Presidential Auto Task Force Concluded Plug-In GM Volt Likely “Too Expensive To Be Commercially Successful in the Short-Term”
Following the short address on Monday during which President Barack Obama outlined the next steps for GM and Chrysler (earlier post), the White House posted summaries of the Presidential Auto Task Force’s assessment of the business plans provided by the two struggling automakers, which led to the terms that are currently unfolding.
Among the highlights of the brief summaries was the conclusion that while the Chevy Volt extended range electric vehicle holds promise, “it will likely be too expensive to be commercially successful in the short-term.”
The GM Viability Determination notes that the company is in the early stages of an operational turnaround in which it has made material progress in a number of areas, including purchasing, product design, manufacturing, brand rationalization and its dealer network.
Despite these steps, a great deal more progress needs to be made, and GM’s plan contemplates initiatives that will take many years to complete. In the end, GM’s plan is based on a number of assumptions that will be very challenging to meet without a more dramatic restructuring in which many of its planned changes are accelerated.
In short, while the Company has made meaningful progress in its turnaround plan over the last few years, the progress has been far too slow, allowing the Company to continue to lag the best-in-class competitors. As a result, the President’s Designee has found that General Motors’ plan is not viable as it is currently structured. However, because of GM’s scale, franchise and progress to date, we believe that there could be a viable business within GM if the Company and its stakeholders engage in a substantially more aggressive restructuring plan.
The assessment concluded that GM’s plan is based on fairly optimistic assumptions that will be challenging in the absence of a more aggressive restructuring. On the product side, the summary asserted that:
GM earns a disproportionate share of its profits from high-margin trucks and SUVs and is thus vulnerable to energy cost-driven shifts in consumer demand. For example, of its top 20 profit contributors in 2008, nine were cars.
GM is at least one generation behind Toyota on advanced, “green” powertrain development. In an attempt to leapfrog Toyota, GM has devoted significant resources to the Chevy Volt. While the Volt holds promise, it is currently projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become commercially viable.
(The Volt is an extended range electric vehicle—i.e., plug-in series hybrid—featuring a 16 kWh battery pack and a 40-mile all-electric range.)
Absent the successful introduction of a number of new-generation nameplates, as described in the Company’s plan, GM’s product portfolio is more vulnerable to CAFE standard increases than the portfolios of many of its competitors (although GM is in compliance today with current standards).
Even under the Company’s optimistic assumptions, the Company remains breakeven, at best, on a free cash flow basis throughout the projection period, thus failing the fundamental test of viability.
The Chrysler Viability Determination concluded that while the plan reflects some progress that has been made under current management, that progress will ultimately be insufficient due to several structural issues that Chrysler, as a standalone entity, is highly unlikely to overcome.
In particular, Chrysler’s limited scale in an increasingly capital-intensive global business, the inferior quality of its existing product portfolio and its heavy truck mix leave the Company poorly positioned. Chrysler’s plan to address these issues is based on overly optimistic assumptions that are inconsistent with its current products and its resources.
The assessment noted that Chrysler’s smaller scale limits its product development budget overall, and particularly limits the amount it can spend developing each platform. Chrysler currently dedicates only 50% as many engineers to each platform, on average, as GM does. The report also notes that Chrysler’s products have also historically underperformed in terms of quality, which remains a significant challenge.
On the product side, the report concludes that:
Chrysler does not have a product pipeline to cover the smaller car segments which are projected to grow in share of the overall car market. Chrysler’s shares of the small and medium car markets are 3% and 7%, respectively (while each category represents 21% and 25% of the market, respectively), and has been declining in each segment.
In the near term, Chrysler is planning to lift profitability by focusing on its more profitable truck and SUV segments. Given the potential variability in fuel prices, Chrysler’s volume assumptions for these cars may be at risk.
Chrysler’s product strength is in the pickup, SUV, and minivan segments—all of which are relatively low in fuel efficiency. On a standalone basis, Chrysler will struggle to comply with increasing fuel efficiency standards, and it may even have to restrict the sale of certain models to make sure it is in accordance with proposed standards.
While Chrysler is investing in newer powertrain development, as are all the OEMs, its limited resources lead it to project spending just over 3% of revenue on R&D over the next five years, versus 4-5% for General Motors, Toyota and Honda.
Chrysler’s standalone plan does not provide for a substantial entrance into the small car segments – an area that will be increasingly important to automotive manufacturer profitability if potential gasoline price hikes meaningfully increase demand for smaller, more fuel-efficient cars and as CAFE standards demand a higher mix of small cars.
While the Company has made meaningful changes to its cost structure in the last few years, the combination of a fundamentally disadvantaged operating structure and a limited set of desirable products make standalone viability for the business highly challenging. As a result, the President’s Designee has found that Chrysler’s plan is not viable as currently structured. However, a partnership with another automotive company, such as Fiat or another prospective partner, which addresses many of these issues could lead to a path to viability for Chrysler.