We knew General Motors (NYSE:GM) and Chrysler were too optimistic when they said they could be profitable as long as the domestic car market achieved 12 million to 13 million in annual vehicle sales. After all, they were selling cars at an annual run rate of just around 9 million cars.
Now with the pressure of bankruptcy filings behind him, GM CEO Fritz Henderson can finally admit that 10 million cars is a more realistic number. And with the May sales numbers showing a run rate of 9.9 million vehicles, the new reorganization target at least seems doable.
The problem is that the carmakers are structured as if we were still buying the same 17 million cars a year that we did at their peak. GM has a network of approximately 6,000 dealers, Chrysler has just less than 3,200, and Ford (NYSE:F) more than 3,700. Having that many outlets simply doesn't make sense if the market can't support that level of sales anymore. In contrast, Toyota (NYSE:TM) has just 1,200 dealerships.
That's why GM and Chrysler need to shed about 3,400 dealerships, but what's right and necessary isn't always simple. A patchwork quilt of state franchise laws makes it expensive, if not impossible, for the carmakers to eliminate dealerships while they're going concerns. GM was sued a few years ago when it wanted to retire the Oldsmobile nameplate and ultimately paid $1 billion to settle the matter, with $583 million going to the dealers.
Bankruptcy removes a lot of those hurdles and was one of the arguments in favor of filing for Chapter 11 protection. Unfortunately for Ford, its decision to forgo government handouts won't do it much good. In the words of President Obama, when GM and Chrysler emerge from court protection, they're going to be leaner, meaner, and more financially secure.
Sure, the failed carmakers would have been able to shed their dealerships had they gone through bankruptcy without government aid. But by appealing for Washington's help, they also got billions in bailout money and got taxpayers to pay their suppliers, while they were able to strong-arm their bondholders into accepting pennies on the dollar for their debt. They also got the unions to give up payments to their health-care trust fund, and they gave their credit units large cash infusions to make car financing easier. Ford doesn't have any of those options available to it.
Still, there's a small window of opportunity available. Although U.S. car sales fell by 34% in May to 926,000 vehicles, Ford's sales dropped by "only" 24%. That was Ford's smallest year-over-year decline since last July, and its sales actually increased by 20% sequentially. Ford also recorded its biggest market-share gains since 2006 and is ramping up production to crank out more cars while its rivals are reorganizing.
The biggest losers in all of this were the Japanese automakers. Toyota and Honda (NYSE:HMC) both reported sales fell 41%, while Nissan (NASDAQ:NSANY) said sales were off 33% from the previous year.
For anyone who's gone through the high-pressure process of buying a new car, it's tough to feel any empathy for car dealers now that they're on the receiving end. But a dispassionate look at the situation shows that if we're serious about rebuilding the U.S. car market -- and since we've sunk tens of billions into the effort so far, we'd better be serious -- then having the carmakers get out from under their dealer obligations is essential to right-sizing the industry.
It's difficult to say that Ford is a good investment right now. Having made the tough choices early and showing that you don't need the government running a car company to succeed in this market, Ford remains at a disadvantage because its main rivals are the beneficiaries of government largesse.
That's going to make them formidable opponents when they emerge financially squeaky clean. It's therefore not a stretch to say that this process may also be Ford's ultimate undoing.
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