The Big 3 - Riches to Rags in 50 years

[russellw]

We've all heard about the financial meltdown that saw General Motors and Chrysler into bankruptcy as well as taking Ford to the brink. It got me to wondering just how such large companies could find themselves in that sort of state so I have gathered all the available financial data from 1954 onward (the first year that Ford was required to publicly report) for a bit of analysis.



This is not intended to be a definitive review of the ills that beset the US automotive giants as these are already well documented in numerous books on the subject but rather a look at what the financial data can tell us about how they got to be where they are today.

Decade 1 - 1954 to 1963

The first decade saw a number of highlights for the industry. GM became the first US company to exceed 1 billion dollars of profit in 1955 with net profit of $1.189bn on sales revenue that also set a new record of $12.443bn.

By way of comparison, Fords best year that decade (1963) returned a profit of $488m on sales revenue of $8.742bn while Chrysler managed a best profit in 1963 of $162m and best revenue of $3.655bn in 1957.

GM sales revenues during this period were a little more than double those of Ford and about triple those of Chrysler. Chrysler was also the first of them to record a full year loss of $34m in 1958 with a further $5m lost in 1959. Average profit margins during this decade favoured GM with 8.35% ahead of Ford 5.85% and Chrysler with a low 1.65%.

To give you an idea of the sheer size of the numbers involved, GM had sales revenue for the decade of almost $121bn and profits slightly over $10bn while Ford revenue was $60bn with profits totaling $3.56bn.

Decade 2 - 1964 to 1973

Both Ford and GM went through the decade recording profits in every year with GM continuing to break sales and profit records right up to the $2.39bn profit of 1973, on $35.79bn of revenue. Likewise, Ford was setting its own records with a highest ever $907m profit in 1973 on just over $23bn in sales. Chrysler also recorded mostly profitable years (except for an $8m loss in 1970) with a peak of $255m in 1973 on $11.5bn in revenue.

GM continued to lead in profit margin percentage with an average across the decade of 7.28% ahead of Ford with 4.1% and Chrysler on an improved 2.29%. It is worth noting the slight reduction in margins for both Ford and GM as these start to point the way to what went wrong for both of them but also worth noting that GM's best ever recorded profit margin came in 1965 at 10.1%.

Again, the totals for the decade are staggering. GM revenues were $245bn (up 103%) but Ford and Chrysler had bigger improvements to record $147bn and $71bn respectively - both up about 140% and closing the gap to GM.
The profit picture confirmed the dropping margins with both Ford ($6.03bn) and GM ($17.85bn) up 70% and 76% respectively while Chrysler showed its improved efficiencies up 234% to $1.636bn.

Decade 3 - 1974 to 1983

Both Ford and GM set new records during this decade - GM in recording a $3.7bn annual profit (on a new sales record of $74.6bn) in 1983 and Ford in the same year with $1.867bn of profit on sales revenue of $44.4bn.

Chrysler, on the other hand, was setting records of a different kind, racking up the largest ever corporate loss at the time of $1.71bn in 1980 on top of the first ever $1bn loss the year before. It was at this time that the US Government provided the first automotive bailout to Chrysler with loans and guarantees of $4bn to see them through.

In revenue terms, Ford was the most improved up a further 140% to $357.3bn, while GM led the raw numbers with sales of $560.2bn during the decade (up 128%) and Chrysler only gained 73% to record $123.7bn of revenues.

The profit margins continued their decline as the manufacturers offered incentive programs in order to gain market share with GM down to 3.4%, Ford to 1.32% and Chrysler in the red. In real terms, profitability had been halved during this period in the chase for numbers at the same time as the Japanese invasion was only just being held back by artificial (and protectionist) quotas.

The profit numbers show this with Ford dropping 22% (despite the doubling of sales revenue) to $4.7bn; GM only up 7% to $19.02bn and Chrysler losing a massive $2.34bn.

Decade 4 - 1984 to 1993

More records this decade on both sides of the ledger. GM recorded a new corporate high with a $4.68bn profit in 1988 but then followed that up with the largest corporate loss (to that point in time) of $23.5bn in 1992 after topping up the deficit in the pension fund.

Same picture at Ford with a new record high of $5.3bn in 1988 and a new record loss of $7.4bn in 1992 for the same reason as GM's while over at Chrysler they also had a best profit of $2.38bn in 1984 and a record $2.55bn loss in 1993.

Sales revenues continued to climb during this period, however, with GM recording over a trillion dollars of revenue for the decade ($1,149bn) for a 105% increase while Ford recorded $832bn (up 132%) and Chrysler managed just under $300bn (up 142%). Profit margins continued to fall with Ford topping the charts at 1.97% ahead of Chrysler (1.90%) and GM only managing 0.05%. Ford profits for the decade were up 246% to $16.3bn with Chrysler taking 2nd spot at $5.68bn and GM only making $624m for the entire decade.

Decade 5 - 1994 to 2003

Another decade of new records with GM topping it's previous best profit to record $6.93bn in 1995 and it's largest sales revenue of $196.7bn in 2002. Likewise Ford also created a new sales record in 2000 with $170.06bn and a new profit record of $6.9bn in 1997. Chrysler did the same in 1998 with a profit record of $5.4bn and in 2002 earnt record revenue of $186.7bn.

GM went through the decade without recording a single loss but Ford had losses in both 2001 and 2002 while Chrysler recorded red ink in both 2001 and 2003.

Overall the decade saw an improvement in profit margins with Chrysler (after a major restructure) the best at 3.25% ahead of GM on 2.48% and Ford with 2.06% - all improvements over the previous decade and a step in the right direction except for one small fact – these gains were coming from the non automotive businesses that they were each involved in, particularly finance arms.

Ford recorded $1.53 trillion dollars in sales for the decade, not far behind GM on $1.71 trillion with Chrysler lagging well behind with $590bn.
Profit wise, GM recorded $42.56bn for the decade, Ford $31.57bn and Chrysler $19.1bn.

Decade 6 - 2004 to 2008

Well half a decade to be exact. As Ford is the only one of the 3 to have reported 2009 results, we will only look at the period up to 2004.

Both Chrysler and Ford have had two profitable years in the half decade and GM had one but the size of the losses has been astronomical in any ones language.

Chrysler got off the lightest with a 5 year loss of only $7.1bn, Ford the next best (!) with losses totaling $24.6bn and GM breaking all records for bad years with a combined $78.5bn during the period which included a record $38.73bn loss in 2007.

Overall revenues were still up during the first part of the period with both GM and Ford recording new peaks of $207.34bn and $177.08bn respectively but profit margins were back down below 2% in even those better years and they have (of course) been negative margins in the bad ones with both GM and Chrysler racking up losses equal to 20% of revenue in 2008!

Turning the figures around a little shows a bit more of the picture. The table below looks at the revenues and profits working backward from now on a decade by decade basis and with the figures consolidated as cumulative totals.



From this data we can see the reduction in profit margins but also that the total margin for Ford over the entire 50 years has only been a mere 1.0%. Even if it had been 2%, there would have been an extra $38bn in the kitty which perhaps gives the best indication of how wasteful and inefficient the manufacturers have been. When you’ve turned over $3.8 trillion it seems almost criminal that profits can be that low. That aside, it is still 6x the retained profit that GM managed over the same period and probably the best indicator as to why they survived without a bail out.

It’s positively good news next to GM though which has a net profit margin of 0.14% over the 50 year period despite the almost $4.65 trillion in revenues. Indeed, in the case of GM the last decade all but wiped out the previous 40 years of profit and its little surprise that they headed into bankruptcy and US Government ownership.

Somewhat ironically it is Chrysler that produced the best profit margin over the 50 year period albeit with a still poor 1.25% on the $1.37 trillion of revenues. It was still enough to give them 3x the net profit of GM despite less than a third of the sales revenue.

When you review the individual years (see table in the appendix below) it is easier to see where the decline took place. GM maintained individual year profit margins above 8% all the way from 1954 to 1967 but they dropped rapidly after that as the impact of reduced market share caused by the first oil crisis (and the subsequent move away from large cars) and the inroads made by Japanese manufacturers forced them into bigger rebates and lower prices.

The Ford story paints a less clear picture. Like GM their margins held around 6% until 1966 and dropped sharply before staging something of a recovery in the middle part of the 80’s while the Chrysler story is simply one of inconsistency in margins across the entire 50 years although their performance in the latter years has been consistently the best of the three.

Conclusions

I’ve not intended this to be a definitive piece on the rise and fall of the Big 3 but to simply look at one piece of the puzzle that can be gleaned from the financial data. There is no one reason why the failures that happened actually did but it is also clear that if you don’t make reasonable margins from the business you are in then you are probably doomed to eventual failure. The 50 year margin looked at above is not reasonable for a capital intensive business.

Certainly the habit the Big 3 got into during the 60’s of buying market share with rebates (commonly $1,500 per vehicle) and the awful deals made with the UAW during the 70’s and 80’s contributed to the decline in profit margins but it’s also pretty clear when reading the annual reports that from about 1975 onward most of the profits they did generate did not actually come from the core business of making motor cars but rather from their finance divisions and other diverse interests. It might even have always been that way but as they were forced to divest themselves of these other profitable businesses in the 80’s and 90’s and as the credit squeeze impacted the once massively profitable finance divisions all they were left with were their inefficient automotive manufacturing business and that simply wasn’t enough.

Anecdotally, we know that GM in particular had been losing upwards of $2,000 per unit of sale in their automotive division since the latter part of the 80’s – partly due to the pension and health plans but also partly due to outdated manufacturing plants and high warranty costs but none of these issues were addressed until it reached the point of no choice and thus we are where we are at now.

The plus side, if there is one, is that they have all now been forced to embark on similar cost reductions and efficiency gains to those that saved Chrysler back in the early 70’s. Ford was fortunate that the leadership had already bitten the bullet and started that process but it was almost not soon enough and time alone will tell whether GM can recover even with the help it has received. The 2009 results (due shortly) will perhaps be the best indicator of that.

Appendix

Below is the raw margin percentage chart referred to above. The best (or least worst) margin in each year is indicated by bold type and the best for each manufacturer is in blue.

[MethodX]

Hope all 3 survive, too many classics to die.

[Stefan]

Sounds to me like they should have stopped making cars, shut up shop, put the money in the bank and made more money than they did.

[EDManual]

What a hopeless business! 1% at best profit over all that time...

How can business work like this?

[Gobes32]

It is amazing to see their decline in such detailed figures....... It would be interesting to see the figures from a more stable manufacturer such as Toyota.

What is truly amazing, as Russel pointed out, is that these manufacturers had such tiny profit margins on such huge turnover. And anyone with any business sense will tell you, it becomes a house of cards. In fact, a more hard nosed person would suggest they deserved to fail. Stories abound of how the major 3's factories were ran, brand new cars used to spill out 24/7. And factory managements bonuses were linked directly to how many cars they could spit out, no concerns for quality nor production viability. Basically it was a case of make as many cars as you can and then get marketing to sell them.......

[DBourne]

Great work putting all the data together mate!

[phillyc]

Terrific and thoroughly detailed post Russellw! Lots of work in that one

[mik]

yes a good read indeed(hey that rymes )wd Russ.

[russellw]

Figures from Japanese manufacturers are not directly comparable for two reasons:

1. They report either a March or June fiscal year compared to the Calendar Year of the US.
2. They report operating profit before extraordinary items - which is porobably more accurate but means that most of their profit figures will be lower than their US counterparts who can include asset sales in the results. They do also show the profit including these items but only on a pre tax basis.

Anyway, there are results available from 1984 to 2009 where their margins have actually been improving to stand at 4.89% during the last 5 year period and for the 26 years that are covered the overall margin stands at 4.30% with total revenues of $2.67 trillion and profits of $115bn.

Their only loss for the period came in 2008 (year ended Mar 2009) of $4.1bn and their best profit of $16.5bn came the year before that.

I've enclosed an update chart with their numbers included and for these purposes have considered the reporting year to be the results for the prior year (that is to say the result reported March 2009 represents 2008).



Cheers
Russ

[Franco Cozzo]

As another member said, wouldn't it be a better idea to completely sell off everything, fire everyone then put your money in a term deposit or something at like 5%?

[irlewy86]

Originally Posted by Big Damo

As another member said, wouldn't it be a better idea to completely sell off everything, fire everyone then put your money in a term deposit or something at like 5%?

Why you're after tax profit would still be less than 2.5%.

[zdcol71]

I think itwould be interesting to see the comparable figures of the oil majors across the same time frame.(particularly in relation to margins involved in production of motor spirit)

[Gobes32]

Thanks Russ, it was just as I thought, the japanes are a lot better at making more from less.

[big_landau]

i think the biggest problem is instead of the big 3 its now the big 25 or how ever many car makes that are sold now,we even are getting hit with chinese cars.its hard to simply stay afloat with so much competition and most young people dont consider a ford etc as an option,most of them just go jap.brand loyalty just isnt there with most people now.

[outback_ute]

Very interesting Russ, thanks for sharing the data.

First thoughts might indicate a huge change in the 1970s with increased regulations, sales drops from oil crises, etc, and then a very poor response to these problems - an important factor may be that the people that built the companies post-WWII would not have been running them by then, they had lost touch with the market, efficiency and had become large beauracracies. The annual facelift cycles, along with the level of competition in the market, saw them spending highly on development

The effect of inflation is interesting. Ford's revenue approximately doubles each decade until the 90's - yet I wonder if that is purely through inflation? GM's revenue clearly indicates a substantial decline in cars sold over the same period.