Auto Industry: Who Gains From Detroit’s Pain

If GM or Chrysler fails, a lot of business will be up for grabs.

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You'd think an automotive apocalypse was nigh. In their pleadings to the government, executives from General Motors, Ford, and Chrysler make it sound as if the entire U.S. auto industry will crash if they don't get billions in aid. But we're forgetting something: Americans will still need to buy cars, even if they don't say GM or Ford or Chrysler on the badge.

Once the recession fades and prosperous times return, in fact, Americans might buy 16 million or 17 million cars per year, a lot more than the 12 million or fewer they'll buy this year. So who will get all that business? Here's some handicapping on who might benefit from the woes in Detroit: Ford. GM and Chrysler are both on the brink of insolvency, but Ford says it doesn't need emergency cash right now and might return to profitability by 2011 without any help at all. If Ford turns out to be Ford tough after all, it could be a huge win. Surveys by CNW Marketing Research show that fears of a GM bankruptcy have driven buyers away from the biggest domestic automaker. Ford picked up 19 percent of those buyers, more than any other GM competitor. Honda got 15 percent and Toyota 11 percent.

That makes sense: The top two domestic automakers have a lot of products that compete head-to-head, especially pickup trucks and SUVs. For many buyers considering a GM car, a Ford would be the next best alternative.
There are several caveats. If GM declared Chapter 11 bankruptcy, that would be an obvious chance for Ford to grab market share. But it wouldn't be that simple. A GM bankruptcy would directly threaten dozens of suppliers that Ford depends on, too. So Ford's future is directly linked to GM's ability to muddle through and keep the suppliers in business. If GM went under, Ford's biggest need would be a government plan that protects the supplier base.

Toyota. Detroit doesn't have much that Toyota wants—except for millions of pickup-truck customers. The full-size-pickup market is the last piece of home-field turf the Detroit 3 still control, and so far, Toyota's new Tundra—built at a new, billion-dollar plant in Texas—hasn't made much of a dent. Nissan's Titan has fared even worse. And crafty Honda has dabbled with the playful Ridgeline, which it calls a "sport-activity truck," but stayed away from a pickup that would compete directly with Detroit's work trucks.

Assuming that GM and Ford both stay in business, Toyota's best opening might be a government-brokered marriage between GM and Chrysler. If that happened, GM would own both the Dodge Ram and the Chevy Silverado pickups. And since GM's bailout plan calls for fewer brands, not more, it's plausible that GM could put the Ram out to pasture. GM and Ford would both rush to corral those abandoned Ram buyers—a rowdy, budget-minded lot—but it would be a great chance for Toyota to prove its chops, too. That also holds if Chrysler gets broken up and the Dodge lineup is sold off to competitors.

The southeastern United States. There's already a "new Detroit" flourishing in states like South Carolina, Alabama, Mississippi, and Tennessee—where Toyota, Honda, Nissan, BMW, Mercedes, and Hyundai turn out cars built by Americans for Americans. These mostly nonunion factories have sprouted during flush times and could get a bigger boost as the Detroit 3 shrink—or become 2 or 1.
"Imagine if the North American plants for GM or Ford were closed, and every remaining automaker built one or two more plants across the country," says analyst David Silver of the research firm Wall Street Strategies. "That would create a lot of jobs, and while it would be an initial shock to the economy, in the long run, it may not be such a horrible scenario." The rust belt would reel, as it did during the modernization of Big Steel, but the jobs created elsewhere would be more stable and the companies more competitive.

Consumers. Everybody loves fire sales, and in the car business, they're likely to intensify. As the Detroit 3 shrink and close down divisions, there could be dramatic markdowns on some of the weaker brands under Detroit's umbrella, like Saturn, Pontiac, Chrysler, Dodge, Lincoln, Volvo, and Saab. That will produce "negative pricing power" on competing brands like Honda and Toyota, which is bad news for profitability but good news for the household budget. And the industry has so much excess capacity that even if one or two automakers go out of business, there's still virtually no way for a survivor to corner the market and build a monopoly. That means cars will continue to get better without costing more—unless the government decides to subsidize mediocrity.