U.S. Car Makers Finally Turn a Corner

DURING THE PAST two weeks the American auto industry has entered the industrial equivalent of an intensive-care ward. General Motors (GM) reported a staggering $15.5 billion quarterly loss (including special items), following Ford's $8.7 billion loss the week before. I shudder to think how bad it is at Chrysler, now in the hands of private-equity investor Cerberus Capital, but note that Chrysler Financial couldn't manage to renew all of its $30 billion in short-term debt.

Now we see the staggering financial results of the myopia that has afflicted Detroit auto executives in recent years. These are the people who staked their companies' futures on the gas-guzzling, heavyweight behemoths that look like the dinosaurs of the freeway.

Auto execs claim they were only giving Americans the products they wanted. Really? That's the same blame-someone-else reasoning that has gotten them into this mess. For proof to the contrary, just look at their U.S. market shares, which are slumping to historically low levels even as the Japanese auto makers gain ground.

At least Ford (F) and Chrysler now have new leadership. But why is Rick Wagoner still at the helm of GM? When will the GM board demand some accountability?

It's easy to get worked up over this if you care about the American auto industry, as I do. But my purpose here is not to further berate the U.S. auto makers, which have already suffered plenty of criticism (including mine), nearly all of which they appear to have ignored. Far more encouraging is the possibility that reality has actually penetrated the fog that envelops Detroit. According to The Wall Street Journal, in a recent meeting with Ford executives, CEO Alan Mulally dared to challenge the Detroit gospel that you can't make money on small, fuel-efficient cars. I wanted to get up and cheer that someone at the head of a U.S. auto company was finally daring to take such a stand.

At last Ford appears to be making bold moves to address the most critical issue, which is to make and sell vehicles people actually want. I was in Paris earlier this summer when I spotted an unfamiliar car so attractive that I went over to see what it was. It was a Ford. Presumably this is one of the six European models that, as part of the "Drive One" campaign, Ford will now introduce in the U.S. I've never understood how Ford could be so successful in the highly competitive European market while floundering in the U.S. Now that high gas prices have more closely aligned U.S. and European consumer tastes, this approach may pay off. Ford is also boosting production of its fuel-efficient "EcoBoost" and four-cylinder engines, speeding up hybrid introductions and converting three truck plants to production of small cars.

I can't say I've ever seen a fuel-efficient GM vehicle that generated comparable excitement, but even GM seems to be facing reality. It said it is planning for oil prices in a $120-$150 range for the foreseeable future, boosting light vehicle production and suspending production at four truck plants. It, too, is accelerating production of efficient four-cylinder engines, and announced a global Chevrolet small-car initiative. It's still banking on a 21% market share, which seems overly optimistic to me.

Can these sensible moves come in time to save these venerable companies? The timetable is daunting. Ford said it will have hybrid versions of its Ford Fusion and Mercury Milan models by December, which is good, but that conversion of truck facilities to small-car production won't be finished until 2010. I don't know when those attractive European Ford models will actually be at American dealers. GM's timetable is even vaguer. Both companies are burning through cash at an alarming rate, but despite much recent talk about bankruptcy, I don't think either company faces an imminent threat. In a few years cost-saving initiatives should start to have a real impact.

Ironically, slightly lower gas prices might give both companies a little breathing room, as long as they don't delude them into thinking they can revert to their heavy-vehicle strategy. There will always be some demand for trucks and large passenger vehicles, and now that gas has dropped below $4 a gallon, sales may pick up a little. But gas-guzzling SUVs were a fad that I suspect will never return, given that most drivers never needed a truck chassis, all-terrain capacity, a big engine or even four-wheel drive. More fundamentally, nothing about the oil supply-demand imbalance has really changed.

I still own my Ford shares, having passed up several opportunities to sell at a profit. Now that they've dropped below $5 apiece, I'm tempted to buy more. Even GM shares are starting to look appealing, though I won't consider buying them until there's a management change at the top. I have nothing against Wagoner personally and applaud his recent moves, but there should be some accountability for the fact that GM shares have lost about two-thirds of their value over the past year. (Ford's are down 40%, but Mulally can't be blamed for the failed policies of his predecessor.) Ford seems to be benefiting from bringing in someone from outside the Detroit subculture — Mulally came from Boeing (BA) — and I encourage the GM board to do the same. Still, at this point I consider any investment in the U.S. auto companies to be very high risk and only for the most patient long-term investors.

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