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November 7, 2006
Auto Industry Outlook: Sinking and Soaring
The 2004-2006 timeframe likely will be remembered as a pivotal period in the automobile industry, as a host of calamitous trends arose to threaten the industry. While "The Big Three" suffer from common ills in the U.S., automakers elsewhere have established themselves as true, high-quality manufacturers with a growing global customer base.
During the 2004-2006 period, high gasoline prices began a sea change among United States consumers that is finally creating significant demand for fuel-efficient vehicles. Gasoline prices of approximately $2 per gallon started taking a huge bite out of family budgets in 2004, and many middle-class consumers who owned fuel-guzzling SUVs and pickup trucks began to wish they had vehicles that were much less expensive to operate. By 2005-2006, Plunkett Research reports, with gasoline prices in the $3 range, "the party was over for traditional, large SUVs."
For Ford, the second-largest U.S. automaker after General Motors, sales of SUVs and pickups are down more than 17 percent for the year, or about 250,000 units, which equates to $6 billion in revenue, according to AMR Research. And as sales of heavy SUVs lagged miserably, other automakers such as Chevrolet, Hummer and Cadillac offered large dealer incentives and rebates in an effort to move these massive gas-guzzlers. Ford cancelled production of its Excursion SUV in which some owners reported getting as little as 11 MPG in the city, and GM cancelled production of the huge Hummer H1.
Yet Toyota truck sales are up more than 40 percent for the year, with the world's second-largest automaker, poised to be No. 1, preparing its new Tundra pickup in 2007, which is predicted to steal even more market value.
U.S. automakers are losing billions on their core automotive operations as they are hit by rising healthcare costs for both active and retired employees. Simultaneously, they are steadily losing market share to foreign competitors. They are making intense demands on their component suppliers for lower prices; these suppliers, in turn, are looking to low-cost production in China. Just last week, Ford announced it will almost double its purchase of China-made parts this year — buying $2.5 billion to $3 billion in auto parts in China — to cut production costs.
"The Big Three" — GM, Ford and Chrysler Group, the American unit of DaimlerChrysler AG — face difficult times at best.
Worries have been growing that Ford could face a cash squeeze before the savings benefits kick in from job cuts, plant closures and other parts of its restructuring plan. Ford, which has been struggling to turn around its business, racked up a $5.8 billion loss for the July-September quarter due to sagging North American sales and huge costs associated with the massive restructuring plan. It was the largest quarterly loss in more than 14 years for Ford, reports Bloomberg News (via The New York Times).
Ford, Chrysler and GM and are under intense competitive pressure from foreign-based firms while enduring high labor costs at home. Ford and GM are both struggling to reengineer all parts of their operations — from design to manufacturing to marketing — in order to cut costs and regain market share.
Chrysler is having major troubles unloading its stock. How do you recover from something like this? Here's one way to do it:
Chrysler said it would reduce shipments of slow-to-sell vehicles to Chrysler, Jeep and Dodge dealers by 90,000 in the three months ending Sept. 30 and by an additional 45,000 in the last three months of the year. Chrysler, which would not rule out plant closings, buyouts, or other cutbacks, is responding to the same shifts in consumer preference that have forced General Motors Corp. and Ford Motor Co. to shed tens of thousands of workers and close plants.
According to U.S. News & World Report late last month, however, GM appears to be turning itself around:
Americans tend to think of The Big Three domestic automakers — GM, Ford, and Chrysler — in lock step. And, yes, all suffer from common ills: aging infrastructure, outdated technology, over-reliance on big trucks and SUVs, and huge healthcare and "legacy" costs that pump up the expense of every vehicle. But the pace of change varies throughout Detroit, as Ford's troubles illustrate. Chrysler, the American arm of Germany's DaimlerChrysler and until recently a success story, posted its own $1.5 billion loss last week. Yet GM, for once, bucked the trend. Overall, it lost $115 million (including special charges), but it also posted record revenues and a tidy operating profit of $529 million.
GM, of course, offered buyouts to its entire unionized workforce earlier this year (resulting in a reduction of 34,000 workers) and is in the process of closing nine factories by 2008, which will reduce capacity by 1 million units. The company has cut costs by $6 billion pre-tax.
Despite the upbeat news for GM, though, 
the automaker should be wary of celebrating, says U.S. News & World Report. The automaker still faces a series of barriers to sustained profitability. Its passenger car lineup remains weak, it is way behind on crossovers, and the company continues to burn an alarming amount of cash.
Together, the companies lost $7.4 billion in the quarter, according to Forbes. So while The Big Three struggle in varying degrees, Asian car manufacturers are generally enjoying booming success.
South Korean makers Hyundai and Kia have established themselves as true, high-quality manufacturers with a growing global customer base.
The dismal results at American automakers blatantly contrast with the healthy performance among the Japanese. Nissan Motor Co. said late last month that its quarterly profit rose 31 percent. Honda Motor Co. posted a slightly lower profit for the quarter, partly because of hedging, but saw its sales grow in North America and other regions reports The Associated Press (via BusinessWeek).
And Toyota is attacking mercilessly. The Japanese automaker is reaping record profits, pouring billions into new models, and racing toward a once unthinkable milepost: displacing GM as the world's biggest carmaker. Moreover, Toyota has the capacity to manufacture over 1.5 million vehicles yearly in North America.
Further, while inexpensive cars manufactured in China will soon be on the market in the U.S., automakers from all nations are racing to establish plants and partnerships in China to produce cars both for domestic use and for export. Low labor costs and increasing product quality in China threaten auto plants located in high-cost nations such as the U.S.
In the booming nation of India, vehicle sales are soaring. While motor scooters continue to sell rapidly, a growing middle class is also creating great demand for cars. Local industrial giant Tata hopes to launch a no-frills Indian car at a base price of about US$2,200, reports Plunkett.
As in the U.S., European manufacturers are facing tougher times, too. With the exception of continued positive results at Audi and Porsche, and reasonably strong profits combined with growing market share at BMW, European car companies are generally facing high costs, tough labor laws, daunting government regulations and disappointing model designs for hampered results.
The parts manufacturing business in the U.S. is equally dismal. Delphi Corp, the giant parts supplier that was part of GM until 1999, lost nearly $4.6 billion in 2004 alone and is operating in bankruptcy, for example. In fact, in June an AlixPartners study of 104 automotive suppliers, 22 automakers, 18 heavy-vehicle producers and 32 automotive conglomerates worldwide found that 38 percent of all auto suppliers in North America are in fiscal danger of insolvency within 24 months unless they take extreme measures. Not only relegated to North America, the study says that globally, 24 percent of suppliers face the same fate.
Of course, in the eyes of consumers, design flaws can have as much of an impact on their perceptions of quality as can a defect, said Joe Ivers, executive director of quality and customer satisfaction research for J.D. Power and Associates, regarding J.D. Power and Associates's latest Initial Quality Survey. "Yet many manufacturers have tended to address quality solely on the plant floor without considering design factors."
So it goes and so it goes, now the automotive industry is oft embraced by the general public as an object of contempt, really. What can be done? Wrote Manufacturing Engineering editor Brian J. Hogan:
The auto industry should keep plugging away at the job of designing and manufacturing handsome, high-quality, reliable automobiles. It sounds banal, I suppose, but that's the ticket to the future. Technically sound, well-manufactured, attractive automobiles will find buyers, without discounting or incentives.
Make quality vehicles that are attractive to consumers? There's a novel idea. Can it be that simple?
Resources
Automoblies and Trucks Overview
Plunkett Research Ltd.
What Ford Needs To Do To Pull Out of Its Tailspin
by Kevin Reale
AMR Research, Oct. 24, 2006
Ford to Nearly Double Purchase of China-Made Parts
Bloomberg News (via NYT), Oct. 27, 2006
DCX: Too Many Trucks: Chrysler to cut production
by Katie Merx
Detroit Free Press, Sept. 20, 2006
While Ford Stalls, GM's in Gear
by Rick Newman
U.S. News & World Report, Oct. 29, 2006
Detroit, Downsizing
by Jonathan Fahey
Forbes, Oct. 25, 2006
Ford wants to invest in development
by Yuri Kageyama
The Associated Press, Oct. 26, 2006
Bankruptcy Concerns for Auto Suppliers Continue to Increase, According to New AlixPartners Study
AlixPartners, June 14, 2006
Porsche tops quality survey
CNNMoney, June 8, 2006
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19 CommentsThe problem is an irrational prejudice against American made cars. For a while there, a decade or two ago, perhaps American manufacturers did not offer the best car for the money. That has changed, but the car-buying public's perception has not.
This is partly because only very new cars are considered in the quality ratings. Ten-year-old cars are not. This is where American cars excel.
I've owned vehicles from all over the globe and do 99% of the repair and maintenance. To my mind, American products offer the best value. My view may be skewed because my vehicles tend to be older, and age exaggerates faults.
I love my German cars best but America has them beat in value. Especially when repair time comes.
Japanese stuff is nice when new, but again, duck when the replacement-parts bill comes at you. My experience with Japanese products is that their materials are of inferior quality. Especially the hardware.
Buy American!
November 7, 2006 3:29 PMLance, I agree with you about the American cars; the parts are cheaper and easy to work on.
Maybe the Big 3 could go into business making parts for the Japanese cars.
Good post.
November 7, 2006 4:42 PMShame on the "Big 3." This is their second round of woe and misery because of high fuel prices. They first got their butts kicked in the mid-'70s after the OPEC oil embargo when they allowed the Japanese manufacturers to gain a beachhead in the US market. AND THEY STILL HAVEN'T LEARNED THEIR LESSON!
It's fine to sell huge gas hogs--if that's what people want to buy but their should be a solid line of cars, in the mix, for when the inevitable next gas price spike hits. With India and China building more cars for their own domestic consumption, gas price problems are going to intensify, not go away.
November 7, 2006 4:56 PMGreat blog, many insightful comments.
When we, with our Western European trading partners, contracted for the major oil concessions in Iran, Iraq and Saudi (1928-1933), until we lost those opportunities when they were all taken away by unhappy host countries who nationalized them back (1950-1980), and then awarded contracts to our competitors and enemies; we had inexpensive gasoline.
Now it is three dollars a gallon and still affordable for most in Los Angeles. When the next inevitable downward blip hits our economy, fuel price and automobile economy will, again, become VERY important. Our short-sighted national and international business and political policies will continue to haunt us until we choose to embrace conservation led by leaders and supported by the publc, or until we perform due diligence on our political and business policies, and then speak with our votes and stock purchases. And, in so doing, this will allow less dependence on foreign countries who used to admire us, and now do not, while we improve our world relations.
Let us think as global good citizens in both reduced consumption and respectful value-based foreign business policies. Sign me, tired of fighting to get back what we lost in the Middle East, before we learned it is easier and better to take care of the relationship you have than to create a new one. The Big Three might consider this as well. Thank you.
November 8, 2006 1:30 AMI am doing my part by recently purchasing a 2006 Chevy Cobalt after having lost my older 16-year-old Honda to a flood last year.
Before purchasing a new vehicle, I looked at Honda, Hyundai and Toyota -- all that had sticker prices that made me cringe. It was not until I looked in the GM lineup that I found a vehicle to suit my needs at a price that did not kill my bank account. While the Cobalt is not as POLISHED / REFINED as the foreign counter parts it is made to compete with it does however provide plenty of power with average fuel mileage in the mid 30's on the freeway.
If the Big Three want to survive, IMO they need to take a long hard look at what the competition is doing and make those changes to their own line-ups (i.e, better warranties and refinement issues). Hell, most of the foreign models are assembled in the U.S. anyway, so what is the problem with the Big Three and their workers?
Well, that is my two cents, for what it is worth.
Ciao!
November 14, 2006 2:58 PMThe change that is needed is similar to the information revolution. Cost must drive all factors. Modular electric urban transport will be the technology of the future, and if we do not build or design it, our place in history will be equal to the ancient Greeks: We had some good ideas but did not avoid the hubris. A person can provide all the power necessary for urban transport. Paying to move a 3-ton vehicle with us everywhere we go is a vast luxury we have been lead to accept. This has been very remunerative for those involved, but also very wasteful. Now is when we must change.
November 14, 2006 4:14 PMMake cars that people want to buy at close to retail prices. It really is that simple.
November 14, 2006 5:09 PMThe Big 3 will never recover to see the good old days...too little, too late. Like the rest of our industries that have gone overseas. The "Imports" will continue to increase their market shares here with lower prices and at the same time build new plants here in America to take the place of ours. The once proud slogan "Made in America" is going by the wayside. The quality of Imports continues to get better each year, and cheaper is not necessarily better; but it is what the mass majority here in the USA can afford. That's why they are buying foreign.
November 14, 2006 5:51 PMIt's has been for so long all about the American dollar. Everyone has been too greedy, from the ground on up.
I have been impressed with GM matching the warranty for all new cars. About time, the Big 3 should had done this years ago. Instead, they waited to go with the trend and not start one. A little too late, I hope not.
I'm proud to be an American and always try to remind myself to buy only American products. But why should I sacrifice when the Big 3 are not willing to meet us half way? A good product, service, exceptional warranty and a reasonible price is what I look for.
Now for Ford, no more, giving their time and effort to the gay rights movement. You just took a large back step.
November 15, 2006 9:02 AMThe Toyota Camry was introduced about 1983, and has become the best car in the US -- reliability, gas mileage, etc. The Big Three have had 23 years to re-engineer their cars to have the reliability and efficiency of the Camry.
Yet the big three keep trying to sell "youth, power and love-my-fast-car" instead of concentrating on building a car with close tolerances, better engineering and manufacturing quality. The result of the 'Consumer Reports' magazine survey should be enough to let the big three see the flaws that consumers see.
I will pay more for reliability. Little repairs and flaws require service shop time and loss of auto usage. I don't have time for that inconvenience.
November 15, 2006 1:10 PMI'm 66 yrs. old, have owned Oldsmobiles all my life -- never had any problems with quality & durability. Still have a '97 LSS-150K miles -- never had a front-end alignment -- 30 mpg on a trip. I also own an '04 Malibu V6-33 mpg -- even 4-cyl Japanese cars don't get that.
When you buy Japanese products new, they are fine, but once you make the last payment -- time for a new one
November 16, 2006 8:26 AMExcellent article, David; excellent sources; and, of course, great reader comments. You know I just can't help myself from stepping in on an automotive article.
My first comment is to Patrik. Check your facts, please. Yeah, the 350Z is an impressive car in many respects, with the jewel of that setting being the (albeit aging) 3.5 DOHC V6. The brilliance of that jewel is fading, however. It used to the state-of-the-art, and it's been wisely refined over the years. The brilliance is not so much in the engine anymore, as it is that Nissan has figured out how to use in in damn near their entire line. That's not great engineering, folks; that's great business management.
Anyway, back to the facts. Ford's been using SOHC V6s in Mustangs for several years. So what if it's got 12 valves and the Z has 24. You want a lotta valves, 32 to be exact, get a DOHC Mustang Cobra -- with the added bonus of a supercharger -- and in the 2003-2004 rendition, 16/22 mpg EPA. With estimated, averaged, dyno'd hp at the crank of 420-430 hp bone-stock (purposefully underrated by Ford at 390 hp), you'll have just about all the valves and cams and kicks that you could want. Okay, so that generation's on an old platform. The aftermarket offers anything you need to take care of any chassis stiffness and handling issue, no matter how picky the enthusiast. And if you want a contemporary chassis, get a 2005 or above. Structurally, the new Mustang is worlds above the previous generation, with even the V6 convertible being structurally much stiffer than the 03-04 Cobras. Ford's done their homework on this car. And, c'mon...a Mustang GT produces 300 hp and pulls 17/25 EPA. Compare that to the Infiniti G35 with about the same hp and mpg (19/26) with a V6. I would think the V6 should be much more efficient than it actually is, and pull much better numbers than the larger, porkier, less aerodynamically-efficient 'Stang. The 350Z/G35 are gorgeous, but -- call me a conservative -- gimme the 'Stang anyday.
Also, implying that pushrod technology is old and antiquated just doesn't fly anymore, Patrik. As mentioned in another blog item, look at the new 500 hp Corvette Z06 pulling 16/26 and tell me all about the inefficiencies of pushrod designs. (While the Subaru WRX Sti with a [+/-] 300-hp, DOHC 4-cylinder's getting 19/25. Yeah, man, that Subaru is just a monster of efficiency.) Let's face it: pushrods and cubic inches still work -- and work exceedingly well the way The General has engineered its performance offerings.
Even in large trucks, where's the efficiency of the almighty Toyota? Take a look at full-size, 4WD, auto-trans pickups. Tundra 4.7: 15/18. F150 4.6: 15/19. GMC Sierra Classic 4.8: 15/19. Um, what am I missing? PERCEPTION leads one to erroneously believe that the Toy is more efficient. It's not.
PERCEPTION leads one to believe that Japanese offerings are cheaper. Sticker-for-sticker, yeah, many appear to be. Wait a sec, though. Have you PAID sticker lately? On most Toyotas, you likely will. They've been winning that perceptual war for years, too. In reality, you'll be able to make a much better deal on an American product, especially now. So, you pay less up-front AND in the long-run (with much less expensive replacement parts). You want everything aligning perfectly so you can roll marbles between your hood and fender to impress your friends at a barbeque? Go get a Toyota. You want performance, efficiency and value? Go American.
GM, Ford, and Chrysler ALL have good, very well engineered offerings up and down their lines. I don't think the problem lies in healthcare costs, engineering, manufacturing, lean-this or ERP-that, 'handsome'-rating, or environmental irresponsibility. The problem -- an enormous one -- is trying to shift perceptions more toward reality.
November 17, 2006 11:17 AMOh...
Since the demise of the Supra and MR2, Toyota really couldn't get more ho-hum. Okay, boring. The new FJ Cruiser is slick; give it more hp. Yes, American automakers sometimes do sell youth (which is interesting, since every 'youth' on the planet wants a tricked-out Civic), power/love-my-fast-car (they've got that, if you're so inclined). I do love my (usually garaged) fast car, but let's face it: only a small portion of the car-buying public wants to go fast. Most do, in fact, want reliability and value, above all. That's where my 20/30 mpg Lumina cop car 'beater' comes in. I'll be the one having more fun, LC, while stealing your parking place at the NAPA Auto Parts store -- to spend less -- while your Camry's gettin' all tip-toed and costing you a fortune for an alternator. Life is good.
November 17, 2006 12:22 PM
