Chrysler and Ford Report Lower Profits : Higher Taxes, Strikes, New-Product Costs, Sales Incentives Cited
Ford and Chrysler reported Thursday that their 1985 profits declined sharply from the record levels posted in 1984, as higher taxes, strikes, product development costs and sales incentive campaigns offset sales gains during the year.
At the same time, Chrysler announced a novel, $710 price cut on base models of its Dodge Omni and Plymouth Horizon subcompacts as part of its effort to compete head-on with cheap imports from Japan and South Korea. Chrysler claimed the move represented the biggest permanent price reduction (excluding temporary sales incentives) on a domestic car in Detroit’s history and said it was made possible only after the company slashed production costs, lowered its profit margins and won concessions from its suppliers, dealers and the Illinois workers who build the cars.
Chrysler Chairman Lee A. Iacocca described the decision to offer the cheap subcompacts, which will be priced at $5,499, as an “experiment” to determine whether the domestic industry can still compete with the imports at the low end of the car market.
Not Abandoning Low End
“Before we bury the American small car forever, we are going to give it one more chance at life at Chrysler,” Iacocca said. “We’re not going to abandon the low end of the market and the jobs that go with it without a fight.”
Meanwhile, Chrysler announced that it earned $1.64 billion in 1985, down 31.3% from 1984’s record level of $2.38 billion, despite record worldwide sales of $21.25 billion, up 8.6%. In the fourth quarter, Chrysler’s earnings plunged 64.7% to $215 million while sales rose 0.7% to $5.38 billion.
Chrysler said strikes in the United States and Canada cost the company about $150 million in lost profits while the payment of $250 million in lump-sum bonuses to union workers and retirees further depressed earnings for the year.
But Chrysler still ended the year with the largest cash cushion in its history--nearly $2.8 billion--even after spending $1.5 billion on new product programs and after making three acquisitions during the year. Chrysler Financial, the auto maker’s financing subsidiary, acquired E. F. Hutton Credit and Finance America for a combined $530 million, while the parent company bought Gulfstream Aerospace for $641.8 million.
Most of Decline in U.S.
Ford said its earnings slipped to $2.52 billion during the year, down 13.5% despite a slight rise in sales to $52.77 billion, up 0.8% from 1984’s $52.36 billion. Ford said the earnings decline was caused by a sharp increase in costs incurred because it was forced to offer sales incentives such as cut-rate financing to keep up with the competition and also because it was bringing out several new models.
The No. 2 auto maker said most of the drop in its profits came in the United States. Its earnings from U.S. operations fell nearly 17% to $1.99 billion while overseas earnings rose slightly to $527 million.
In the fourth quarter, Ford’s profits were virtually unchanged from the year before. The company earned $720 million on sales of $14.1 billion, compared to earnings of $721 million on sales of $13.4 billion in the last three months of 1984.
Combined, the Big Three auto makers earned a total of $8.13 billion during 1985, down 17% from last year’s total of $9.8 billion. GM reported earlier this month that its earnings fell 11.5% to $3.99 billion last year.
But despite the fact that the domestic industry is still reporting huge profits, competition in the low end of the car market is more intense than ever before, and Chrysler’s move to slash subcompact prices seems to be an effort to combat the new mini-cars arriving from South Korea and other Third World countries whose shipments are not limited by the kind of quotas that restrain Japanese imports.
But Iacocca said Thursday that Chrysler’s price cuts will make the Omni and Horizon “America” models, to be introduced as 1987 models on May 15, less expensive than any comparably equipped Japanese cars. Iacocca added that they will be the first Chrysler products priced under $5,500 since 1980. The two models, which will have only limited option packages available, will be on sale for about one year, until Chrysler’s small car plant in Belvidere, Ill., is retooled to build larger models, Iacocca said.
To fund the price cuts, Iacocca said Chrysler is obtaining 10% price reductions from parts suppliers while its dealers will be giving up some of their traditional subsidies given by the company to finance and sell the vehicles.
