Diversification

Auto-related businesses eyed as new opportunity

Automakers see profits in services for consumers

Photos by Wieck Wire Service Ford expects to report revenues of $1 billion in several years from recycling junked vehicles.

By David Phillips / The Detroit News

    It’s no longer good enough to just design, build and sell cars and trucks.

    Detroit automakers now want to sell you tires, handle your banking, display e-mail messages on your windshield, make dinner reservations at your favorite bistro, pump commercial-free music into your car, teach you to drive — even recycle your old car.

    The booming 1990s left General Motors Corp., Ford Motor Co. and DaimlerChrysler AG awash with cash — a combined $63 billion in cash and marketable securities — and a bigger appetite to expand their grip on consumers’ love or need for everything automotive.

    But can Detroit automakers use the industry’s current gold rush to find and mine bigger nuggets they hope will pay handsome dividends down the road?

    Historically, Detroit automakers planned for the automotive value chain to start at the plant floor or engineering lab and end at the dealer showroom and service bay.

    They’ve since discovered and largely locked up the profitable financing function — DaimlerChrysler now provides loans on more than 1 million new Jeep, Chrysler, Plymouth and Dodge vehicles a year. GM’s and Ford’s credit operations have been cash cows for years.

    But a new, even larger business blueprint is emerging for Detroit’s tradition-bound automakers.

    While GM, Ford and DaimlerChrysler have diversified in the past — acquiring appliance makers, airplane builders and rental car companies — the latest buying binge is designed to build and exploit existing customer relationships while tapping more of the money spent on auto-related merchandise and services.

    GM and Ford are seeking government permission to open full-service banks. In the past year, Ford has used its hefty cash pile to acquire Canada’s largest driving school for young motorists, purchased a British chain of auto service centers and launched a new business unit to sell tires through its dealers.

    Ford has ambitious plans to overhaul and modernize the nation’s junkyards by standardizing vehicle recycling from coast to coast.

    Both GM and Ford have invested in satellite radio services that begin beaming 50 kinds of commercial-free music and other programming to motorists in late 2000. Within five years, analysts estimate as much as 10 percent of the 200 million cars and trucks on U.S. roads will receive music and other audio programing by satellite.

    For investors in Sirius Satellite Radio and XM Satellite Radio — the only two providers licensed by the federal government — the windfall could mean up to $1.2 billion in sales and earnings up to $400 million a year.

    “We’re convinced we have an entertainment service that is going to become an indispensable, mass market business,” said David Margolese, co-founder and chairman of Sirius Satellite Radio.

    “Farther down the road, we’re going to be a permanent fixture on the automotive landscape.”

    Ford estimates consumers spend as much as $60,000 over 10 years on gasoline, insurance, finance, parts and repairs after they walk out of the dealership with a new set of keys. But the automaker only captures the original $20,000 purchase price.

    And with profit margins on core auto operations under more pressure, a race to find more profitable revenue channels is unfolding.

    “If you want to grow faster than the traditional auto business — designing, engineering and building cars, engines and transmissions — you have to look at these other revenue opportunities,” said DaimlerChrysler Chairman Robert J. Eaton. “Nobody is happy with returns of 5 percent or 7 percent.”

    Ford believes strongly it can wring more cost out and drive more efficiency into the highly fragmented driving school business.

    The strategy is simple: Standardize curriculum at all locations, pay higher wages to attract quality instructors, hook up with insurance companies to guarantee lower rates to adults who enroll in its driver improvement classes and expand an already strong brand that is able to charge premium prices throughout Canada to the United States and other markets.

One person’s junk may be another one’s opportunity. That’s why Ford plans to own and operate auto recycling yards in about 70 cities nationwide in a couple of years.

    Ford is convinced that the 2 million to 3 million U.S. residents who learn to drive every year is an untapped market. Some 15 percent of Young Drivers graduates in Canada purchase a vehicle within one year.

    “Our franchisees earn returns of 15 percent on sales before taxes,” said Rick Rigby president of Young Drivers International. “If we can a sell another Ford vehicle on top of that, it’s even a greater return and investment.”

    The schools are exposing hundreds of new drivers to the new Focus small car and other Ford brands. And starting this year, Ford plans to entice Young Drivers graduates to purchase a new Ford vehicle with a $500 certificate.

    Of course there are serious questions whether the automaker’s new business strategy will pay off long term. Much depends on on consumer buying tastes and prices. The success of satellite commercial-free radio in cars depends on how many people will pony up $10 a month for the service.

    Analysts believe Detroit automakers have only begun to explore the entire automotive value chain, hoping to find the perfect fit.

    “We are only at the beginning of a new effort to get a lifelong lock on the consumer’s automotive spending.” said Jim Mateyka, head of A.T. Kearney Inc.’s global automotive consulting practice.

    But there is risk. By packing the chest with too many toys, management’s focus on the core business may blur.

    “Detroit still has to fix the long-term problem,” said Mateyka. “Few automakers are creating enough shareholder value anymore. The market respects their excellent manufacturing, but it’s still a high fixed-cost and cyclical business.”

    GM, eager to minimize capital spending, believes it can capture more downstream revenue by exploiting electronic commerce and using the Internet to court younger consumers.

    And it plans to expand its relationship with 30 million existing consumers who own a GM car or truck, as well as GMAC’s 6 million automotive retail account holders, 10,000 auto dealers, 5.4 million insurance policy holders and 1.5 million mortgage holders want a deeper relationship with the automaker.

    “Nothing has the potential for higher returns in the next five years than electronic commerce,” said GM President G. Richard Wagoner Jr.

    But success isn’t guaranteed.

    “For us to deliver shareholder value, it’s going to take a change in attitude of what business we are in,” said Rigby. “The old Ford would say the automotive sales chain starts at the manufacturing plant. The new Ford says the automotive chain starts with a young person’s need to learn to drive.”