Howes: The auto profit party is winding down | Michigan Radio
WUOMFM

Howes: The auto profit party is winding down

Jun 29, 2019

Credit Daniel Howes / Detroit News

Ford Motor is cutting another 12,000 jobs in Europe.

And global automakers have confirmed plans to close 16 plants around the world and eliminate 120,000 jobs, because the profit party is winding down.

You read that right. Historically strong sales of profit-rich trucks and SUVs are not enough to overcome economic headwinds.

From trade tensions. From weakness in markets like China. And from enormous pressure to keep pace with the auto race to 2.0.

There’s a whole new auto industry emerging. One that promises to change decades of assumptions. The drive to embrace electrified and self-driving vehicles is consuming vast amounts of capital.

Auto industry consultant AlixPartners say automakers will spend $225 billion over the next four years to develop battery-electric vehicles. They’ll invest $85 billion on self-driving cars.

And the returns on those investments are likely to decline nearly to Great Recession levels before creeping back up. That’s if the big bets pay off.

The result is a “profit desert.” And crossing it will have profound implications for Detroit’s automakers, for their place in next-generation auto hierarchy, even for future profit-sharing payouts for union members.

That’s a whole lot of not good for as long as the dry spell lasts.

But it explains why Ford is continuing to execute a global restructuring, why General Motors is exiting markets and moving to close five North American plants, and why Fiat Chrysler pushed to merge with Renault of France.

They’re getting squeezed, along with their European and Asian rivals. Major shifts in emissions regulations are redirecting powertrain investments, moving more future development to electrics from a century of gas and diesel engines.

No wonder automakers get so little respect from the investor class: even in the best times, low double-digit profit margins are hard to sustain. They’re harder still when a whole new automotive world of mobility, autonomy and electrification beckons.

The challenge for industry leaders is articulating to employees, politicians and communities just how difficult the coming changes could be. Who’s likely to emerge in the lead is not at all certain. Nor is the assumption that big automakers like those hailing from Detroit will continue to drive the industry.

Automakers are investing in a future they cannot see clearly, one that is not guaranteed to generate revenue and profit. Sitting it out is not an option, because that would be choosing irrelevance.

The decade-long sales boom is losing steam. Rates on auto loans are rising and terms are lengthening. Transaction prices are up, pricing some customers out of certain models. Trade tensions are increasing costs and uncertainty.

Worse, pre-tax profit margins are slipping, and break-even points are reaching highs not seen since the Great Recession pushed two the Detroit Three into bankruptcy.

You want to know what profit desert looks like? This is it.

Daniel Howes is a columnist at The Detroit News. Views expressed in his essays are his own and do not necessarily reflect those of Michigan Radio, its management or the station licensee, The University of Michigan.