Crain News Service
DETROIT (Aug. 14, 2015) — Even in the midst of its best profitability in decades, the global auto industry faces a strategic threat to its existence.
Fiat Chrysler Automobiles CEO Sergio Marchionne said it: The industry makes meager profits while burning huge amounts of capital.
He wasn't the first to acknowledge that. Wall Street has said it for decades. Thoughtful industry folks have said so privately for years. But Mr. Marchionne is the car exec who said it publicly, with PowerPoint slides.
The message is simple: The auto industry requires stupendous amounts of capital.
It doesn't recoup the capital it spends, destroying shareholder value.
That should be apparent from General Motors Co.'s two-generation descent from world's largest corporation to bankruptcy over a trail of write-offs and accounting tricks. Or from the bones of hundreds of auto makers that ran out of capital, from Packard and Studebaker to Rover and American Motors.
Auto industry veterans are inured to low rewards. Modest returns on capital seem normal. So what?
But Mr. Marchionne sees a coming capital crunch to develop autonomous driving, connected-car technology, alternative powertrains and shared-mobility solutions.
Consulting firm AlixPartners sees growth slowing and few existing players with enough scale to invest in all those technologies.
And the scent of disruption is attracting cash-rich newcomers sensing fresh opportunity.
That's a picture of a slow-growth industry on the cusp of fundamental change — pitting flush newcomers against experienced incumbents seeking investors despite a century-long track record of low returns on capital.
It's uncertain where the auto industry is headed. But conventional responses, even bold ones, may not continue to work.
Companies must adapt by re-examining assumptions, expanding contingency plans, monitoring competitors more closely and bolstering relationships with vendors and customers.
This editorial appeared in Automotive News, a Detroit-based sister publication of Tire Business. Have an opinion on it? Send your comments or a letter to the editor to [email protected]. Include your name, title, company name, city in which it's based, and a daytime phone number at which we can reach you.