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A tale of two automakers, one mighty one weak…both headed in the same direction



May 01, 2008 – Comments (6) | RELATED TICKERS: TM , GM , F

Gather round children.  I have a fantastic tale to tell of two automakers, one a mighty titan who has dominated the industry for the past decade and another that is more like the local court jester, both who are headed in the same direction…down. 

It pains me to say this because I am a huge fan of Toyota (TM).  It has been the gold standard for as long as I have worked in the auto industry.  Talking about a misstep by them is sort of like talking about Michael Jordan missing a dunk, but even the reign of the great number 23 had to come to an end.  Not even the mighty Toyota is immune to the tremendous slowdown that the domestic auto industry is currently experiencing.  Its main problem is with trucks, specifically pickup trucks.

For years, the “Big 3” automakers, General Motors (GM), Ford (F), and Chrysler, dominated the truck market.  If you wanted an SUV or a pickup truck, they were basically the only game in town.  As foreign automakers, like Toyota, Honda, Nissan, BMW, etc, began to eat away at their market share their last remaining stronghold was these super profitable vehicles.  Seeing how much money the domestics were making by selling the huge trucks that Americans loved, the import manufacturers began to introduce SUVs.  After falling behind the import brands in cars, increased competition in the SUV segment was extremely painful for the Big 3.  Smelling blood in the water, the Big 3 Japanese manufacturers decided to introduce full-size pickup trucks to the U.S. market as well. 

Fortunately, for the domestic manufacturers it proved much more difficult for the Japanese automakers to steal market share in this segment.  For whatever reason, whether it is that the pickup buyers of the south and middle America were gung ho “Buy American” or the quality of their entries into the segment was not as good as the domestic vehicles, the Japanese were not able to make much headway in the full-size pickup business.  Last year, Toyota decided to change this.  It spent tons of money to redesign and build a new U.S. plant to manufacturer its entry into the segment the Tundra.  By most accounts, Toyota did a great job with the vehicle.  It is an outstanding truck.  The problem is its timing.  It introduced a new large pickup right around the time that gas prices began to skyrocket, consumer spending is slowing, and the construction industry is a mess.  Demand for full-size pickups like the Tundra, and its cousin the full-sized SUV called Sequoia, has fallen dramatically.  Now Toyota is stuck with way too much production capacity for a vehicle that is not nearly as popular as they were forecasting. 

Looking at a manufacturer’s level of unsold inventory is sort of like a doctor taking your temperature.  Like with a fever, the higher your inventory level is…the worse shape you are in.  Toyota division’s U.S. inventory has hit a record level this year.  Its dealer stock has risen from around 100,000 units last summer and 348,000 during the same period last year to more than 376,000 today.  If this trend continues, Toyota will likely have to either cut production or dramatically increase its spending on incentives like cash back and special lease or financing rates to help whittle away at its glut of unsold vehicles.

At the other end of the spectrum we have Chrysler.  Not even the powerful Mercedes-Benz was able to save the worst of the "Big 3" automakers.  After taking over Chrysler in a “merger of equals” that was never very equal back in 1998 (Man has it been that long ago already.  I feel old.), Mercedes finally cried uncle and basically gave the company to the hedge fund Cerberus Capital Management.  Mercedes kept a 19.9% stake in Chrysler for itself.  Boy oh boy, Cerberus didn’t know what it was getting itself into.  When Daimler AG published its first quarter results earlier this week, it disclosed that it has written down the value of its investment in Chrysler by nearly two-thirds!  That’s right, the company initially pegged the value of its nearly 20% stake in Chrysler at $2.18 billion.  Today it believes that it is worth only $851.2 million. 

And it’s not like Chrysler is headed in the right direction either.  It is spending wads of money on incentives, has major quality issues, and has no notable new products in its pipeline (new products are the lifeblood of automakers).  I highly doubt that the ousted head of Home Depot (HD), Bob Nardelli, is the man who is going to be able to right this ship either.  I feel so sorry for Cerberus…well maybe not HAHAHAHAHAHAHAH.


No position in any company mentioned



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6 Comments – Post Your Own

#1) On May 01, 2008 at 11:22 AM, GS751 (26.73) wrote:

love the post and the humor.

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#2) On May 01, 2008 at 11:53 AM, TMFDeej (97.65) wrote:

Thanks GS751.


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#3) On May 01, 2008 at 12:19 PM, DemonDoug (31.52) wrote:

Deej, is toyota going to be coming out with a fully electric or an electric-gas hybrid? (as opposed to gas-electric - kind of my own view point, an "electric-gas" would be different from "gas-electric" in that the electric-gas hybrid would be an electric car with a very small, like 1-2 gallon, gas tank that would be used solely to charge the electric car battery).

I believe that electric cars are finally here, and here to stay, so if TM starts making some good straight electrics, there is a good chance they will stay on top.

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#4) On May 01, 2008 at 1:38 PM, TMFDeej (97.65) wrote:

Hey Doug.  I know that a number of automakers are working on plug-in electric vehicles.  Toyota is the current market leader in hybrid technology, but I have not read anything about it being closer to market than any other manufacturer with plug-ins.  I'll make sure to keep any eye out for any news on the subject.


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#5) On May 02, 2008 at 12:45 AM, dwot (28.99) wrote:

Good post...

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#6) On May 02, 2008 at 5:40 AM, TMFDeej (97.65) wrote:

Thanks dwot.


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