Detroit: Economy stalls on Motown carmakers

The three Detroit-based carmakers are on the road to recovery. Or are they?

General Motors, Ford Motor and Chrysler are aggressively working to restore their core North American operations to profitability by cutting costs and building vehicles Americans want to buy.

But a combination of weakening US consumer confidence, fierce competition and credit-market turmoil has thrown a spanner into their efforts.

GM, widely seen to have made most progress, has won applause for some new models, such as the Chevrolet Malibu and Cadillac CTS sedans, and a stable of three Buick, GMC and Saturn crossover vehicles.

Peter DeLorenzo, author of the autoextremist.com blog, enthused recently about “a hunger at GM that hasn’t been seen since their Glory Days of the 60s”.

At Ford, Alan Mulally has pulled out the stops to break down long-standing regional fiefdoms since he took the helm in September 2006.

Mr Mulally has, among other changes, laid the groundwork for global co-operation in designing and building new vehicles. This approach is being applied for the first time in developing a new version of the Fiesta small car – formerly known as the Verve – going on sale in Europe later this year, followed by Asia in 2009 and North America in 2010.

Chrysler, the smallest of the three, is going through a shake-up after its acquisition last August by Cerberus Capital Management, the New York hedge fund.

The new management team has embarked on an ambitious, four-to-six year plan to rationalise its product line-up and reduce its dealer network.

It has launched a drive to boost overseas sales, which made up 9 per cent of total shipments last year, compared with close to 60 per cent at GM. The strategy involves seeking partnerships with foreign carmakers, along the lines of a deal with Nissan for the Japanese carmaker to build small cars for Chrysler, to be sold initially in Latin America from 2009.

All three companies are set to reap benefits from ground-breaking new labour contracts hammered out last autumn with the United Auto workers union. These will see the union take over management of the companies’ healthcare plans, relieving them of an ever-rising cost. The companies have won the ability to hire thousands of workers at far lower wages and less advantageous benefits. The contracts also pave the way for more flexible work practices.

Since the contracts were signed, the three companies have unveiled huge new buy-out offers that will enable them to shed tens of thousands of well-paid jobs.

Detroit has made progress on other fronts as well. The carmakers have adopted a more targeted approach to the discounts and other incentives used over the past six years to boost demand.

They are gradually slimming down their bloated dealer networks. GM has 6,800 US dealers, down from 7,400 four years ago.

They have also pared their reliance on the car-hire industry. GM and Ford cut low-margin sales to these customers by a quarter of a million vehicles last year.

“We’re delivering on the turnaround plan we established in 2005 and have exceeded expectations on virtually all counts,” Rick Wagoner, GM’s chief executive, said in January.

Jim Press, Chrysler’s co-president, now asserts that “we’re going to be really well positioned to be the best damn little car company in America”.

But such confidence is tinged with caution. The entire industry faces headwinds in the form of lower US sales, high raw material costs and mounting regulatory requirements.

The slowing US economy is the most immediate threat. Car and light truck sales slid to a seasonally-adjusted annual level of 15.24m units in January from 16.65m a year earlier, according to Autodata, a market research firm.

Most analysts – including those at the car companies – project sales for the year of around 15.5m, down from 16.1m in 2007 and 16.6m in 2006. A drop of 200,000 vehicles represents the equivalent of an assembly plant, suggesting further production cutbacks are inevitable.

In a break with the past, all three companies have vowed to cut north American production by however much it takes to keep capacity in line with demand. “Every month, we’re going to look at the market, and see what level demand is,” Ford’s Mr Mulally said recently.

GM disappointed analysts with a $1.1bn pre-tax loss in north America for the fourth quarter of 2007, up from $129m a year earlier. Chrysler trimmed output by 15 per cent in January, compared with a year earlier.

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