Last in a series
Zero-interest financing lured auto buyers to dealerships in huge numbers last year, helping the U.S. auto industry post its second-best sales performance ever. But as domestic automakers look forward to the year ahead, they find little reason to celebrate.
Ford Motor Co., which earned $5.4 billion in 2000, is expected to have an operating loss of more than $800 million in 2001, and the Chrysler unit of DaimlerChrysler an operating loss of around $2.2 billion.
General Motors Corp. will make money, but nowhere near the $5 billion operating profit it posted in 2000, when industry sales hit a record 17.4 million units.
GM had an operating profit of $1.2 billion in the first three quarters.
Never before have so many cars and light trucks added up to so little for the domestic Big Three.
Analysts predict it will get worse in 2002. J.D. Power and Associates expects U.S. auto sales to fall to 15.6 million next year, the lowest since 1998, and profits to be scarcer as Asian automakers continue their aggressive expansion in North America.
“With such intense competition, it just squeezes the profit margins and everyone ends up competing on price,” said Jeff Schuster, Power’s director of industry forecasting. “2002 will essentially be a dogfight.”
The manufacturers can thank zero-percent financing and other incentives for stoking sales to near-record levels, but the sales came at a high cost.
CNW Marketing/Research, which tracks industry marketing costs, estimates that the zero-percent program helped increase GM’s per-vehicle incentives to $3,200 in the fall. Chrysler’s incentives were higher at $3,314 and Ford’s were higher at $3,379, according to CNW.
Heavy spending on incentives helped GM maintain its 28.4 percent market share, halting a 10-year decline, but Ford and Chrysler lost share.
The domestic manufacturers also may have mortgaged the future with zero percent, pulling ahead consumers who were not planning to buy a new vehicle until 2002 or later.
“Anyone even remotely thinking of buying a new vehicle in the next six months probably has already done so,” Schuster said, estimating that zero percent pulled forward at least 500,000 buyers.
One was Louis Zuckerman, a senior sales executive in the financial-services industry, who said: “If zero-percent wasn’t part of the formula, I wouldn’t have started looking. Zero percent really jump-started the search.”
Zuckerman ultimately accepted a $3,000 rebate instead of interest-free financing and bought a $29,000 Chrysler Town & Country mini-van at a substantial discount.
“This was the first time we bought a new car before the old one was paid for. We wanted the van for the space, and there were just such great deals out there,” he said, adding that it could be six or seven years before he and his wife buy a new vehicle again.
“I’d say a minimum of five years. We’re running this one into the ground.”
The Zuckermans traded a 2000 Honda Accord with 33,000 miles on the odometer for the roomier Town & Country to cart around their two toddlers. This represents a “conquest” sale for Chrysler in that it comes at the expense of Honda.
Most traffic goes the other direction, with owners of American vehicles defecting to foreign brands. Before zero-percent began attracting buyers to domestic showrooms in September, the Big Three’s share had slipped more than 4 points, to 62 percent. It rebounded to 63.3 percent by year’s end, but Japanese brands gained 1.4 points, to 26.6.
Toyota, the largest Japanese manufacturer, increased its U.S. market share by 1 point, to 10 percent, including sales of its Lexus luxury division. Toyota offered zero percent on only a few models and had no incentives on some. American Honda posted record sales of 1.2 million vehicles without zero-percent loans.
Koreans gain
Korean brands Hyundai and Kia (which is owned by Hyundai) also made big gains. Their combined sales soared 41 percent to 570,000, and they picked up a point of share, to 3.3 percent. Hyundai is shopping for a site for a U.S. plant because its dealers are clamoring for more cars to sell.
Japanese manufacturers also are benefiting from a weak yen, which hit a three-year low against the dollar in late December. That lowers the price of Japanese-manufactured vehicles in the U.S. and returns greater profits when dollars convert to yen.
Toyota earned $1.75 billion in the first half of its current fiscal year and Honda $1.4 billion. Both are on a fiscal year that ends March 31.
Most of the Big Three’s profits in the late 1990s came from surging sales of mini-vans, full-size pickup trucks and large sport-utility vehicles, but Japanese companies are rapidly expanding into those domestic strongholds.
Five years ago, Toyota offered two SUVs, the 4Runner and the low-volume Land Cruiser. Now it has five, adding the car-based RAV4 and Highlander and the Sequoia, a full-size model. Toyota also offers the Tundra full-size pickup and Sienna mini-van, recent additions.
Toyota will double the capacity of its Princeton, Ind., plant that builds full-size pickups and SUVs to 300,000 units by 2003 to add mini-van production, and it will hire an additional 1,700 workers.
Nissan will open a truck plant in Mississippi next year to build full-size pickups and SUVs and mini-vans.
Honda recently opened a 150,000-unit mini-van factory in Alabama, freeing space at its Alliston, Ontario, plant to build an additional 100,000 SUVs.
While major Japanese brands expand their U.S. operations, the domestics are retrenching.
Ford, until this year the most profitable of the Big Three, is now in the same boat as Chrysler, DaimlerChrysler’s U.S. arm.
Falling sales, rising costs, mounting quality problems and the ongoing battle with Firestone resulted in Chief Executive Jacques Nasser being forced out in October, replaced by a new management team led by Chairman Bill Ford Jr.
Ford will announce a restructuring Jan. 11 that some analysts predict will include shutting U.S. plants, despite a moratorium on closings in the United Auto Workers contract that runs through Sept. 30, 2003, and the firing of 10,000 or more workers.
Schuster believes Ford may try to invoke an “emergency clause” in the UAW contract to shut plants, citing three straight quarters of red ink. Ford executives hint they will slow production lines or eliminate shifts instead of shutting plants.
Ford restructures
Ford has eliminated one shift at a New Jersey truck plant because of sagging sales of its Ranger compact pickup and cut more than 4,000 white-collar jobs, with more expected to be announced soon.
Chrysler, which announced in February that it would cut 26,000 workers by the end of 2003, says it plans no further cuts despite a disappointing performance in 2001.
“With the additional constraints from the economy, we know we have to accelerate our cost-reduction efforts,” Chrysler CEO Dieter Zetsche said last month. “Our plan is flexible enough to do this without further layoffs.”
Zetsche also said that the previously announced plan to break even in 2002 is now “a goal” because Chrysler’s sales have dropped 10 percent while incentive costs have climbed.
By maintaining share and staying profitable in 2001, GM emerges as the healthiest of the Big Three.
GM initiated zero-percent after Sept. 11 to boost moribund sales, and extended it twice, leveraging its stronger balance sheet to pressure cash-strapped Ford and Chrysler.
GM continues to turn the screws on its rivals. Last week it announced a $2,002 rebate and 5.9-percent financing for all 2001 and 2002 models.
After losing share to Ford in the 1990s because it had a weak truck lineup, GM has some of the hottest-selling SUVs and full-size pickups, fresh vehicles with enough profit margin to carry hefty incentives and make money.
With a 31 percent increase in truck sales in 2001, GM overtook Ford in this key category for the first time since 1994.
“For the first time in 20 years, we are able to go out in the marketplace with industry leading products,” said Paul Ballew, GM’s chief market analyst. “We have to lead with the products that are the strongest, and we put our trucks front and center with zero percent.”
GM has no plans to permanently close U.S. plants during the current UAW contract, but will idle plants and furlough workers for a week or two at a time to control inventory.
Ballew predicts that car and light-truck sales will drop to around 15.2 million in 2002, the lowest in five years, but even at those levels GM is alone among the Big Three in predicting it will be profitable.
GM sees an economic recovery beginning in the second half of the year, leading to volume of 16 million to 17 million by 2004.
“We’ve got a couple of tough years ahead of us, but we’re in a better position to weather it than in the past,” Ballew said. “The fundamentals for GM are better than they’ve been in a couple of decades.”
