A Wall Street Journal report that General Motors(NYSE: GM) and Ford(NYSE: F) will end production of several car models has some investors worried: Are GM and Ford repeating the mistakes that put Detroit on the skids a decade ago?
Back then, Ford, GM, and the company then known as Chrysler had spent years emphasizing high-profit truck-based SUVs and reducing their investments in fuel-efficient cars, only to be caught out when gas prices jumped and consumers suddenly wanted fuel-efficient choices.
That, and the economic crisis that followed in 2008, nearly wrecked the American auto industry. GM and Chrysler were forced into bankruptcy, while Ford ran the financial equivalent of a Hail Mary pass in a last-ditch effort to save itself from the same fate.
A decade later, all three companies -- Chrysler now as a part of Fiat Chrysler Automobiles -- are healthy and profitable, thanks once more to booming truck and SUV sales.
Are they about to make the same mistake again?
A blue 2018 Ford Fiesta hatchback
Is Ford discontinuing the little Fiesta? Not exactly, it turns out. Image source: Ford Motor Company.
Sometimes, it really is different this time
Investors are always reminded to be wary of the words, "It's different this time." But sometimes, it really is different, and this is one of those times. At first glance, it does seem like Ford and GM have failed to learn the lessons of the recent past. But when we look deeper, we find that things aren't quite what they seem.
Let's start with GM.
What GM is probably planning
The Journal reported that GM has decided to discontinue production of the subcompact Chevrolet Sonic hatchback, and that it's considering ending production of the large Chevrolet Impala sedan. Sales of both are down significantly; the decisions make business sense. But won't the end of the Sonic leave GM without a fuel-efficient small car?
Not quite. First, GM also has a small, fuel-efficient crossover SUV, the Chevrolet Trax, that gets about the same fuel economy as the Sonic. Second, and more importantly, there's probably a larger plan at work here -- one that should make green-minded folks quite happy.
A red 2017 Chevrolet Sonic, a small hatchback
GM sold 93,518 Chevrolet Sonics in the U.S. in 2014 -- and just 30,290 in 2017. Image source: General Motors.
The key to understanding where GM is headed is that the Sonic is built at GM's Orion Assembly Plant in Orion Township, Michigan, on an assembly line that's shared with GM's all-electric Chevrolet Bolt EV. I think what's really happening here is that GM is discontinuing a slow-selling internal-combustion vehicle to make room to build more electric vehicles.
GM has a whole bunch of new electric vehicles on the way. Most will use an all-new battery and powertrain system that GM is working on now. But there are two known to be coming fairly soon that that will share the current powertrain technology used in the Bolt. (They're thought to be a small Buick SUV and a Cadillac of some kind, but GM hasn't shared details yet.)
A small silver crossover SUV with no easily-visible brand identification
This image from a GM presentation last year might show a new Bolt-based battery-electric SUV coming in the next year or two. That vehicle will probably be built where the Chevy Sonic is built now. Image source: General Motors.
Those new vehicles may be very different from the Bolt, but they'll share quite a few parts under the skin and will be assembled in similar ways. It would make sense to make them at the same factory that makes the Bolt.
I think GM is discontinuing the Sonic so that it can reconfigure the Orion factory for mass-production of electric vehicles. Suddenly its plan looks a lot different, doesn't it?
What about Ford?
The Journal reported that Ford will drop the subcompact Fiesta and large Taurus sedan from its U.S. lineup. But here's the thing: Ford isn't discontinuing either the Fiesta or the Taurus. Both will live on in other markets around the world.
What's really happening here is that Ford has decided not to offer the next-generation versions of the Fiesta and Taurus in the United States, and to build higher-profit truck and SUV models on those cars' current assembly lines instead.
A silver Ford Taurus, a large sedan built by Ford for the Chinese market, with Chinese license plates
Here's the latest Ford Taurus, which was all-new in 2016. It sells well in China, but Ford hasn't bothered introducing it in the United States -- and won't. Image source: Ford Motor Company.
Those next-generation versions have already been launched, the Taurus in China and the Fiesta in Europe. Because U.S. sales of both have dropped dramatically, Ford has decided that it isn't worth investing in assembly lines to build them in North America.
But that doesn't mean it couldn't start selling the new Fiesta or Taurus here, if needed. If gas prices, or some other factor, caused demand for sedan and hatchback models to rise dramatically, Ford could start importing those vehicles to the United States -- probably within several months.
It would probably take Ford several months to set up production and shipping of versions of the Fiesta or Taurus that met U.S. regulations. But it wouldn't take years and billions of dollars; it's very doable.
A teal 2018 Ford Fiesta hatchback, parked in front of a bakery in France
Ford's Fiesta is one of Europe's best-selling cars. Ford launched an all-new Fiesta in Europe last year, and demand has been high. But as of now, there are no plans to offer it in the United States, where the Fiesta is an afterthought in Ford's truck-and-SUV-focused lineup. Image source: Ford Motor Company.
The upshot: The easy lessons of history don't always apply
This is one of those times when applying the apparent lessons of history won't give you an accurate picture. It's easy to read the report and jump to the conclusion that Detroit hasn't learned anything in the last decade, but it's untrue.
Leaders at both Ford and GM are very well aware of what happened a decade ago, and why. If demand should suddenly jump for well-made, small, fuel-efficient vehicles, they'll both be ready.
