Delphi wage cut protest
Bill Pugliano  /  Getty Images file
GM employee Donald Kemp of Flint, Mich., joins Delphi employees earlier this year to protest wage cut plans. Delphi’s negotiations with organized labor are critical to the future of the American automotive industry.
By Roland Jones Business news editor
msnbc.com
updated 5/9/2006 4:01:03 PM ET 2006-05-09T20:01:03

With sinking sales to job cuts by the thousands, it’s no great exaggeration to say that when historians write the history of America’s big automotive manufacturers, 2005 will go down as one of their most dreadful years.

That’s not to say the American automotive business is in dire straits — on the contrary, it’s thriving. Automobile sales are still strong, but while times are good for some manufacturers, the nation’s two biggest — General Motors and Ford — are in the midst of a massive and agonizing reorganization, hobbled by a shrinking domestic market share, plunging profits, and the high wages and generous health benefits promised to their existing and former workers.

As if that wasn’t already enough, Detroit’s supremacy is also under threat from a handful of Asian manufacturers, some already well-established, that are keen to muscle their way into the U.S. market.

“American vehicle makers are in the middle of a very hard market environment — overseas companies are attacking them with strong products and good prices, and more of them are coming onto the market each day,” said Daniel Gorrell, vice president of the automotive practice at research and consulting firm Strategic Vision.

As American automakers struggle to deal with sagging sales and tough union negotiations, MSNBC.com looks at some of the most pressing issues now facing the American automotive industry. They include stiff competition from Asian manufacturers, the inexorable rise of the fuel-efficient, gas-electric hybrid and America’s waning love affair with the sports utility vehicle, or SUV — at one time Detroit’s cash cow, but after a year or so of high gasoline prices reviled as a symbol of America’s gas-guzzling car culture.

Still, the decline of one of the nation’s largest industries can’t be blamed entirely on high gas prices and healthcare costs, Gorrell notes.

He also blames Detroit’s inability to come up with exciting products that consumers want to buy. GM, for its part, hopes to counter some of those charges and raise sales and revenue in 2006 with a new line of full-size SUVs and pickups with greater fuel-efficiency. But the introduction of the vehicles comes as consumers shift toward car-based “crossover” vehicles, or CUVs. And GM no longer enjoys an image of distinction and quality.

“There’s an image issue here,” Gorrell said. “Even though the quality of many American cars is as good, if not equal to those of the Japanese, people don’t believe that, and a lot of that has to do with public perception — it takes a long time to turn public perception around. So if they don’t produce hits, they’ll have more problems.”

Embarrassingly for GM, it’s also facing the prospect of losing its position as the world’s largest automaker to Japan’s Toyota, which said recently it intends to produce 9.06 million vehicles in 2006 — a production level that would surpass GM’s expected output. If Toyota overtakes GM, the auto giant will likely find it increasingly difficult to rebuild its position if Toyota continues to innovate and aggressively pursue the U.S. market.

“Our forecast shows GM and Toyota at about parity with GM in 2006, but Toyota takes over the lead in 2007, and they stay in front until 2017,” said Rebecca Lindland, an automotive analyst at consultancy Global Insight.

Discounts delivered, but not enough
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. The Big Three 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 cars than they can sell.

Sales of SUVs 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, curbing 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 this fall, will be stiff competition for the 2007 Toyota Camry, the latest version of America’s top-selling car.

But for some, changing car tastes and the potential for higher gas prices means a new breed of smaller CUVs — essentially a smaller-sized SUV that is more like a car than a truck — will grab consumers in 2006. And the market for CUVs is expected to heat up later this year when Ford launches new models like the Ford Edge.

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 last year, when 22 new vehicles and 30 redesigns hit the market.

Are better times ahead for GM and Ford? Few analysts think the U.S. automotive business is out of the woods. For its part, GM is burning through its hoard of cash at the rate of about $5 billion a year. It sold a controlling stake in its GMAC financial services unit earlier this year to raise funds, having lost nearly $4 billion in the first nine months of 2005. There’s even talk of bankruptcy.

One year ago, the outlook for American automobile makers looked brighter. Interest rates were still unusually low and attractive incentive programs in America’s auto showrooms kept Americans spending heavily on new vehicles. 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 the year 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.

But this year the answer to whether GM can regain its footing in North America or slips into bankruptcy can be found in the current negotiations between Delphi, GM’s former parts unit, and its organized labor.

Delphi, which is now in bankruptcy court after declaring bankruptcy in October, argues it needs to void labor contracts that run through September 2007 and cut workers’ pay, but unions say their members should not be penalized for the mistakes of management and have threatened a strike if labor contracts are canceled, and that could bring operations at GM to a standstill. Delphi supplies products ranging from satellite radios to steering wheels to every major automaker.

“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.”

If GM continues to lose market share in North America 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,” analyst Rebecca Lindland said. “For the GM side, that will be concessions on products, and for the unions it will be concessions on the side of letting the company close down plants and cut back on pensions.”

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.

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.94%
$30K home equity loan FICO 5.19%
$75K home equity loan FICO 4.58%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.40%
13.40%
Cash Back Cards 17.92%
17.91%
Rewards Cards 17.12%
17.11%
Source: Bankrate.com