Detroit Has ‘Too Many Mouths to Feed,’ Analyst Warns
By James M. Amend WardsAuto.com, Aug 8, 2007 7:01 PM

TRAVERSE CITY, MI – Wall Street guru John Casesa thinks Detroit’s Big Three will survive and prosper, but their work towards long-term profitability has only just begun.

“The crisis in which Detroit finds itself will probably get worse before it gets better,” says Casesa, managing partner of the consulting firm Casesa Shapiro Group.

“We are in the eye of the storm right now. The transformation we are now in the middle of is long term,” he says in a recorded presentation played here for the Management Briefing Seminars, which run through Friday.

Casesa says General Motors Corp., Ford Motor Co. and Chrysler LLC have already begun resizing their businesses – itself a painful process – but contends a more difficult process of restructuring lies ahead. Restructuring, he offers, does not refer to job cuts; instead, it represents a fundamental change in the business model of the U.S. companies that will allow them compete more closely with Japanese auto makers Toyota Motor Corp. and Honda Motor Co.

“(Resizing) won’t solve the problem,” says Casesa, who is currently in the U.K. “Detroit resized in the ‘70s, the ‘80s and the ‘90s. It’s pretty good at it. But Detroit has struggled to change its business model to grow once it has resized.”

Toyota’s structure, for example, uses a single platform worldwide for its Corolla, which it customizes for local markets, while Detroit’s structure leverages many different platforms. Honda, meanwhile, applies different work rules, benefits and job classifications within its U.S. plants, while Detroit uses one template.

“In my mind, restructuring means redefining the labor relationship, rationalizing the brand portfolios. Detroit in my opinion has too many mouths to feed, far too many brands to compete with Toyota.”

Casesa points out that with just three brands, Toyota controls 15% of the market in the U.S. That gives Toyota retailers a greater number of sales per facility than their domestic rivals, which means the dealers earn more profit to finance expenditures such as facilities, employees and advertising.

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“That’s a structural difference,” he says, adding Detroit must also consolidate its distribution network.

“Restructuring is a long list of very difficult activities,” Casesa says. “I think the management of these companies know where they need to be. I think the union knows what it takes to be competitive. It’s a question of finding the money to pay for it and finding the terms that will make all the parties want to do this.”

But the road doesn’t end at restructuring, Casesa warns. The auto makers must then reinvest in new technologies, new markets, new vehicles and refocus brands in North America that carry tremendous resonance with consumers, such as Chevrolet, Ford and Dodge.

Honda, for instance, reinvests 11% to 12% of revenue in new product but also boasts an average vehicle margin of 11% to 12%. Ford, conversely, spends about 10% of revenue on new product but loses money.

“To compete with the Toyotas and Hondas of the world requires a strong balance sheet and a lot of capital,” Casesa says.

That’s enormously important, he adds, because fresh product wins. In fact, the average showroom age of vehicles in the U.S. market today is 2.8 years, down sharply from the 4.0 years of the 1980s.

Reinvestment, however, costs money. “Money is the lubricant for this very difficult process,” Casesa says.

Luckily, there’s plenty of cash available to the industry today, either in the form of private-equity investment, strategic divestitures or bank borrowing.

Investors in general, Casesa says, are encouraged by consumer spending, recent labor deals like (Goodyear Tire and Rubber Co.’s) and signs that companies are moving to a more competitive business model.

“There is an immense motivation among investors,” he says, citing “a potentially huge upside” down the road. “The transformation under which Detroit is going is painful, but it’s better that it happens now when there’s money around.”