Howes: Fat truck, SUV profits are necessary preconditions for Auto 2.0

Old Detroit is fighting back.

For years now, investors frustrated industry brass by valuing the Motor City’s automakers like it's still 1999: namely, as Old Economy manufacturers with high labor costs and low, single-digit profit margins primed for crisis whenever the next downturn arrives.

Can't necessarily blame investors, considering this town's amply documented record of capital incineration, unrealized promises and mediocre products. Detroit's automakers have spent the better part of the past decade trying to remove those stains — with varying effectiveness only now delivering better results.

Third-quarter earnings reports, punctuated Wednesday by General Motors Co.’s strong numbers, suggest Wall Street’s pessimism may be overwrought. It's the same ol’ thinking that assumes the only way to make money in the car and truck business is to make sure it’s not made in Detroit.

Not true, even as all three companies lean more heavily on their truck and SUV lineups to meet consumer demand, boost transaction prices and swell all-important margins. GM and Fiat Chrysler Automobiles NV last quarter booked North American margins north of 10 percent each. Ford Motor Co. hit 8.8 percent. And the bets by all three against the traditional car business is, for now, proving smartly profitable.

Read: Profitable GM looking to cut costs with buyouts

Investors are responding. Coupled with plans to offer voluntary buyouts to 18,000, or roughly a third of GM's 50,000-person North American salaried workforce, the Detroit automaker's shares gained nearly 9 percent on the day to close at $36.58. 

The collective performance, particularly at GM and FCA, signals that two former bankrupts and their crosstown rival are managing better the real beginnings of adversity — emphasis on the word "beginnings" — than skeptics believed. They'd better, if they want to have any shot at delivering the kind of results that warrant higher share prices.

The headwinds are stiffening: Rising interest rates, rising steel and aluminum prices, changing emissions standards, a brewing trade war between the United States and China already are producing the kind of challenges this town’s autos long struggled to negotiate.

Now? Much less so, thanks to a realism in Detroit and Auburn Hills (if not Dearborn) that amounts to big chips on the corporate shoulder. Management has something to prove — to investors, to Silicon Valley rivals and partners, to employees and retirees, to the town and state they still call home.

It won't be easy. A century, more or less, of accumulated culture is weighing on a business model that needs to move much more quickly, take more risk, embrace innovation and woo a whole new kind of talent. And doubts that any of that can be achieved are key reasons smart money so consistently bets against Detroit: its Old Economy legacy threatens to smother New Economy imperatives.

This shouldn't be a surprise to any but the most willfully self-deluded. On The Street, past performance is considered a reliable predictor of future performance. And new business models accounting more for the future than the present often warrant higher valuations, even for chronic money losers.

Case in point: At $57.5 billion, Elon Musk's 14-year-old Tesla Inc. is valued roughly $6 billion higher than GM and nearly $20 billion higher than Ford, a 115-year-old global automaker with one of the world's most recognizable brands.

The industry sits astride its biggest transformation since the onslaught of World War II forced the militarization of its plant floors. Instead of converting assembly lines to build tanks, trucks, Jeeps and B-24 Liberators, the automakers are undertaking an all-new kind of tooling with self-driving technology at its heart.

It's a technological and engineering challenge that will determine whether the survivors of Detroit's first automotive century prosper in its second; whether this town cedes its standing as the Motor City to Silicon Valley or Shanghai; whether its automakers emerge on the short end of the value chain, relegated to contract manufacturers delivering smallish profit margins and commanding low valuations.

The fattening profit margins on the core truck and SUV business, highlighted last quarter, are necessary down payments on their march to the future. But they're not sufficient, a primary reason companies like GM are moving to rationalize their salaried workforce even as they make new hires in emerging technology areas.

A generation ago, GM's leadership circa Jack Smith and Rick Wagoner aimed to deliver margins of 5 percent in North America — half what their successor, CEO Mary Barra, is delivering today. They didn't make it, which tells you how much the competitive metabolism inside GM and the tech-fueled industry has quickened.

Yes, Old Detroit is fighting back. But the battle is just beginning.

daniel.howes@detroitnews.com

(313) 222-2106

Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.