogent and factual exposition of just where EXACTLY the GM bailout credits and debits stand as of today, and how many shares Treasury still has to sell at what price to get us out even.

    I have been impressed for more than a year with Fords management approach and determination to deal with all their long term problems bit by bit. Its reflected in their share price history, dividend and customer response to their products.

    While I have been a Chrysler guy from the 70's to the 90's and drive a 99 Subaru Outback with 393,000 mi (no kidding) now, my next auto will be a Ford, likely a Fusion.

    Long F the Taxpayer's friend.

  • Report this Comment On July 08, 2013, at 7:55 PM, Nohurry1 wrote:

    I've had great "luck" with Ford products over the years. I have had GM's, Hondas, even a Hyundai and 1 Toyota and overall, they're about as equal as can be expected. They all tend to last according to how they're treated. Today more than ever, the quality gap is essentially non-existent.

    Considering the costs of things, I am looking at the CRUZE DIESEL as my next car. I'm also looking at the Focus ST(for it's obvious fun factor), the Toyota Camry(looks fine, runs great, etc.) and perhaps at the top of the list with CRUZE, the FUSION! That car is simply astounding, all things considered. It's beautiful, extremely well equipped(keeping in mind, this isn't luxury level), comfortable and very fuel efficient, with the top fuel rating being 47/47! I'm more likely to get the 2.0L turbo version myself.

    The point is, there are so many choices today, you can hardly make a mistake overall.

    Where trucks are concerned, each of the big 3 has it's advantages and I'd wait till next yr to see the next F-series. Simply stated, it's the best, highest quality pickup money can buy. Not the greatest economy(though it's nearly there), not necessarily the highest hp rating, but again, it's right there. The thing is, it can do what the others can and it has superior upgrades available. It seems you can get more today on an F-series than you can the freshly updated GM full size... That says plenty.

    RAM has become an excellent truck too, as is the GM, but overall, Ford has the strongest build imo and I actually am an automotive expert, though I'm no writer. I hold no ill will or bias for any of them, nor do I intend to be bias, except where the truth is. These vehicles have helped me put food on the table for a very long time.

  • Report this Comment On July 09, 2013, at 8:36 AM, Tomohawk52 wrote:

    I like to take transit.

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