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Automakers try to forget nightmarish 2009

Image: Detroit auto show floor
An overall view of the auto show floor during the press preview for the world automotive media North American International Auto Show in Detroit, Michigan.Bryan Mitchell / Getty Images

For all the focus on new products at the 2010 North American International Auto Show, the “reveals” ultimately seemed to fade into the background.

The real chit-chat among most of those attending was the health of an industry that came perilously close to collapse last year.

Even the most bitter competitors were comparing war wounds and projections for what most assume will be at least a moderately better year than 2009. “Cautiously optimistic” echoed over and over again as more than 4,000 journalists from around the world cornered executives with their questions.

“I’m a lot more confident,” said Sergio Marchionne, looking for an alternative to what was, by the end of the two-day media preview, a hackneyed cliché. “We’ve hit rock bottom and we’re out.”

But Chrysler’s new CEO, like most of his counterparts, cautioned that there are just too many external variables to be certain that the bad times are over. Some analysts, like Jim Hall of 2953 Analytics, continue to warn them that a double-dip is a very real concern. And the steady rise in fuel prices since the beginning of 2010 has only underscored that possibility.

“In the back of our minds we’re all concerned something else might be coming,” said Ernst Lieb, CEO of Mercedes-Benz U.S.

Last year, U.S. automotive sales fell to 10.4 million vehicles, a plunge of roughly 38 percent from the industry’s peak of more than 17 million in mid-decade. Adding insult to this injury, the booming Chinese market, which seemed all but immune to economic woes, soared to 13.5 million, overtaking the American market for the first time ever. Sheer numbers had suggested this would eventually happen, but few anticipated the flip occurring before 2020 at the earliest.

While there are a few observers who contend recovery will come to the U.S. quickly, the general consensus is that it will be a slow and painful slog. The well-respected veteran analyst David Cole of the Center for Automotive Research, or CAR, in Ann Arbor, Mich., anticipates 2010 sales of 11.8 million, but the center’s data suggests the numbers could run as low as 10.8 million and as high as 12.4 million.

Considering that even at its 17 million peak few automakers were making anywhere near the fortunes one might expect, that would seem to lay out another year of hard times. But this is not the same auto industry that it was when the new millennium began, said Mark Reuss, the new president of North American operations at General Motors.

The company has shed tens of billions of dollars in debt, closed dozens of inefficient and redundant assembly lines and other facilities, slashed its work force and even won a two-tier wage structure from the traditionally militant United Auto Workers Union.

“We’ve now got a pretty lean cost structure,” which puts the company on a par with even its toughest foreign-owned rivals, such as Toyota, said Reuss.

He declined to put a hard dollar figure on the savings achieved during bankruptcy and union negotiations, but CAR’s Cole estimated, “GM is on the path to taking $5,000 to $6,000 out of the cost of (building) a new car” in the U.S.

To put that into perspective, at the beginning of the last decade it was generally believed that General Motors and the other domestic makers spent at least $2,000 a vehicle more than a Toyota or Honda per vehicle. If Cole’s numbers are correct, GM — and Ford and Chrysler, which have achieved similar cost reductions — now have a significant cost advantage.

Where they still lag is in image. “We have a credibility problem,” admitted Marchionne, the result of decades of bad products, poor customer relations, quality issues, recalls and a long list of other factors.

Few would disagree. The axiom in automotive circles is that there are only three things that matter: product, product and product. But even the best vehicles don’t always help. A spate of well-reviewed models didn’t save the doomed Pontiac brand, acknowledged GM’s Reuss.

The executive, whose father previously served as GM president, said he is personally on a mission to restore “the mark of excellence” that once was more than just a company slogan. In the coming weeks, Reuss suggested, he plans to become a “mystery shopper,” visiting GM dealers large and small across the country to get a sense of what the company needs to do, post-bankruptcy.

For his part, Chrysler’s Marchionne says the first critical step is to avoid “falling back into bad habits” that seemed to define the auto industry during its flush years. A big test of that will come in 2011, when the Detroit Three have to renegotiate their individual contracts with the UAW.

More immediately, a test for industry management at domestic and import brands will be whether they can maintain the discipline they developed over the last couple years, Can they hold down production levels, keep inventories lean and forswear the rapacious incentives that once drove U.S. sales to record levels, yet all but destroyed industry profitability?

Mercedes trimmed imports and production at its Alabama assembly plant, noted CEO Lieb, and sharply cut back on the heavily subsidized leases that not long ago accounted for more than 70 percent of the purchases of the E-Class line.

On the other hand, Lieb stressed, a manufacturer can’t be too cautious. “If we wait too long, we may miss the opportunity.”

That’s something Detroit makers are wrestling with. Even though two of the three domestics still saw sales decline in December, they’re all looking at opportunities to step up production, at least on some of their newer, more popular models, such as Chevrolet’s Camaro “pony car,” and Malibu midsize sedan.

GM and Chrysler executives said during the Detroit Auto Show that they may need to begin hiring workers; some would likely come from the ranks of laid-off hourly employees, but new hires could occur too. GM, said Reuss, is even considering re-opening some of the plants it has idled, such as the former Saturn assembly line, in Spring Hill, Tenn.

With all the variables at play, one thing seems certain for 2010 and beyond: The U.S. market will remain one of the world’s most competitive. Things could be even more up in the air than before. The Japanese and Germans have been stung by the weak dollar; it's a serious problem for imports and for U.S.- assembled models that often depend on foreign powertrains and other components.

Nonetheless, Yoshimi Inaba, Toyota’s top U.S. executive, said his company will be further expanding its already significant North American production base. (New plants have been opened, in recent years by Hyundai and Kia, and soon Volkswagen will launch production in Chattanooga, which it hopes will reduce the impact of a strong euro.)

Toyota is an example of how things can turn around unexpectedly. Little more than a year ago, the maker was celebrating its ascension to the top, having overcome GM as the world’s best-selling automaker. But 2009 was a devastating year worldwide and within the U.S., where it recalled a record 4 million vehicles.

In the coming weeks, it will begin repairs designed to prevent accelerator pedals from sticking on many of its models, an issue that has led to numerous accidents, injuries and fatalities which threaten to tarnish the brand’s sterling reputation. But Inaba insists the recall “is an opportunity to prove ourselves” to customers.

It will need to. How a manufacturer deals with 2010 could determine its long-term viability.