After a record year of sales in 2000, what could the auto industry do for an encore in 2001?
Against all expectations, the industry again had a banner year of sales.
But the numbers come at a cost for the traditional U.S. Big Three automakers. Because of the unprecedented financing deals offered to reverse falling sales after the September terrorist attacks, the near-record volume brings little or no profit–or even losses.
Crisis after crisis brought down Chief Executive Jacques Nasser at Ford Motor Co. Rival General Motors Corp. hired veteran product guru Robert Lutz to oversee a revamping of its lineup. Both companies overhauled their North American executive leadership.
Japanese and South Korean automakers, continued their assault on domestic dominance, scoring their biggest gains in a decade and largely without following the Big Three on interest-free financing.
Zero-percent painful
GM pioneered the no-interest deals when sales stalled nationwide as consumers stayed away from showrooms after Sept. 11. The no- and low-interest financing saved sales in the fourth quarter, clearing out dealer inventory. But the automakers don’t foresee the strong demand continuing, and they have eased production.
“There’s no question” that the cutbacks will hit sales hard in the first and possibly second quarters of the new year, said Diane Swonk, chief economist with Bank One Corp. in Chicago, noting: “We’ve got sales with no production. They’ve still got to replenish the bare cupboard.”
Still, said David Littmann, chief economist for Comerica Bank in Detroit, there are signs of recovery beyond the short-term profit woes.
“The Big Three are cutting costs pretty dramatically. I don’t think next quarter will go to hell in a handbasket,” he said. “For the first quarter, I think they can show a turnaround in the profit situation.”
The automakers, grateful the metal is moving, groan at the cost.
Changes at Big Three
It was a tumultuous year in Michigan, with the exodus and reshuffling of top automotive executives continuing from 2000.
Nowhere were things more in turmoil than at Dearborn-based Ford, which faced financial setbacks, extraordinary charges related to Firestone tire recalls, delayed vehicle introductions and the ouster of Nasser. William Clay Ford Jr., the non-executive chairman and a great-grandson of company founder Henry Ford, took Nasser’s place, putting a family member at the helm for the first time since 1979.
Lawsuits continued in the wake of hundreds of deaths in Firestone-related crashes, mostly involving Ford’s Explorer sport-utility vehicles. By last January, the automaker had spent $500 million to replace 6.5 million tires recalled the previous August by Bridgestone/Firestone Inc.; Ford in May announced its own recall of 13 million additional Firestone tires at a cost of $3 billion.
The redesigned 2002 Explorer was recalled twice, and the 2002 Thunderbird was delayed, making it the fourth new Ford in a row beset by launch setbacks.
And analysts warn that Ford will suffer from a lack of new product.
“GM has a relatively low but steady replacement rate,” said John Casesa, Merrill Lynch’s senior auto industry analyst in New York, in a December report on the U.S. auto market in 2002-2005.
“Ford, as many investors already fear, faces a pronounced product drought until 2005,” Casesa said, noting that “the Japanese and Korean manufacturers will have massive launch activity in the 2003 model year.”
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Bill Ford said he recognizes the challenges.
“We had our day in the sun, and [GM] took a pounding, so now it’s our turn in the barrel,” he said. “We certainly have issues.”
He and a new management team are going through every business Ford conducts to weed out the distractions and concentrate on building cars and trucks.
At GM, Chief Executive Rick Wagoner could boast of rising quality, productivity and market share as 2001 closed. New products such as the Chevrolet TrailBlazer and Cadillac Escalade SUVs were hits.
GM, the world’s largest automaker, hired Lutz as vice chairman to turn around product design.
“GM has been down for so long, I think they emerged from 2001 as a leader through zero-percent financing, which was very well executed and clearly communicated; by halting their slide in market share; and by hiring Bob Lutz to do product development,” said Tom Libby, director of industry analysis for J.D. Power & Associates in Detroit. “None of that could have been predicted a year ago.”
Wagoner & Co. also could point to GM’s renewed prowess in light trucks, as it sold more SUVs, pickups and minivans than Ford, regaining the crown for the first time since 1994.
“The big story [this] year will be whether GM’s risky realignment at the top will pay off,” said Michael Flynn, director of the University of Michigan’s Office for the Study of Automotive Transportation. “Will there be new product and spirit at GM, and will the products work in the marketplace?”
Chrysler Group–the Chrysler, Dodge and Jeep brands–plodded through a restructuring announced in February, which included shedding 26,000 workers, taking a $2.8 billion charge, wringing price concessions from suppliers and selling non-core assets.
“Obviously we are very well alive, so it’s not killing us, but clearly we think we should not only worry about the volumes, but that we should strive to rebuild margins,” Chrysler Group Chief Executive Dieter Zetsche said.
Chrysler, wading in red ink, is an unwilling player in the escalating no-interest finance game, which costs the automakers an estimated $1,500 to $3,000 per vehicle sold.
Asian brands strong
While turmoil swirled in Detroit, No. 1 Japanese automaker Toyota Motor Corp. seemed poised to become the first importer to grab a 10 percent share of the U.S. market, though it ended with 9.2 percent.
But 2001 was no aberration. What happened with Toyota and the other Asian brands, in particular red-hot Hyundai Motor Co. of South Korea, has been building for years. And if anything, pressure on the domestic brands from Asian automakers will increase this year.
In particular, a reborn Nissan Motor Co. will get deeper into a product offensive that began in late 2001 with cars such as the redesigned Altima and Infiniti Q45.
Honda Motor Co. is following the success of its Acura MDX luxury SUV with a smaller Honda model called the Pilot. Mitsubishi is redesigning its Montero Sport, and smaller Asian brands are looking at trucks to expand their presence.
Also, the Asians have the only hybrid-propulsion cars being sold in the U.S.: Toyota’s four-door Prius and Honda’s two-seat Insight combine small gasoline engines with electric motors to improve fuel economy without diminishing performance. Honda this year will add to its fleet with a hybrid version of its Civic, a move analysts say will help bring the hybrid into the mainstream.
As the domestic automakers are idling plants and furloughing workers, Toyota, Honda, Nissan and Mitsubishi plan to build new North American plants or enlarge existing facilities.
Even the South Koreans are getting into the act, with Hyundai, which owns Kia Motors Corp., expected to announce plans this year for its first U.S. factory.