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Refer to important disclosures on page 14.
Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
THE RECAPITALIZATION OF DETROITTHE RECAPITALIZATION OF DETROIT
An Equity Investor’s View of the Current Crisis
Automotive News World CongressDetroit, January 17, 2006
THE RECAPITALIZATION OF DETROITTHE RECAPITALIZATION OF DETROIT
An Equity Investor’s View of the Current Crisis
Automotive News World CongressDetroit, January 17, 2006
John A. CasesaResearch Analyst, MLFP&S
(212) 449 8431 [email protected]
2Refer to important disclosures on page 14.
The Crisis at Hand:Big Three Auto Margins
Source: GM, Ford, DaimlerChrysler, ML Estimates
13
.4%
16
.4%
16
.9%
15
.6%
15
.5%
13
.3%
10
.3%
12
.9%
12
.8%
4.9
%1
0.6
%1
1.4
%1
0.1
%4
.2%
4.9
%9
.3%
9.4
%8
.4%
4.9
%-3
.6%
-0.2
%1
.4%
6.9
%7
.3%
6.0
%4
.3% 5
.7%
6.5
%5
.3%
0.7
%-3
.1% -0
.9%
3.6
%7
.0%
4.8
%4
.7%
4.8
%5
.2%
5.6
%3
.8%
0.1
% 1.1
%1
.5%
2.0
%-3
.7%
-10%
-7%
-4%
-1%
2%
5%
8%
11%
14%
17%
20%
19
61
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
e
Op
erat
ing
Mar
gin
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
20,000,000
Detroit Three Operating Margin
US Light Vehicle Sales
3Refer to important disclosures on page 14.
The Domino Effect:Supplier Profitability Trends
Source: Company filings.
Operating Margins Return on Assets
-2%
0%
2%
4%
6%
8%
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
OEM Avg
Supplier Avg
-2%
0%
2%
4%
6%
8%
10%
12%
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
OEM Avg
Supplier Avg
4Refer to important disclosures on page 14.
The Domino Effect (continued):Dealer Profitability Trends
Source: NADA, Wards
29.6
%
35.7
%
35.3
%
34.9
%
28.7
%
27.3
%
15.5
%
14.9
%
14.2
%
20.7
%
25.8
%
30.0
%
23.0
%
24.8
%
22.1
%
27.0
% 29.3
%
24.3
%
30.7
%
27.6
%
25.1
%
21.4
%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%19
83
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Pre
tax
Pro
fit
% o
f E
nd
ing
Ne
t W
ort
h
10
11
12
13
14
15
16
17
18
U.S
. L
igh
t V
eh
icle
Sa
les
(m
m)
U.S. Light Vehicle Sales
Franchised New Car Dealers' Pretax ROE
5Refer to important disclosures on page 14.
Oligopoly’s Gone:Market Share Trends in US
Source: Ward’s AutoInfobank
0%
5%
10%
15%
20%
25%
30%
35%
40%
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
YT
D
0%
5%
10%
15%
20%
25%
30%
35%
40%
GM
Ford
Japanese
DaimlerChrysler
European
Korean
Toyota
Honda
6Refer to important disclosures on page 14.
Retreat:Assembly Capacity in North America
Source: Ward’s AutoInfobank, ML Estimate
14,3
30
14,5
75
13,1
84
13,9
13
13,7
27
13,6
85
13,5
58
13,6
62
13,6
12
14,0
08
12,7
87
13,1
90
12,4
01
12,1
97
11,4
86
11,1
90
10,8
98
10,6
98
3,1
24
3,1
72
3,2
53
3,4
48
3,5
89
3,8
11
4,0
86
4,3
34
4,5
00
4,3
18
4,9
69
5,1
23
5,5
77
5,7
17
6,1
55
6,5
13
6,9
23
7,1
83
00
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,00019
93
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
e
2006
e
2007
e
2008
e
2009
e
2010
e
To
tal
Cap
acit
y (0
00s)
New Domestics TotalBig Three Total
7Refer to important disclosures on page 14.
Retreat Not Enough: 2006-2009 Volume Replacement Rates, US Mkt
Source: Merrill Lynch
57%
59%
64%
67%
68%
71%
83%
90%
93%
141%
European
Ford
GM
Nissan
DaimlerChrysler
Total
Total Japanese
Toyota
Honda
Korean
8Refer to important disclosures on page 14.
They Can Afford to Spend:Pretax Margins of Major Global OEMs, 2004E
Source: Merrill Lynch
-3.4%
1.2%
1.4%
2.5%
2.5%
3.2%
3.4%
4.6%
4.6%
5.0%
5.4%
8.0%
8.6%
8.7%
9.2%
10.2%
10.4%
-6% -4% -2% 0% 2% 4% 6% 8% 10% 12%
Fiat
Volkswagen
General Motors
DaimlerChrysler
Mazda
Fuji Heavy
Ford
Peugeot
Suzuki
Average
Kia Motors
BMW
Renault
Honda
Hyundai Motor
Nissan
Toyota
9Refer to important disclosures on page 14.
Conclusions:Industry Analogies Sobering
US steel in the 1990s
US airlines in the early 2000s
Parallels suggest it gets worse before it gets better
Source: Merrill Lynch
10Refer to important disclosures on page 14.
Conclusions: What Could be Worse?
New deal or serious confrontation with UAW by 9/07
Increased demand risk given incentive pull-ahead, higher energy prices & higher rates
Accelerated supply base consolidation as more weak companies fail
Further shift in dealer capital away from GM & Ford
More share gains for Japanese & Korean OEMs
Radical downsizing of GM & Ford
Source: Merrill Lynch
11Refer to important disclosures on page 14.
Conclusions: What Will be Better?
Better demand/supply balance
Stable vehicle pricing & higher margins
Detroit OEMs with more focused, desirable product portfolios
Fewer, stronger suppliers with balance sheets to invest in technology
Consolidated, more consumer friendly dealers
Source: Merrill Lynch
12Refer to important disclosures on page 14.
Conclusions: Detroit Will be Recapitalized
Current owners (stockholders) lose value/control - happening now!
Unsustainable operating & financial structures get cleaned-up – in or out of court
Recapitalization means new owners
Creditors – lenders become stockholders
New investors – private equity, institutional investors including hedge funds, rich individuals, etc.
Source: Merrill Lynch
13Refer to important disclosures on page 14.
Conclusions: Bide Your Time
Expect continued poor equity performance until these radical restructuring actions are taken
Easy to lose money in early restructuring stages 1989 & 2005 were examples, lots of restructuring, but
incremental not radical, so earnings & stocks were a disaster
Can be great coming out After radical actions, lean cost bases made for 1992-1993
earnings & and stock explosion
Seems more like 1989 than 1992 right now
Get ready, but bide your time
Source: Merrill Lynch
14Refer to important disclosures on page 14.
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It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that price or value such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance.The bonds of the company are traded over-the-counter. 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Global Securities Research & Economics Group
Refer to important disclosures on page 14.
Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Backup Slides
16Refer to important disclosures on page 14.
Demand: Long-term Trend in the US
Source: Ward’s AutoInfobank, ML Estimates
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
20,000,000
50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04
U.S
. L
igh
t V
ehic
le S
ales
1955 -1958-35% 1973-1975
-23%OPEC I
1978-1982-31%OPEC II
1988-1991-20%Gulf War
2000-2003-4%
2000: 17.3 million2001: 17.1 million2002: 16.8 million2003: 16.6 million2004: 16.9 million2005: 16.9 million
2006e: 16.0 million
17Refer to important disclosures on page 14. Source: U. of Michigan Survey Research
0.5
0.6
0.8
0.9
1.1
1.2
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00 01 02 03 04 05
Co
nsu
mer
Co
nfi
den
ce
9
11
13
15
17
19
U.S
. Lig
ht
Veh
icle
Sal
es (
mils
)
Consumer Confidence, LTM Trend
U.S. Light Vehicle Sales, LTM Trend
December = 0.915
September 11th:The Straw that Broke the Camel’s Back
18Refer to important disclosures on page 14.
Lucky:Low Rates & Liquidity Overcame the Confidence Gap
Source: Federal Reserve
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0
19.0
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
Lo
an R
ate
Auto Finance Company Rate
Direct Consumer Loan Rate
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
30
35
40
45
50
55
60
65
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Mo
nth
s
Auto Loan Interest Rate Trends Amount Financed
Avg. Maturity of New Car Loans
19Refer to important disclosures on page 14.
Supply: Days’ Supply Inventory
Source: Ward’s AutoInfobank
30
40
50
60
70
80
Oct
-00
Jan-
01
Apr
-01
Jul-0
1
Oct
-01
Jan-
02
Apr
-02
Jul-0
2
Oct
-02
Jan-
03
Apr
-03
Jul-0
3
Oct
-03
Jan-
04
Apr
-04
Jul-0
4
Oct
-04
Jan-
05
Apr
-05
Jul-0
5
Oct
-05
-20%
-10%
0%
10%
20%
30%
% + / - 5yr Avg Total (DS)
20Refer to important disclosures on page 14.
Pricing: Incentives & CPI
Source: Ward’s AutoInfobank, Autodata2, U.S. Department of Commerce
Demand vs. Incentives
Consumer Price Index
2.2%
3.4%
2.8%
1.6%
2.3%
2.7%
0.7%-
3.0%
1.6%
2.3%
2.9%2.6%
3.0%
4.2%
5.4%
2.8%
2.9%
0.8%
0.6%-
1.9%-
1.2%-
0.4%-
0.0%
0.8%-
2.4%
3.6%
1.4%
2.4%
3.4%
2.2%
1.7%
0.2%
3.1%
1.2%-
0.2%-
0.6%-
0.5%
0.7%-
2.0%-
0.6%
0.2%-
1.3%
2.5%
4.4%
3.7%
4.5%
3.9%
3.0%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005YTD
CPI CPI New Cars CPI New Trucks
15,000
16,000
17,000
18,000
19,000
20,000
Jun
-00
Sep
-00
Dec
-00
Mar
-01
Jun
-01
Sep
-01
Dec
-01
Mar
-02
Jun
-02
Sep
-02
Dec
-02
Mar
-03
Jun
-03
Sep
-03
Dec
-03
Mar
-04
Jun
-04
Sep
-04
Dec
-04
Mar
-05
Jun
-05
Sep
-05
Dec
-05
LT
M U
.S.
LV
Sal
es$1,000
$1,400
$1,800
$2,200
$2,600
$3,000
LT
M A
vera
ge
Ince
nti
ve
LTM Average Incentive
LTM U.S LV Sales
21Refer to important disclosures on page 14.
Competition: New Model Launches in US
Source: Source: Merrill Lynch
35 34
26
3538
36
21
48
21
3935
3841
3941 43 41
45
67
47
363231
-
10
20
30
40
50
60
70
801
98
7
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
E
20
07
E
20
08
E
20
09
E
# o
f N
ew M
od
els
Lau
nch
ed
Average = 35, 1987-2005
22Refer to important disclosures on page 14.
Competition: Market Showroom Age Trend
Source: Merrill Lynch
4.0 4.0 4.04.3 4.2
3.6 3.6 3.73.5
3.8
3.03.2 3.1
2.9 3.0
2.5 2.6
3.03.1
2.92.93.03.1
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
E
20
07
E
20
08
E
20
09
E
Av
era
ge
Sh
ow
roo
m A
ge
in Y
ea
rs
Average Showroom Age of Models on US Market
23Refer to important disclosures on page 14.
Competition: Replacement Rates, Showroom Age & Market Share
Source: Merrill Lynch
Average Volume Replacement Rate 1995-2005 Model Years
Average Showroom Age Higher/(Lower) Than Industry
Average 1995-2005U.S. Market
Share Change*GM 14% 0.8 -5.8%Ford 15% 0.3 -6.4%DaimlerChrysler 16% 0.0 -0.7%European 18% (0.3) 2.5%Japanese 20% (0.5) 7.2%Korean 26% (1.3) 3.2%
* Market Share is Based on Calendar Years 1994-2004
