January will be an exciting month for America’s top automakers, as General Motors, Ford and Chrysler aim to make a big splash at the Detroit auto show, parading their newest vehicles and dazzling, futuristic concepts. But that might be as fun as it gets for the Big Three in 2007.
The automakers face severe headwinds in the year ahead, including a slowing economy and the relentless growth of Asian automakers, analysts say. Softening North American sales are also a worry. Figures issued Wednesday show U.S. sales slipped again in December for General Motors and Ford, even as Japan’s Toyota said sales rose almost 17 percent. Analysts expect more of the same in 2007.
GM and Ford are in the middle of massive restructuring programs, and as they struggle to radically reshape their businesses, they face the added challenge of potentially thorny contract negotiations with the United Auto Workers, the industry’s biggest union by far.
Talks are already under way to replace a UAW contract that expires in September, and some argue that additional union concessions are the only way the Big Three can remain competitive with Toyota and other Japanese rivals.
But the union is also facing difficulties. As automakers and their suppliers continue to cut back production and workers, it is likely to see its membership dwindle below 500,000, down from a peak of 1.5 million in 1979, analysts say. More than 70,000 unionized workers signed up for buyouts or early retirement plans at GM and Ford in 2006.
“These discussions will be very significant because the domestic manufacturers have their backs to the wall, and so does the UAW,” said Jack Nerad, executive market analyst for Kelley Blue Book, which tracks the automotive industry. “We have had recessions and cyclical ups and downs before, but today we have consumers looking more and more at overseas manufacturers, and that has shocked [U.S. automakers] significantly.”
Automakers want to secure significant concessions in benefits granted for current and retired unionized workers, especially for health care, which the industry says are too expensive and put them at a disadvantage with their Asian rivals.
But UAW President Ron Gettelfinger already has said he intends to fight to keep health care benefits for both active union members and retirees. Gettelfinger also has said he will aim to preserve the so-called “jobs bank” — a program that guarantees pay for laid-off workers.
The Big Three already have won significant concessions from the UAW, with GM and Ford negotiating changes to health care packages and worker production programs that have allowed them to eliminate tens of thousands of jobs through buy-out programs. And after the steep losses Chrysler sustained in the third quarter, the UAW has said it will consider extending similar breaks to the DaimlerChrysler unit.
One area to watch in the contract negotiations is benefits for retires workers, said Mike Hudson, an automotive analyst at Edmunds.com, a Web site offering car-buying advice.
“Retirees can’t actively vote in the union, so there’s always the threat that they will be disproportionately hurt, and they are the most expensive in terms of loss to the companies, so they ripe for cost-cutting,” he said. “This is a key area to watch. They have the least protection, and the company gets the least from them.”
The high cost of health care for employees and retirees, which adds some $1,000 to the cost of every car they make, is one of the biggest problems the Big Three face. GM, the nation’s largest private provider of health care, spent $5.3 billion on health care last year for 1.1 million employees, retirees and their dependents.
Japanese carmakers, by contrast, are not contractually obligated to provide health care for legions of retired workers.
With the new Democratic-controlled Congress, the issue of health care could explode onto the national stage again, Hudson said.
“This is a place where the union and automakers can come together to get sympathy from the general public,” he said. “I think people will be stunned to hear how much GM and Ford have to pay for health care. The numbers are staggering, and the cost is putting American companies at disadvantage.”
Politically, the wind may be blowing in Detroit’s favor. A new year brings a Democrat majority to the House and Senate. An especially promising sign for the Big Three is the ascendance of Rep. John Dingell, D-Mich., a longtime friend of the industry who is in line to lead the House Energy and Commerce Committee.
GM’s restructuring plan is well under way, and the company looks set to turn its business around. Ford, however, is in need of help, analysts say.
The automaker’s future hangs in the balance as it struggles with the early stages of its turnaround plan, dubbed the Way Forward, which includes far-reaching changes to trim costs and revitalize its product line. The company has even used its factories and other assets as collateral to get $26 billion in fresh financing.
“I think this is the lowest we have seen of the Big Three sink in modern times,” said Tom Appel, editor of Consumer Guide Automotive, which offers buying advice for car consumers. “And most disturbing to me is we don’t see a silver bullet coming from Ford; there’s no huge product around the corner that could save Ford, there’s no new Taurus.”
Also of concern to Ford is the advent of the new Toyota Tundra. The Japanese automaker is trying to muscle its way into the full-size pickup truck market with the 2007 Tundra, which is going directly against Chevy’s Silverado, the Dodge Ram and Ford’s F-Series pickup, long the country’s best-selling vehicle and Ford’s bread-and-butter product.
“The introduction of the Tundra will be seminal,” said Daniel Gorrell, president of the Gorrell Group, an automotive strategy consultancy in Tustin, Calif.
“Our reports are that the new Toyota truck is fully competitive, and I’m picking up some concern here from the Big Three U.S. domestics toward the new pickup,” Gorrell said.
Another seminal event expected in 2007 is the likely ascendance of Toyota as the world’s No. 1 automobile maker. Almost 50 years after its North American debut, Toyota is expected to produce 9.42 million vehicles this year, surpassing longtime No. 1 GM.
“The symbolism here is huge,” said Tom Appel. “This once American industrial giant has been beaten at its own game by a relative upstart in the auto industry.”