CHRYSLER 300
Business Wire file
After a rocky 2005, Detroit faces a bumpy 2006, analysts say. But a line of exciting new cars like the successful Chrysler 300 could give U.S. automakers a boost.
By Roland Jones Business news editor
msnbc.com
updated 1/23/2006 3:03:03 PM ET 2006-01-23T20:03:03

From sinking sales to job cuts by the thousands, it’s safe to say that 2005 was a dreadful year for the American automotive business. Will 2006 be any better? Detroit certainly hopes so. But some industry observers say that despite new vehicles and far-reaching restructuring plans, serious challenges remain for America’s big automakers.

And those challenges look much like the ones that dogged Detroit in 2005 — stiff competition from Asia, tough union negotiations over crippling healthcare and pension costs, and a continued erosion of U.S. market share, as consumers continue to gravitate to foreign automakers such as Toyota and Honda, which have been at the vanguard of new consumer demand for cars with more fuel-efficient gas-electric hybrid engines.

“Sometimes you say a new year can bring a clean slate and refreshment, but that’s not the case for 2006,” said Rebecca Lindland, an automotive analyst at consultancy Global Insight. “2005 was a tough year, and 2006 will be another tough year. In the U.S. market, I don’t see a let-up of the pressure on GM and Ford from the Asian car makers.”

Despite the gloom in Detroit, 2005 ended on a fairly high note. Analysts are predicting full-year sales of around 17 million vehicles, a healthy pace that has held steady over the last 6 years. But GM and Ford still face challenges in 2006 when it comes to selling cars.

While Chrysler has brought out a line of attention-grabbing vehicles — including the 300 sedan and the Dodge Magnum, Charger and Challenger — GM and Ford need to bring out their own lines of must-have vehicles, notes Lindland.

“Young people who wouldn’t normally look at a Chrysler car are flocking into Chrysler showrooms,” she said. “That’s the problem that GM and Ford are facing.”

Another difficulty for Detroit is a growing portion of its sales are moving toward foreign automakers. GM, Ford and Chrysler had a combined U.S. market share of 57 percent at the end of November, down from 60 percent two years before. In sales terms, that’s as many as 600,000 vehicles lost to flourishing competitors such as Toyota, Honda and Hyundai.

U.S. automakers hit a home run last summer with discounts that let consumers pay the so-called “employee” price, leading to near-record sales. But as soon as the discounts expired in October, sales plummeted. GM, Ford and Chrysler have vowed to pull back on incentives, which confuse customers, cheapen brand image and hurt resale value. But analysts say that won’t be easy as long as they churn out more vehicles than they can sell.

GM and Ford were hit hard last year as consumer demand shifted away from Detroit’s gas-guzzling SUVs, a longtime cash cow, and toward smaller, more fuel-efficient cars, a segment of the market long dominated by Asian and European automobile manufacturers. Sales of sport utility vehicles have fallen by 2 or 3 percent in each of the last few years, and a jump in gas prices late in 2005 accelerated that trend curbed sales of the biggest SUVs.

GM is hoping to halt that slide with a new lineup of full-size SUVs coming out in 2006. GM says its 2007 Chevrolet Tahoe, Cadillac Escalade and other models get 20 miles to the gallon, making them the most fuel efficient in their class. And Ford hopes its Ford Fusion sedan, introduced last fall, will be stiff competition for the 2007 Toyota Camry.

But for some, changing car tastes and the potential for higher gasoline prices means a new breed of smaller, car-based crossover vehicles, or CUVs — essentially, a term for a smaller-sized SUV that is more like a car than a truck — will grab consumers in 2006.

The market for CUVs is expected to heat up this year, as Ford launches new models like the Ford Edge and Lincoln Aviator. Also, GM has two crossover SUVs in the pipeline.

In all, automakers will introduce 21 new and 38 significantly redesigned vehicles in 2006, according to J.D. Power and Associates. That’s similar to 2004, when 22 new vehicles and 30 redesigns hit the market.

One year ago, the outlook for American automobile makers looked a little brighter than it does today. Interest rates were still unusually low and attractive incentive programs in America’s auto showrooms kept Americans spending heavily on new automobiles. Yet at the 2005 Detroit Auto Show Rick Wagoner, CEO of General Motors, warned of a difficult year ahead.

His prediction was right on the money. Trouble for GM started early in 2005 when it reported a $1 billion loss for the first quarter and credit agencies cut its credit ratings to “junk” status, citing skepticism about the troubled automaker financial future.

Just before Thanksgiving, GM announced plans to cut 30,000 hourly jobs and close 12 facilities by 2008 to restore profitability in the face of a shrinking market share. It also said it plans to sell a majority stake in its profitable finance arm, GMAC, in 2006 to raise cash, having lost nearly $4 billion in the first nine months of 2005. Wagoner also took pains to assure workers that bankruptcy isn’t an option for GM, but this may come to pass as its sizeable financial resources are drained away said analyst Rebecca Lindland.

“Although some people don’t like to think it, there’s nothing to stop Ford and GM slipping into bankruptcy,” she said, adding that GM faces tough negotiations with its North American unions in 2006 to cut costs.

If the company continues to lose market share and comes under financial pressure because of its dependency on SUV sales, “Then I think that for the good of the company there will have to be concessions on both sides,” Lindland said. “For the GM side that will be concessions on the product side, and for the unions it will be concessions on the side of letting the company close down plants and cut back on pensions.”

Also critically important to GM’s financial future is its former parts unit Delphi’s negotiations with organized labor. If Delphi, which declared bankruptcy in October, doesn’t come to terms with the United Auto Workers union, GM, its former parent and largest customer, still faces a multi-billion-dollar bailout bill, as it still has benefit and pension obligations to Delphi workers formerly employed by GM.

As part of its restructuring, Delphi, which supplies products ranging from satellite radios to steering wheels to every major automaker, has asked its unions to reduce hourly workers' wages by more than 60 percent. The United Auto Workers, which represents the bulk of Delphi's 34,000 North American hourly workers, has rejected that request. The turmoil paves the way to 2007 when the UAW’s contract with the Big Three is set to expire.

“How Delphi deals with the union, and also GM’s plans to recover and get to profitability will be important for the broader marketplace,” said Erkut Uludag, a partner at Roland Berger Strategy Consultants in Detroit, which tracks the automotive business.

“Lots of suppliers are highly exposed to the Big Three — their product lines; their platforms, and any changes in manufacturing or new products,” he said. “Anything they decide could significantly impact the market, and so everyone’s looking at these signals. They’ll be watching GM, and also Ford — they have been quiet about their plans.”

Ford announced its own restructuring plan on Jan. 23. The number two U.S. automaker, which had its own share of turmoil in 2005, including an expensive bailout for its former parts division, Visteon, said it will cut up to 30,000 jobs and idle 14 plants as it seeks to reverse a $1.6 billion loss last year in its North American operations.

The Associated Press contributed to this report.

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