BUSINESS

Kicking the tires

A leading auto analyst rates the car companies

February 10 1997
BUSINESS

Kicking the tires

A leading auto analyst rates the car companies

February 10 1997

Kicking the tires

BUSINESS

A leading auto analyst rates the car companies

For two decades, Maryann Keller has been one of North America’s most astute automotive analysts—renowned not only for her firm grasp of the industry’s nuts and bolts, but for her blunt assessments of the automakers’problems. Last week, she spoke with Maclean’s Æsistant Managing Editor Ross Laver from her office at Furman Selz Inc., a New York City securities firm. Excerpts:

Maclean’s: A few years ago, the North American auto industry seemed to be in a perpetual state of crisis. Are you surprised by the strength of the turnaround?

Keller: There’s no question the industry overall is strong, but you’ve got to be careful about the words you use. I was surprised by the speed with which Chrysler turned around. But GM is still turning around. And I do not think Ford has turned around at all.

Maclean’s: What are the problems at Ford?

Keller: Their costs have gone up instead of down, and they’re still very clumsy at developing new products.

This is a company that spent six years and $6 billion to develop the Ford Contour. And by anybody’s judgment the new Ford Taurus missed the mark in terms of styling— it’s nowhere near as popular as the company expected.

Ford’s other big problem is the complexity in their product mix. Look at all their twodoor sporty coupes: the Probe, Mustang, Cougar, Thunderbird, Lincoln Mark VIII and a new, two-door, sporty Escort. It would be one thing if the public loved these cars, but the truth is that nobody cares whether these cars continue or not.

Maclean’s: How do you rate GM?

Keller: As an organization, GM has improved significantly. On the other hand, GM’s share of the North American market has fallen from 35 per cent to 30 per cent, and it’s still the high-cost producer in the industry. It has to come to grips with the fact that it has too many products that it builds in very small quantities. When you see Oldsmobile with the market share that it has

today—I don’t even think it’s three per cent—you have to ask yourself, is it worth it? I’m sure that in time we will see the disappearance of some GM nameplates. Maclean’s: Some people have suggested that GM, instead of going after market share, should aim to become a smaller but more profitable company.

Keller: That’s a loser’s philosophy. Besides, GM’s recent labor agreements include promises of employment to its workers. How do you keep people employed if

your market share is shrinking? Maclean’s: Right now, Chrysler is the world’s most profitable car company on a per-vehicle basis. What is its secret?

Keller: Chrysler is successful because it had a brush with oblivion and decided it had to change. For many years, they were in a state of denial about their problems with costs, engineering and quality. Sometime around 1989, they realized all those criticisms were true, and that if they didn’t change they wouldn’t survive. They still need to improve their quality, but I don’t think anyone at Chrysler is in a state of denial any longer. I visited the Toyota assembly plant last week in Georgetown, Ky., and

I asked how often their competitors visit that factory [to study Toyota’s operations]. It turns out they had 300 or 400 visits last year and a very high proportion of those were from Chrysler.

Maclean’s: Is it true that no company in North America makes serious money these days building cars?

Keller: The industry loses serious money making cars, and it doesn’t make much money on small trucks. Most of the profit is in minivans and large sport-utility vehicles—which are so profitable that the industry makes a tremendous amount of money. On large sport-utility vehicles like the GMC Suburban, you’re talking about a margin of $12,000 or $13,000 per truck— maybe more.

Maclean’s: Some analysts say the truck boom is coming to an end. Do you disagree? Keller: When you have all of these car companies adding capacity to build trucks, how in God’s name is this thing going to peter out? As capacity increases, there will be surpluses that will lead to more competition, so the fat profits will shrink somewhat. But meanwhile, the public is showing less and less interest in cars, hence it’s becoming more difficult to price them to make money. Within four or five years—maybe sooner—I think more than 50 per cent of all vehicles sold in the United States and Canada will be light trucks.

Maclean’s: Looking ahead a few years, do you foresee any changes in the industry that might surprise people?

Keller: Number 1,1 think fuel economy is going to become an issue again. Gasoline has been so cheap for so long that the issue of efficiency is no longer in anybody’s top 10 criteria for selecting a new vehicle. My guess is that at some point over the next four or five years, we’ll see the price of energy rising sufficiently that it becomes a factor again in the vehicles we buy. Also, I think the way we buy cars is going to change dramatically. There are going to be fewer and larger dealers, a lot more used-car superstores and a significant increase in marketing over the Internet. The industry’s current distribution system looks just like it did at the dawn of the automotive age, with lots of little dealers all over the place. Not only is that system not delivering a high level of customer satisfaction, but it’s also very expensive. The reality is that people will drive 100 miles to buy a car—they don’t care who their local dealer is. So I think the restructuring will be rapid and dramatic. □