DesRosiers On DCX And Our Future

Comment from Dennis DesRosiers on Allenparkpete's note about Chrysler running out of steam.

Interesting article about DCX. Your reader is correct in that no company can have their way with the market for any length of time before the competition responds and in most cases are successful. DCX has had a great run with the 300 but they have also relied heavily on what we call 'safety valves' to maintain market share. There are five 'safety valves' which include fleet sales, consumer incentives, sub-venting lease residuals, extending model runs and pushing inventory down to the dealer level. DCX has been aggressive with most of these over the last year which indicates that their existing product is not selling as well as they would like. Each of these 'safety valves' result in margin reduction somewhere in the system so companies usually only push them hard (they use some of these every day so it is the degree they use them that is important ) when existing product is struggling.

People have to understand that GM, Ford and DCX are not losing market share because they are making mistakes or have less than exciting product. Most of the market share losses that have occurred is because of what the import nameplates are doing right rather than what the others are doing wrong. Not that GM, Ford and DCX haven't made mistakes, they have. But there was a time when only these three companies could jump all the barriers to competition in the market place and as a result they were able to divide up about 90 percent of the market with themselves. Today, there are 8 global entities that can compete head to head and so the previous three have had no choice but to give up market share in the face of this level of competition. You can't have 8 players dividing up 90 percent of the market and at the same time have the original three maintain share. There is a variety of functional things successful OEMs need to accomplish to be successful, these include engineering, design, manufacturing, marketing, selling, distribution, advertising, financing, warranty programs, a national dealer body, used vehicle auctions, etc to name a few. In today's automotive sector each of the majors ( GM group, Ford group, DCX, Toyota group, Nissan group, VW group, Hyundai group, Honda ) can do each of these functional activities very well. There are no barriers to entry. Eight into 90 percent will always result in a lower market share than three into 90 percent. Your reader should be concerned.

Yes DCX has a bunch of new products coming to the market this year but so do all the other companies as well. About 45 all new products are now regularly introduced each year into the market (there will be closer to 70 in the 2006 model year) compared to about 30 new products through the 70's to the 90's. This decade will see close to 500 all new products, the 90's saw only 322 new products. So there is less of a guarantee that the new DCX's product will result in higher market share or at least sustainable higher market share. I believe DCX will be very successful but I also believe they will have lower market share in the future than today and the managing of this downsizing will be critical for anyone who touches DCX, and Ford and GM for that matter since they will likely lose more market share than DCX.

Windsor has very high exposure to these three companies and very little exposure to the growing side of the industry, what we call the "New Domestics". We call them new domestics because they have North American content levels in some cases higher than the content level of selected GM, Ford and DCX products and in general they have very high NA content.

The unions in Windsor have made sure that Toyota and Honda and suppliers to the new domestics will never come near Windsor. Thus Windsor - Essex county will lose thousands of jobs over the next few years, indeed they have already lost thousands of jobs. But the worse is still to come.

This was predictable close to a decade ago and your previous Mayor was quite concerned. So when confronted with this dilemma, Mike Hurst asked me to come back to him with a few ideas for the City of Windsor to respond. My conclusion was that there was little that the City of Windsor could do to stop the erosion of the GM, Ford and DCX position in Windsor Essex county. The City could perhaps slow the erosion by being proactive with other mayors in the same boat by encouraging senior Governments to help these companies with specific requests but they could not stop the loss of jobs. Mike formed a coalition of Mayors that were instrumental in springing a billion dollars of incentives from the Ontario and Federal Government for these companies to respond. (the DCX paint shop investment was supported by this fund ... thanks Mike! ). These investment incentives have helped but they only slow the erosion.

The other thing we identified came from what Yves Landry who once told me ... that "the future of the automotive sector was the six inches between our ears" .. Quite insightful and another one of the reasons Mr. Landry should be viewed as the greatest man to ever step foot in Essex county. We picked up on this and recommended that the City of Windsor aggressively pursue a strategy of attracting "intellectual capital" to the area. Research, design, development and testing activities annually amount to over $20 billion in the North American automotive sector and these activities have to continue whether a company is doing well or not. Lee Iacocoa once said ... "I'll sell the furniture before cutting my product programs". These are also very high value added jobs and less prone to union problems. And Canada was getting very little of this activity. But advanced IT capability and the search for tax breaks for R,D,D and T was freeing up some of this activity for movement away from head offices. Why not reposition Windsor - Essex County as the "Intellectual Capital" of Canada's automotive sector and one of the key intellectual centres in the entire global automotive sector. Now that's dreaming big and a lot more reachable than digging a billion dollar tunnel under the Ojibway environmental reserve.

Mike Hurst aggressively pursued this strategy of moving Windsor - Essex County up the intellectual curve and was able to put in place initiatives that eventually resulted in over $1 billion in investment in intellectual activity, centred around the ARDC but there are about 20 plus other significant 'intellectual' investments in Windsor as a result of his efforts. When we first did the study we could identify only a few hundred engineering jobs in Windsor - Essex County. Now there are closer to 2,000 high end engineering positions. Now the unions have some trouble with this since they believe intellectual jobs are not plentiful enough to off set the lose of blue collar jobs AND intellectuals typically don't relate to a union but Windsor is far better off today as a result of this strategy than the area would have been without it. And secondary investment is starting to roll into Windsor as well. The University of Windsor has targeted well over a $100 million in new investments in buildings and equipment over the next few years and at the core of this investment is a new engineering building that without the automotive sector may never have happened.

Now City Council and the new Mayor have abandoned this strategy so the concept may never fully develop but Mike Hurst had the forethought to understand the problems that were coming to the region and to develop a strategy years before anyone else even though of the issue. But in today's politics a new Mayor can never embrace an old political rivals ideas no matter how good the idea. Thus Windsor is languishing. And by the way don't believe the job numbers related to the medial school. Quote the Provincial Government ... "there will be 96 medical school positions created at the U of Windsor over the next four years which will create 5,000 direct jobs and 12,000 indirect jobs". Give me a break, that would be 175 new jobs per student ... boy are these kids getting a lot of attention. In the automotive sector about 3 additional jobs are created for each new position. Dwight could solve the entire unemployment problem in Ontario by simply adding a few thousand new medical students to the economy. Not going to happen.

And the multiplying works in reverse as well. Remember those thousands of automotive jobs that Windsor Essex have lost and the thousands more it will lose, they also result in thousands and thousands of additional job loses. Maybe that is why Glendara Condo's are being reduced in price. No economy, no jobs, no need for expensive condos.

Dennis