Different Approaches to a Truck Slowdown

Truck sales are plummeting thanks to rising gas costs.  What are the major automakers doing about it?  First, let's recall our post last month on Nissan and Chrysler.

The column goes on to discuss how Chrysler will build large vehicles for Nissan and Nissan will supply or co-manufacture small vehicles for Chrysler.  This will help reduce the multiple architecture or platform problem that Mr. Phelan believes is critical to Chrysler's long term viability.

So if sales of large vehicles are decreasing, who got the better end of that deal?  If fuel costs continue to rise, will Chrysler be manufacturing... anything?

Now let's move on to Ford.

Ford Motor Co. will halt more pickup-truck and sport-utility vehicle production over the next two months, a sign that falling U.S. consumer demand for the vehicles still hasn't bottomed out.  The auto maker's Wayne, Mich., truck-assembly plant, home to the Expedition and Navigator SUVs, will be shut from June ...

Sounds prudent.  Painful, but prudent.  Better to reduce the top line than to keep on manufacturing products that aren't going to be purchased any time soon.

And then there's GM.  I guess you could say they're lucky... they have idle truck plants thanks to a strike, so they aren't incurring major shutdown costs like Ford while still drying up excess supply.  Or so you would think.

In a regulatory filing, GM said the 11-week strike at American Axle & Manufacturing Holdings Inc. cut GM's truck production by 230,000 vehicles in the second quarter. GM estimated that drop would lower its pretax earnings by $1.8 billion, and warned it won't be able to make up that lost production later in the year because of slack truck demand.

Uhh... wait a minute.  If demand is slack, why would you want to make up production?  So the trucks can sit and tie up cash while depreciating and waiting for a fire sale?  Yep, that's a good strategy.

GM has more than a simple production demand problem.  They just don't realize what it is.

Comments

[ps]

Let me guess: GM's $1.8 billion drop in pretax earnings is due to the overhead that couldn't be absorbed by the lost production. Why didn't they just add that overhead to the inventory value of what they did produce? Excuse my cynicism but is accounting supposed to illuminate reality or hide reality?

[Kevin]

The Chrysler strategy seems sound to me. They have excess truck capacity, the partnership with Nissan will absorb some of that and give Chrysler access to small efficient vehicles and technologies. This will allow them to wean themselves of their truck dependence.

[Martin B]

This is going back a bit, but I remember when they used to manufacture the original BMC Mini at Blackheath near Cape Town. We went on a factory tour, and I saw thousands of unsold Minis parked between the factory and the railway. The brown iron dust that always hangs around a rail line had settled on the paintwork and eaten into it. I heard later that it cost the dealers so much to buff up the paintwork and replace perished rubber window seals that they made no profit on the Mini. A couple of years later BMC were bankrupt. Overproduction costs!

[Barry]

Chrysler's strategy is faulty on many fronts. But, what are they to do to immediately impact their situation. Daimler took them from a low cost producer of affordable vehicles to an upscale product mix that is the worst of any major automaker on earth.

Over the long haul, Chrysler needs to re-invest in ITS former competency as a low cost producer of affordable vehicles. Until they have the time to do that, they must do something to fill product gaps. Or, they will have nothing to sell.