No Letup to Auto Industry Struggles
Labor negotiations will add a new wrinkle to the auto industry’s upcoming year, but observers say the overriding theme will be much the same as in 2002: more incentives for consumers and more worries about costs, profits and market share.
No-interest financing and other deals have become a trademark of the industry, leading to vigorous sales: When automakers close the books for 2002, the U.S. sales tally is expected to be about 16.7 million vehicles, one of the best years ever.
But what’s been good for consumers hasn’t always been for manufacturers. Incentive programs that began soon after the Sept. 11 terrorist attacks have hampered profits and stock prices at General Motors Corp., Ford Motor Co. and DaimlerChrysler’s Chrysler Group, among others.
By year’s end, automakers in North America will have provided about $40 billion in incentives, said analyst J Ferron of PricewaterhouseCoopers.
“And you wonder where the profits have gone,” Ferron said.
Market share is shrinking along with profits. Although the traditional Big Three -- GM, Ford and Chrysler -- controlled about 72% of the U.S. market six years ago, that number has dwindled by nearly a dozen percentage points as Japanese and other foreign makers have expanded.
The charge continues as Toyota Motor Corp., Honda Motor Co., Nissan Motor Co. and Hyundai Motor Co. add new vehicles and manufacturing capacity in North America. A major addition next year will be Nissan’s assembly plant in Canton, Miss., which is set to begin production in the spring and eventually employ 5,300 people.
Some analysts predict that foreign brands will have 50% of the U.S. market in the next five years.
“I think you can safely say ... that all of them have their pedal to the metal,” said George Peterson, president of AutoPacific Inc., a Santa Ana-based automotive market research firm.
A fuzzy economic picture and the likely need for further incentives will only heighten financial worries in the new year, analysts say.
“If you look at the industry over the past several years, what you see are more cars with more content at lower prices,” said John Hoffecker, a vice president at the management consulting firm A.T. Kearney.
“Each of them, whether it’s Ford, Chrysler, GM, or whether it’s any of their suppliers, is going to have to continue to reduce costs in an accelerated fashion,” he said.
Hoffecker said it’s difficult to predict sales patterns for next year, although some forecasts say overall U.S. volume is likely to decline 3%. Adding to the uncertainty is a possible U.S. attack on Iraq and its implications on fuel supplies and prices.
Upcoming contract talks between the United Auto Workers and the Detroit automakers is another challenge. The current agreements on wages and benefits for more than 300,000 UAW workers at GM, Ford and Chrysler and auto parts suppliers Delphi Corp. and Visteon Corp. expire in September.
The UAW could find it difficult to match the pay hikes and job security measures negotiated in Canada in 2002 for GM, Ford and Chrysler workers there.
In 1999, when U.S. contracts were last negotiated, the UAW leveraged strong corporate profits and industry sales into a four-year contract that provided 3% annual pay increases and prohibited plant closings.
Since then, GM, Ford and Chrysler have lost U.S. market share and faced other difficulties, such as billions of dollars in pension fund deficits.
Big factors between now and then will be the economy, new car and truck sales and ongoing restructurings at Ford and Chrysler.
Both companies are in the midst of major turnarounds that include tens of thousands of job reductions.
Ford, which turns 100 in 2003, is nearly 12 months into a five-year revitalization plan that calls for the elimination of 35,000 jobs globally -- part of its goal to improve profit by $9 billion by mid-decade.
Analysts say Ford appears to be progressing in its effort to reduce costs and improve efficiency, but market-share loss, price wars with GM and Chrysler and weak performance by luxury brands such as Jaguar have driven away some investors.
Chrysler expects to finish job reductions in 2003 that are part of its latest restructuring, started in February 2001. To date, Chrysler has made nearly 25,000 of the planned 26,000 cuts.
GM will welcome a new chairman next year, although he has a familiar face: The world’s No. 1 automaker announced in December that President and Chief Executive Rick Wagoner will assume the additional post of chairman in May, succeeding Jack Smith, who is retiring.
GM expected to post, at the end of 2002, its first back-to-back yearly gains in U.S. market share in more than a quarter century. Its share of U.S. car and truck sales rose to 28.1% in 2001 from 27.8% in 2000.
A big issue for the company is the drain on profit caused by its stake in foreign outfits such as Isuzu and Fiat.
“The situation has gotten a lot more serious during the course of 2002 and looks like it will be an issue for GM’s cash flow,” said analyst David Healy of Burnham Securities Inc.
