For the past decade, U.S. automakers have been riding high on American car buyers' extremely profitable love affair with SUVs and light trucks. Now, plagued by rising gasoline prices and stubbornly high labor costs, Detroit is finding it has little room to maneuver its way out of a sharp drop in sales.
There's nothing wrong with the auto business overall: car sales in the U.S. are on track to hit 17.5 million cars this year -– up a bit from 2004. But American automakers are getting left in the dust by foreign rivals as the boom in sales of gas-guzzling SUVs appears to have come to an end. The slowdown appears be magnified by a big sales push earlier this summer spurred by deep discounts.
“There have been huge declines in the sales of SUVs for Detroit which are their most profitable models,” said David Healy at Burnham Securities. “August was lower, September was slower still and from what I read things are extremely slow in early October.”
As American automakers' sales have slumped, Japanese car makers have been gaining market share. For September, the combined share of the Big Three automakers fell to 54.9 percent, down 6.7 points from the same period a year ago. The Asian brands boosted their share of the U.S. market by 6.3 points to 38.3 percent, according to industry tracking firm Autodata. SUV and truck sales at GM were off 30 percent, while the same segment was down nearly 27 percent for Ford.
The uphill road for U.S. car makers may be getting steeper. For starters, switching gears to smaller, more fuel-efficient vehicles will take time. Worse, it’s not likely to help GM and Ford’s profit picture in the short term. Not only are American car makers seeing less profit from lost SUV sales, they continue to lose money on those smaller vehicles. At GM, for example, the average profit on an SUV came to nearly $6,000 last year; for a large pickup, it was nearly $3,000, according to DeutcheBank Securities analyst Rod Lache. But GM lost money -- roughly $2,600 on average -– for every mid-size car it built, according to Lache’s estimates.
One big reason: American car makers bear a huge labor cost that their Japanese and European rivals don’t. Workers in Japan and many European countries are covered by national health plans, sparing car makers there the burden of rising U.S. health care costs. Foreign car makers that have set up plants in the U.S. over the past decade haven’t built up the large numbers of retirees that are supported by their American rivals. The result is that the Japanese can build a car in the U.S. for $1,500 to $2,000 cheaper that Detroit can, said Healy.
“The foreign producers have exploited this cost differential to put more features into the car without raising the price,” he said.
With market share declining, both GM and Ford have cut production: GM slashed output by 20 percent in the first three quarters of this year; Ford has cut production by 9 percent. But building fewer cars only intensifies the profit pressure of high overhead for pensions and health care costs because it spreads the same fixed cost burden over fewer cars.
To try to boost sales, General Motors earlier this summer kicked off massive discount program – selling cars at prices normally available only to GM employees. The program was a short-term success: sales spiked, and Ford and DaimlerChrysler followed suit, posting big sales gains of their own.
But the program apparently did little more than rob sales from the fall. Now that those heavy discounts have been removed, GM and Ford dealers are reporting that showrooms are much quieter than normal for this time of year.
The solution, say analysts, will likely inflict more pain on American auto workers and retirees. Both GM and Ford are working on plans to cut jobs, close plants and build fewer cars.
Shareholders are feeling the pain too. GM’s stock has lost of third of its value so far this year: Ford is down 40 percent. Both companies have built up cash hoards of at least $20 billion to weather the painful restructuring that lies ahead. But a shareholder revolt – demanding a big dividend payout or a spinoff of profitable units like GM’s finance arm – could spell big trouble.
“The major wild card in our outlook for GM is whether major shareholders take matters into their own hands,” wrote Lache in a recent research note.
Selling off assets and draining cash could accomplish another key goal: winning steeper concessions from the United Auto Workers union. Because the company is on a relatively strong financial footing, with cash to burn and assets to sell, the union has been slow to make concessions, said Lache.
But problems besetting American car makers extend all the way up through senior management. Though the quality of American cars has improved, they haven’t offered consumers that overall appeal – from styling to features – of their foreign rivals, say analysts. Though they’re rolling out redesigned lines of SUV’s and pickups, it’s not clear that the new models will be enough to get American car makers back on track.
“You can count on the fingers of one hand the number of hot models GM Ford and DaimlerChrylser have,” said Healy. “An awful lot of car buyers are increasingly finding them boring and shifting over the foreign brands.”