Auto Industry Still Trying to Right Itself After Tough Year
After a record year of sales in 2000, what could the auto industry do for an encore in 2001?
Against all expectations of a year ago, the industry is set to record its second-best sales year, projected to come in between 17 million and 17.2 million units when results are announced Thursday, just short of last year’s 17.4 million.
But the robust numbers come at a withering cost for the traditional U.S. Big Three auto makers. Because of the unprecedented cheap financing deals offered to reverse plunging 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 auto makers, meanwhile, continued their assault on domestic dominance, scoring their biggest gains in a decade and largely without following the Big (but Dwindling) Three down the interest-free financing chute.
GM pioneered the no-interest deals when sales stalled nationwide as consumers stayed away from showrooms in the days after Sept. 11. The no- and low-interest financing saved sales in the fourth quarter, clearing out accumulated dealer inventory. But the auto makers don’t foresee the strong demand continuing, and they have eased production going into the new year.
“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 auto makers, though grateful the metal is moving, groan at the cost.
“Whereas October was ridiculous, now it’s only horrific,” Ford Chief Financial Officer Martin Inglis said. He noted that Ford offered fewer no-interest loans in December and a greater mix of low-interest financing.
But he is not saying goodbye to rebates and cheap loans by any means.
“If the industry falls off, what will manufacturers do? My hypothesis,” he deadpanned, “is they’ll juice the market up” with more marketing and incentives.
To Inglis, any marketing costs above 10% or 12% of revenue are of concern, but third-quarter costs leaped from 14% to 16%, with October even higher than that.
“I do believe that after 9/11 the industry needed to be jump-started,” he said. “The only question was: Is this the way to jump-start it?”
Ford Stumbles
It was a tumultuous year in Michigan, with the steady exodus and reshuffling of top automotive executives continuing from 2000.
Nowhere were things more in turmoil than at Dearborn-based Ford, which suffered financial setbacks, extraordinary charges related to the Firestone tire recalls, delayed vehicle launches and finally the ouster of CEO Nasser. William Clay Ford Jr., the nonexecutive 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.
Trouble appeared on many fronts.
Lawsuits continued to mount in the wake of hundreds of deaths in Firestone-related crashes, mostly involving Ford’s Explorer sport-utility vehicles. By last January, the auto maker 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 all-new 2002 Thunderbird was delayed, making it the fourth new Ford in a row plagued by launch setbacks.
Ford Europe veteran Nick Scheele was brought in to oversee North American operations, even as Ford announced it would slash up to 5,000 white-collar jobs and cut its earnings forecast and dividend for the first time in a decade.
The September attacks hurt sales at Ford and at the other major auto makers, but Ford’s third-quarter loss marked the first back-to-back quarterly red ink in nearly 10 years, to the tune of $692 million.
Finally, in late October, Bill Ford showed Nasser the door.
As if the sea of bad news weren’t enough, analysts warn that Ford will suffer from a lack of new product hitting the market.
“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, by contrast, “the Japanese and Korean manufacturers will have massive launch activity in the 2003 model year.”
The Japanese plan to replace a whopping 91% of their current volume in the next four years or so, meaning “Ford’s product line will lag the industry’s in freshness,” Casesa said. The main arrivals in 2002 are a new Expedition and its sister truck, the Lincoln Navigator, as well as the smaller Lincoln Aviator SUV.
Bill Ford told The Times last month that he recognizes the challenges ahead.
“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.
“We’re looking at everything, top to bottom,” Ford said. “We’re going through all the consultants--and all the excuses as to why they can’t get their jobs done.”
“I don’t ever want to look back,” the 44-year-old scion said. “I want to keep the best of what makes Ford special. Part of that is a focus on product. Part of running a big company is listening to what people tell us. We have to spend a lot of time communicating.”
GM Hums Along
At General Motors, CEO G. Richard Wagoner could boast of rising quality, productivity and, importantly, market share as 2001 came to a close. New products such as the Chevrolet TrailBlazer and Cadillac Escalade SUVs were hits.
GM, the world’s largest auto maker, hired ultimate Detroit car guy 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 143,992 more SUVs, pickups and minivans than Ford through November, regaining the leadership crown for the first time since 1994.
Cut it any way you like, said George Pipas, Ford’s director of sales analysis and reporting, “[but] they can’t say they have the best-selling brand [Ford], the best-selling SUV [Ford Explorer] or the best-selling truck [Ford F-150 pickup].”
It’s a rivalry that all will be watching given the new management teams in place: Scheele and other key additions at Ford, and Lutz and new North America President Gary Cowger at GM.
“The big story next 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?”
A Subdued Chrysler
DaimlerChrysler’s Chrysler Group--the Chrysler, Dodge and Jeep brands--plodded through a restructuring plan 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 told The Times last month.
Chrysler, already wading in red ink, is an unwilling player in the escalating no-interest finance game, which costs the auto makers an estimated $1,500 to $3,000 per vehicle sold.
“It’s like taking a drug addict who is getting used to the monthly fixes, and now you don’t get your monthly fix anymore and suddenly you develop all these withdrawal symptoms,” Chief Operating Officer Wolfgang Bernhard said. “Then the market goes down, and you’ve got to have the guts not to go to the drug anymore to get another fix.”
Chrysler, in any case, is going ahead with the much-anticipated Crossfire, which originally was to be introduced Sept. 12 at the Frankfurt International Motor Show in Germany but was postponed because of the terrorist attacks.
The Crossfire--”essentially a coupe built on Mercedes’ superb last-generation E-Class platform,” analyst Casesa of Merrill Lynch noted--will be unveiled Thursday at the Greater Los Angeles Auto Show.
“The car should look great, perform terrifically and achieve quality levels perhaps below Mercedes’ but far above Chrysler’s,” he said, comparing Daimler’s luxury and mainstream lines.
While turmoil swirled in Detroit, No. 1 Japanese auto maker Toyota Motor Corp. was poised at the end of November to become the first importer to grab a 10% share of the U.S. market.
Overall, the Asian brands increased their market share to slightly more than 30% while the domestics saw their grip slip to an all-time low of 63.5%.
Importers Ascending
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 auto makers will increase this year.
“It’s been a combination of things, including the bigger Asian brands entering segments, like full-size trucks and sport-utility vehicles, that had been exclusively the domain of the domestics,” said analyst Wes Brown of Nextrend, a Thousand Oaks-based automotive consulting firm.
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, which set industry standards for power and performance while demonstrating that Japanese cars don’t have to look bland.
Nissan President Carlos Ghosn, who brought the company from the brink of insolvency in 1999 to record profitability last year, said the company will have almost a dozen new cars and trucks for the North American market in the next five years.
The smaller Asian companies aren’t sleeping either. Mitsubishi Motors Corp., which saw U.S. sales rise last year despite deep image troubles at home in Japan, plans seven new cars and trucks for the U.S. by 2007. Ford affiliate Mazda Motor Corp. says it will launch at least 10 new or redesigned models by 2005, including the resurrection of the rotary engine in the uniquely styled RX-8--a four-door sports coupe--this summer.
When Toyota launched its Tundra pickup two years ago and immediately topped Ford and General Motors in buyer satisfaction and initial quality surveys for full-size pickups, it started a landslide that is still gathering momentum.
Indeed, while enthusiasts eagerly anticipate the release this year of the Nissan 350Z sports coupe, the company also will introduce its first large pickup and is expected to follow it, as did Toyota, with a full-size SUV.
Honda Motor Co., though not in the pickup market, is following the phenomenal 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 as a way to expand their presence.
But it’s not all trucks.
The Asians so far have the only hybrid-propulsion cars being sold in the U.S.: Toyota’s four-door Prius and Honda’s two-seat Insight both 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 auto makers are shuttering plants and furloughing workers, Toyota, Honda, Nissan and Mitsubishi are planning to build new North American plants or enlarge existing facilities.
Even the South Koreans are getting into the act, with Hyundai--which owns rival Kia Motors Corp.--expected to announce plans this year for its first U.S. factory. Hyundai Motor America, whose 2001 sales through November were up an industry-leading 41.9%, and Kia Motors America, which was up 41.2%, recently broke ground in Irvine for a jointly operated U.S. advanced design and engineering facility.
The U.S. market “is being taken over by the youngest members of the baby boom generation, the Gen-Xers and the leading edge of Generation Y,” analyst Brown said. “And those are all people who grew up in households where import cars were acceptable, even preferred. After all, it was the boomers who made Toyota and Honda in the ‘70s.”
The Europeans also came on strong in 2001, and with little help from rebates or deeply discounted loans.
BMW expanded sales by a vigorous 15.4% from last year’s record pace, vaulting from fourth place in 2000 to second place among luxury brands through November, trailing only segment leader Lexus. While European and Japanese luxury marques prospered, GM’s Cadillac fell to fourth place in the segment and Ford’s Lincoln to sixth.
Volkswagen and its Audi luxury division enjoyed another strong year. Audi sales were up 4.3% through November, and although VW’s were down 0.7% from a robust 2000, the two brands have succeeded in the U.S. without truck products, effectively competing in only half the U.S. market.
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Jones, who reported from Detroit, can be reached at t.jones@latimes .com; O’Dell, based in Orange County, can be reached at john .odell@latimes.com.
