As we enter into the last month of summer, savoring both time with the kids and the PGA Championship Tour-albeit disappointed that Tiger Woods won't be joining us-Michiganders hardly have less on their plate. Between the Management Briefing Seminar in Traverse City and the dramatic changes and losses within the auto industry, many of us have booked calendars, only allowing the time to shake our heads at the state of our industry. I've been in this business 22 years, yet nothing seems to surprise me when I read the daily paper.
Looming rumors circulate about bankruptcy at the domestic automakers (which they continue to deny), yet big investors like Kirk Kerkorian and Jerry York are quickly buying as much Ford stock as they can get their hands on. Some may ask why. Investors buy stock with the intention there will be payback in the near-term future. So as an auto industry analyst watching Ford all these years, I have to ask: Has Ford done all the things necessary to see a short-term turnaround that will provide enough value for these big investors? My answer continues to be NO, as it would be for any of the Domestic Three players put in this scenario. While all have certainly made dramatic improvements over the years, have they moved fast enough or executed effectively enough to really drive value in their business for investors? Again, the answer is NO. And their value, according to Wall Street analysts, continues to reflect that, particularly when compared to other OEMs around the globe.
Chairman of the board for Dura Automotive Systems Inc., Tim Leuliette, presented comparisons of market capitalization between Chrysler, Ford and General Motors to other global OEMs at a speech for the Society of Automotive Analysts in June. Much like our profit-per-vehicle comparisons, the relative gap between these companies and others-like Toyota, Volkswagen, Mercedes, and Honda-is staggering. Toyota's market capitalization is around $162-billion while Ford, which is the highest of the Domestic Three, is only $13.5-billion. VW is $106-billion; Mercedes is $71-billion; and Honda $64-billion. These numbers are shocking to me. And when compared to other industries like chemicals, aerospace, and agriculture, the domestic OEMs come up way short.
It's amazing to me the hand that Wall Street plays in the value of these companies. Wall Street fails to even consider the Domestic Three as large capitalization companies, based on market capitalization. Yet GM continues its reign as one of the largest, if not the largest, Fortune 500 company. And when you talk to many Wall Street analysts, they cite reasons such as: The domestic OEMs are too dependent on the U.S.; they haven't gone global enough; or they're dependent on trucks rather than cars. However, companies like Honda earn nearly 50% of their revenue in the U.S., compared to 55% for GM. Toyota is adding truck capacity in the U.S. faster than any other automaker. So who is dependent on the U.S. and who relies on truck profitability?
The same question can be posed to suppliers, according to Leuliette's data. The Wall Street clan is hardly the only one paying attention to the global transitions suppliers are making. Still, other suppliers have diversified themselves from strictly auto manufacturing, branching out and into other industries successfully. So what does all this mean and why do I think it is so important?
In November, there will be an election that is probably one of the most heated in years, with a focus on change. Not only does everyone want change, we need change as our tired economy continues to head in the wrong direction. Each day the struggles with health care, the credit crunch, and lowest-ever stock prices increase. Coupled with high unemployment rates, the housing crisis and now, the slippery slope of our most prized industries, we're in hot water. What will the new administration do to solve these problems? I'm not sure I have all the answers but I do know that the candidates running in this election must spend more time becoming educated on the problems of the auto industry. Of course, surrounding themselves with the right people who understand and can help solve these problems is fundamental.
I recently met with a group of European suppliers in Germany, the topic of discussion being the state of the North American automotive supply industry. I can tell you, most of the participants were suppliers that are very well entrenched in the European auto industry and looking to grow globally, particularly given today's exchange rates. A key factor on the side of these European suppliers is that their market capitalization is significantly higher than that of their American competitors. (Again, a reflection of Wall Street's twisted view of the U.S. auto industry.) These European companies, along with their counterparts in China, India and around the globe, have the drive, determination, and money to pursue new business. They view North America as a prime place to lay roots; and with their cost structures, exchange rates, and stable businesses, they will put even more strain on the North American auto industry and its suppliers.
So what is the solution? One answer is education for our policy and decision makers. And importantly, there is a need for fast execution: If the government and the people of the industry do not move at a faster pace, the world and all the global markets will continue to eat our lunch until it is gone.
The biggest fear I have as a tried-and-true American automotive analyst is that investors like Cerberus and Kerkorian see the opportunity to buy these companies at very low prices in hopes or plans that they can turn around and sell them to foreign companies from China, India or elsewhere. Yes, value will be dramatically driven for a short time. And they'll get their return just before riding off into the sunset. I'll end by posing this question: Can you imagine a world where Ford Motor Company is owned by . . . Tata Motors?