Fanfare and Fidgeting in Detroit

A gospel choir belting out “Oh Happy Day” heralded the unveiling of a retro-styled Ford concept car. Cascades of confetti formed a rainbow tumbling onto a brand-new Ford Thunderbird. A new Cadillac truck burst onstage amid dry-ice fog and strobe lights. And Chrysler sent its latest Jeep clambering down an elaborate man-made mountainside.

But underneath all the fanfare at the current North American International Auto Show, there is an underlying gloomy outlook for the traditional Big Three auto makers.

General Motors Corp. saw its market share drop to a post-World War II low last year and is cutting thousands of white-collar jobs.

At Ford Motor Co., costs associated with the Firestone-Explorer tire debacle, product recalls and launch problems have cost the auto maker $1.5 billion, and the company is expected to post sharply lower fourth-quarter earnings today.

DaimlerChrysler had a disastrous 2000 anyway you slice it. Among other startling facts, its car and truck manufacturing business finished the year with cash reserves of exactly zero.

All of the Big Three have idled plants to shrink bloated inventories of unsold vehicles. And despite record U.S. industry sales of 17.4 million new cars and trucks last year, all three declined as consumers flocked to imports. This year, with the market expected to shrink by 1 million to 1.5 million units, the U.S. companies are looking at further contraction, even though 2001 is likely to end up the third-best year ever for auto sales in this country.

The Big Three’s woes are largely their own doing, from misjudging what Americans would pay for cars and trucks to rushing new models to market at the expense of quality. Tougher economic times on top of that come just as Asian and European brands seem to be making all the right moves in the U.S. market, delivering hot-selling new products and finding ways to expand even as the larger market contracts.

At the same time, some once-struggling imports have made pronounced gains in reliability--South Korean makes and VWs spring to mind. And imports have become more savvy in developing vehicles that the U.S. market wants. High-profit trucks in particular, such as Honda Motor Co.’s Odyssey minivan and Toyota Motor Corp.’s Tundra pickup, have gnawed away at Big Three stalwarts.

In effect, they’re beating the Americans at their own game.

“Part of the impact on the Big Three is due to the fact that international companies are moving more and more product in segments that were historically owned by the Big Three--pickups, SUVs, that type of thing,” said David Cole, director of the Center for Automotive Studies. “We’re seeing more people enter the marketplace the Big Three had to themselves for a long time.”

With inventories already backing up, the U.S. manufacturers are bracing for tougher times.

“The slowing rate of sales is exacerbating the excess supply. Therefore, further production cuts may be necessary in the first half, which will likely pressure the entire industry’s earnings,” said John Casesa, Merrill Lynch’s senior auto analyst.

Industry leader GM saw market share shrink another point last year to 28.1%. The company said Wednesday that fourth-quarter earnings fell 51% from a year earlier. Chief Financial Officer John Devine last week said GM must bring on a barrage of new and redesigned trucks to stem the slide.

“The product is leading a lot of the charge in terms of getting market share right,” he said. “Frankly, I would welcome some stability in market share.”

But slowing sales are but one part of the picture for the Big Three.

Ford Chief Executive Jac Nasser stunned analysts last week when he said quality problems will end up costing the No. 2 American auto maker $1 billion for 2000, adding to the $500 million Ford has already written off because of the massive Bridgestone/Firestone Inc. tire recall.

Ford’s compact Focus, the best-selling car in the world, and its Escape small sport-utility vehicle were plagued by product recalls before and after their launches--an embarrassment to a company whose slogan once was “Quality Is Job 1.”

Daimler’s Chrysler Group is hemorrhaging red ink after a year of heavy incentives--rebates, discounts and cheap financing--that slashed profit for the sake of moving metal off dealer lots. Incentive-based losses on its all-new 2001 minivans, which are widely regarded as overpriced, were one factor in the replacement of the group’s president, James Holden, by Dieter Zetsche, a veteran of Daimler’s German businesses.

GM and Ford also rely heavily on such discounts.

“Those incentives were just thrown out there this past year and got us up to 17.4 million [units sold], but now it’s payback time,” said J.D. Power III, head of the Agoura Hills product quality consultancy that bears his name. He estimates that manufacturer incentive spending last year was an enormous $35 billion, or about $2,000 per vehicle, compared with about $13.5 billion spent on automotive advertising.

All three American auto makers have implemented year-end and first-quarter production cuts to clear out unsold inventory amid hopes that things will look better by the second or third quarter.

“We’re trying to take all the medicine we need to take in the first quarter--get our inventories in line by the end of the first quarter so that we can run the rest of the year on an even keel,” said Ron Zarrella, GM’s president for North America. “The potential is still there to have a pretty good year.”

The Federal Reserve’s recent interest rate cut and possible tax cuts by the incoming Bush administration have lessened fears in Detroit of a full-blown recession. Car makers now see sales picking up in the second half of this year.

“There’s nothing fundamentally wrong with the economy,” Zarrella said in an interview last week. “Some things have to happen to get consumer confidence turned around, and the Fed rate reduction will go some way toward doing that. So we believe consumer confidence is going to come back.”

But a look at the Chrysler side of DaimlerChrysler shows how deep the Big Three’s problems have become. The Chrysler Group--as Chrysler, Dodge and Jeep are now known--lost an estimated $1.7 billion in the last two quarters. Zetsche, Chrysler’s new chief, says he expects to hold even in market share in 2001, but that would mean 10% fewer vehicles sold on top of last year’s 4.4% decline. Operating profit for the year would be just a tenth of what it was in 1999.

The red ink has left Chrysler reeling. “I don’t see that it can get much worse than this,” Zetsche said in an interview.

Analysts, meantime, are skeptical of any quick recovery.

“What we fear is that the structural problems that Chrysler faces will take much more time to resolve, and that the unique circumstances that allowed Chrysler to earn margins that were superior to those of Mercedes will never return,” Merrill Lynch’s Europe-based automotive analyst, Steven Reitman, said in a report to investors last week.

To the dismay of the domestic auto makers, the importers were the winners last year and likely will be again this year. And again, their gains are likely to come out of the Americans’ hide.

“If we take 1.1 million, 1.2 million units out [of 2001 sales], you’re going to see that most of it comes out of the domestics, and there’s going to be a big change” in market share, Power said.

South Korean makes, in particular, continued their meteoric rise last year, pursuing a strategy of dominating the market for lower-priced small cars. U.S. sales rose 48.8% at Hyundai Motor Co. and 19.3% at its Kia affiliate. Daewoo Motor Co. continued its triple-digit sales surge, increasing 122%.

But the Europeans and virtually all the Japanese makers in this market are thriving too.

“The niches that Chrysler was able to so profitably exploit in light trucks have now been overrun by excellent entries from the Japanese and others,” Merrill Lynch’s Reitman said.

Honda, in particular, has moved shrewdly. Overall sales rose 6% last year, and its Odyssey minivan with its foldaway third row of seats has eaten significantly into the sales of minivan leader Chrysler. Honda expects U.S. sales to rise about 3.5% this year. But its Acura division could see an 18% surge, thanks partly to the upcoming RS-X sports coupe.

Toyota is expanding its truck factory in Indiana, where it will soon begin producing minivans that Japanese sources say could include an upscale Lexus model. Lexus itself has quietly become the top-selling luxury nameplate in the U.S. for the first time--and only 11 years after the brand was introduced.

Nissan Motor Co., despite deep troubles at home, is building a factory in Mississippi for a full-sized truck that will take on the Americans in their most profitable sector. Even smaller Japanese auto makers--including Mitsubishi Motors Corp., Fuji Heavy Industries’ Subaru brand and Suzuki Motor Corp.--have announced plans to expand factories in this country or their U.S. product lines.

Volkswagen of Germany and its Audi luxury division also continued to surge last year, with VW sales growing 12.6%. VW is projecting a further gain in this year’s tighter market, including double-digit sales growth for Audi after its record 2000.

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Slow Lane, Fast Lane

Bracing for a sales downturn, the U.S. Big Three have announced first-quarter production cuts of 17% to 26%. At the same time, the major foreign manufacturers are generally forecasting higher sales in 2001, with such vehicles as the Acura RS-X sports coupe the Suzuki XL7 small SUV and the Kia Rio station wagon leading the charge.

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Sources: Autodata Corp., Automotive News Data Center