Serious Woes for U.S. Auto Makers

Will the great U.S. automotive companies, General Motors Corp. and Ford Motor Co., go the way of the steel industry and become lumbering financial cripples, clinging to survival in the shadow of foreign competitors?

That’s a serious question asked by many experts these days despite what appears to be another highly successful year of record vehicle sales for the industry. Consumers have never had it so good. U.S. and foreign car and truck producers offer tremendous variety in the U.S. market, low prices and attractive deals on financing.

In an expansive mood, Toyota Motor Corp. said last week that it is planning to build another plant in the U.S. “One more plant is small talk, there will be more plants than one,” Toyota Chairman Hiroshi Okuda said.

But GM and Ford won’t be opening new plants. In fact, the big Detroit companies have to close or modify factories in the next few years if they are to bring their production in line with the numbers of vehicles they can sell at a profit.

Right now they are using zero-percent financing and liberal discounts to sell cars and trucks and keep their factories running. But they are not making much profit on those sales.

And the investment markets are rendering judgments on their plight. GM’s stock price is down 28% in the last three months and Ford’s is down 39%. The total value of all shares of GM and Ford combined is 60% of the market value of Toyota alone. Honda Motor Co., which has only one-third the annual sales of GM, has a larger market value than that of GM.

The U.S. auto makers face a life-threatening problem. GM and Ford and the Chrysler division of DaimlerChrysler have huge liabilities for pensions and health-care costs for hundreds of thousands of retired workers. Those are called legacy costs.

But Toyota, Honda and other foreign firms manufacturing cars and trucks in the U.S. do not have such liabilities and may not have them for many years because their work forces are younger. Also, their health and pension benefit bills are nowhere near as large as those of the U.S. firms, which have more retirees than active workers.

Therefore, GM and Ford are at a long-term competitive disadvan-tage. “Every new plant Toyota opens reduces GM and Ford’s profit potential,” says Maryann Keller, an independent automotive analyst. That’s because Toyota, Honda and Nissan Motor Co., the big three of Japan, are producing SUVs, pickup trucks and vans in their U.S. plants. Those are the very products that gave U.S. auto-motive companies good profits in the 1990s.

But profits are down from their boom-time highs. And the stock market’s two-year decline is hurting the returns on GM and Ford’s pension funds.

As a result, GM may have to inject $16 billion into its pension fund over the next four years and Ford may have to put in $4 billion to $5 billion, according to a study by investment banking firm Goldman Sachs. That promises to limit the firms’ potential profit growth.

The companies, led by GM, are taking drastic action. One reason GM introduced no-interest financing after Sept. 11 last year was because running the plants and producing more cars led to lower costs per car, partially offsetting the costs of low-interest loans to customers. Also, cutting back production would not have saved money because GM, Ford and Chrysler’s unionized work forces collect almost all their regular wages and benefits when plants are shut down temporarily.

GM’s move, directed by Chief Executive G. Richard Wagoner Jr., who has brought in top executives from other firms to revive the big auto maker, is the first phase of a larger strategy, says consultant David Andrea of the Center for Automotive Research in Ann Arbor, Mich.

“It’s a bridge to allow the company to gain market share and then introduce new models with more profit, while working to get costs down and rationalize production,” Andrea says.

GM’s vehicles have 28.5% of the U.S. market, in which 17 million vehicles are sold annually. Ford’s share is about 22%.

But Toyota’s market share is more than 10%, and that of imports and foreign cars produced in the U.S. by all companies is more than 38% and growing.

It is critical that the U.S. firms come back to profitable and competitive operations. And there are signs that they can do so. GM has improved its production efficiency, measured in hours to produce a single car or truck. It is still not as efficient as any of the Japanese Big Three but it is gaining. And serious negotiations next year with the United Auto Workers union will try to achieve long-term solutions.

Also, Detroit must rediscover how to make appealing cars that can be sold without big discounts.

The big Detroit companies may not be the force in the U.S. economy that they were decades ago, when GM sold one of every two vehicles in the U.S. and employed double its current work force of 355,000. But the industry, including suppliers to the U.S. Big Three, is still very important. And it is suffering at the moment. Bankruptcy filings among suppliers to U.S. auto makers are a spreading story in the Midwest, automotive experts report.

What if the U.S. companies can’t return to solid profitability while commanding about 60% of the U.S. market? Then the U.S. government may have to step in to handle some of those legacy costs, says economist Harley Shaiken, a labor expert at UC Berkeley.

The unequal burden of pensions and benefits is not simply the result of union-management relations in Detroit, Shaiken says. “Governments in the home countries of German and Japanese companies finance pension and health-care costs. Those companies never shoulder the burden that private firms do in the U.S.,” Shaiken says, although their U.S. subsidiaries provide benefits and pensions in the U.S. pattern.

But getting Congress to approve a bailout of union contract costs would be tough because a new American auto industry has grown up across the Southern states, where high-paying--but nonunion --automotive jobs are replacing lower-wage textile employment. Alabama soon will account for 3.5% of U.S. auto production; Nissan is building a plant to pro-duce 400,000 vehicles in Missis-sippi. And San Antonio believes it is a finalist for the next U.S. Toyota plant, the company’s fourth.

Why are all the foreign firms making cars here? Because U.S. purchasing power makes this just about the only market in a world of auto production overcapacity in which a firm can make a real profit. By some estimates Toyota, which sells 1.7 million vehicles in North America--more than 750,000 of them produced in the U.S.--earns almost all its profit in this market.

How did once-powerful U.S. companies lose their hold on such a market? Self-inflicted wounds are partly to blame. “In the 1990s, when they made good profits, GM and Ford bought back shares to make the mutual funds happy and support their stock prices,” says analyst Keller. “They should have used the money for product development.” Now mutual funds and other investors have downgraded the U.S. auto companies, showing that it’s not financial tricks but the potential for profit and growth that commands investment markets.

Detroit’s Big Three, having learned hard lessons from competition, have hard work to do.

James Flanigan can be reached at jim.flanigan@latimes.com.