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Struggle in Detroit

The Baltimore Sun

In a series of startling announcements last week, the managers of America's Big Three automakers conceded that a business model that had long produced enormous profits and sparked emulation around the world was no longer working.

Facing billions in anticipated losses, GM and Ford executives announced sweeping layoffs of both production workers and managers and an array of plant closings, while DaimlerChrysler unveiled significant production cuts, with the declared intention of transforming their failing companies into smaller, more nimble organizations better able to compete for the dollars of increasingly fickle consumers.

Ford is offering buyout and early retirement packages to all 75,000 of its employees as part of its "Way Forward" turnaround plan, with hopes of eliminating 44,000 salaried and hourly jobs and saving $5 billion a year. In April, GM offered all of its 113,000 employees buyouts worth up to $140,000, of which 35,000 accepted, the company said, saving it $1 billion a year. DaimlerChrysler AG had already reduced its work force by 26,000 jobs and said it would avoid another round by shutting down plants for one-week intervals as it scales back production in the second half of the year.

Still, the fate of these three corporate icons, burdened with heavy pension and health care costs, remains uncertain. Some Wall Street analysts are questioning whether the steps they have taken are radical enough.

But, with understanding and sympathy for the economic dislocation now faced by hundreds of thousands of Big Three employees, many experts argue that the role of cars in the nation's economy will remain vital, providing thousands of new jobs and contributing significantly to economic growth.

Continuing evolution will produce a brighter future for the industry, they say, as a growing legion of automakers competes to offer consumers an array of smaller, fuel-efficient vehicles.

"The consumer has more and better choices today than they ever have," said Bram Bluestein, senior vice president of the global auto practice at Booz Allen Hamilton in Chicago. "Every automaker wants to offer their product here. It's really becoming a global industry."

Overall, the number of U.S. auto industry jobs has hardly changed in more than a decade - with nearly half a million direct employees of the car companies and many more at thousands of suppliers - because foreign automakers and suppliers have built plants in the U.S. Those numbers will fluctuate this year as Ford and GM shed 70,000 jobs through buyout programs while the foreign companies expand.

Japan's Nissan Motor Co. is building its new North American headquarters in Tennessee while another Japanese company, Toyota Motor Corp., is building an $800 million manufacturing plant in San Antonio.

The expansion of foreign automakers' operations in the United States is a mixed blessing, said James Kitman, New York bureau chief for Automobile magazine, because they typically pay less than the union wages offered by American automakers. And workers displaced from GM or Ford would likely have to move out of state to find work.

Still, international automakers - Germany's BMW, South Korea's Hyundai and Japan's Honda, Nissan and Toyota - employ more than 100,000 in the U.S. and have invested $36 billion in those plants, according to the Washington-based Association of International Automobile Manufacturers.

They plan to continue to expand and are not weighed down by the same pension and health care costs as the traditional U.S. automakers. By 2009, these "new American automakers," as they call themselves, expect to invest another $3.3 billion and add another 10,000 jobs, the association said.

Japanese automakers are spending $1.7 billion on four new auto and parts engineering plants in the U.S. this year, bringing total investment by the Japanese to $30 billion by 2008, according to the Japan Automobile Manufacturers Association.

This first wave of foreign automakers from Japan and Europe are looking over their shoulders and seeing the next wave, which includes Hyundai and possibly some Chinese car makers.

Hyundai said it is spending more than $1 billion on its plants in Alabama and California and a new engineering center in Michigan.

"It's a swift kick to say there's not much time to make a turnaround" for the Detroit car makers, said Alexander Edwards, president of the auto division at Strategic Vision, a San Diego consulting and research firm.

American automakers have been making poor strategic decisions for decades, analysts say, failing to innovate and update popular models and depending for profitability on an increasingly narrow sector of the light vehicle market.

"It's been coming a long time," said Kitman, of the American automakers' decline. "It's like a disease, where the symptoms didn't manifest themselves until the patient got sick. In this case, the patient was the auto industry."

GM, Ford and DaimlerChrysler have all produced significantly fewer cars than light trucks and SUVs in recent years, in part because the heavier gas-guzzling vehicles offered significantly higher profit margins.

Meanwhile Toyota has been making healthy profits on fuel-efficient cars as well as trucks and SUVs. Toyota and other foreign makers also pioneered a new category of crossover vehicles - small, fuel-efficient SUVs like the Honda's CR-V and Toyota Rav 4.

Through August, DaimlerChrysler sold 470,000 passenger cars this year, compared with 1.15 million light trucks and SUVs, according to Autodata Corp., while Toyota sold nearly a million passenger cars and 710,000 light trucks and SUVs.

In an op-ed article for the Los Angeles Times in June 1998, Kitman warned car makers chasing the SUV market that an energy crisis would catch them flat-footed if they didn't invest more in smaller cars. And that is exactly what happened earlier this year, shortly after gas prices skyrocketed and people stopped buying gas-guzzlers.

Chrysler admitted as much in a warning this month to analysts and investors that it would post a stunning $1.5 billion loss for the third quarter, twice what it had anticipated.

(GM lost $2.9 billion in the first half of this year while Ford lost $1.44 billion.)

"In the third quarter, the Chrysler Group was unable to follow customer demand with its existing product portfolio, as customers shifted toward smaller vehicles," the company said in a statement.

After losing $10.6 billion in net sales last year, the Chrysler Group announced last week that it would cut deliveries to dealers by 24 percent, or 90,000 cars, in the third quarter because it is stuck with too much inventory after a slow summer.

Kitman said the auto industry is too focused on short-term results, and needs to think - and invest - for the long term.

"The thing that's sad is, it's not like they can't build better cars," Kitman said.

Kitman also blames U.S. car manufacturers for not reinvesting in existing products. Toyota and Honda replace their Corollas and Civics, respectively, every four years, he said, while Ford only redesigned the Taurus in 1996, a decade after it was first introduced. The model will be discontinued next year.

"Only the most patriotic customers are going to overlook that," Kitman said.

To survive, the onus is on the U.S. automakers to come up with cars that consumers want: fuel-efficient, with luxuries they can afford.

"The domestics have to continue to produce new and innovative products," Edwards said. "For the people they lost over the last 10 years to Korea and Japan, they have to win them back."

In response, the Chrysler Group plans to offer U.S. consumers eight new vehicles in the second half of the year, including smaller ones such as the Dodge Caliber, launched in the second quarter, and the Jeep Compass and the Jeep Patriot, which boast 30 miles per gallon highway mileage. It will also introduce the "smallest Dodge SUV in history," the Dodge Nitro.

Other models stirring up some excitement are GM's Saturn convertible, the Sky, and the Ford Edge, which like the Dodge Nitro is a new entry into the crossover SUV market. Ford plans to offer another new crossover model in 2008 based on its Fairlane concept.

Some older brands and models may go the way of the Oldsmobile, which GM discontinued five years ago, but Edwards said such decisions aren't made overnight. Ford has announced it will discontinue the Mercury Monterey minivan this year and the Freestar minivan next year.

Hybrid technology, which uses a combination of electricity and gas as the power source, could save truck and SUV sales by offering fuel-conscious consumers big cars with more miles to the gallon. Auto makers hope Congress will offer tax rebates to encourage consumers to buy them, which would further help sales, Kitman said.

In Baltimore, GM is pouring $118 million into the Allison Transmission plant in White Marsh to manufacture hybrid transmissions for light trucks and SUVs.

Foreign automakers may play a role in the Detroit automakers' recovery. Analysts say potential relationships with foreign competitors around sharing parts, suppliers and even technology are in the works.

Chrysler tried to be proactive when it merged with Germany's Daimler-Benz AG in 1998. When the Germans first arrived in Detroit and slashed Chrysler jobs and shared technology, they seemingly sparked a healthy recovery. But the company got caught in the SUV trap, too. Now, the company is reportedly in talks with several Chinese companies about possibly building small cars for export around the world.

GM has been discussing a possible merger with Nissan and French-owned Renault SA, at the request of GM shareholder Kirk Kerkorian, who owns a nearly 10 percent stake in the company.

Meanwhile, the companies are trying to grow. GM is offering a 100,000-mile warranty on new cars. Chrysler has extended its employee discount to the general public.

And they are still churning out new products, despite criticism that they're not innovating as fast as their foreign competitors. Last year, the three say they spent $21 billion on research and development, mostly in the U.S.

"Vehicles are becoming more customized to niche markets," said Matt Vicenzi, an analyst with JD. Power and Associates in Westlake Village, Calif. "But many are feeling the crunch for that."

"The only ones that can prosper and succeed are the ones that can build the product at a very low cost," Bluestein said.

Several analysts said it may take help from the government - either directly or indirectly - to bail out the companies or alleviate their health care and pension costs

Last year, GM, Ford and DaimlerChrysler spent a combined $12.2 billion on health care for their 2 million employees, dependents and retirees, compared with the $1.6 billion spent by their foreign competitors, according to a report issued by the three U.S. companies. They estimate they spend $1,435 per car on health care, compared with $475 per car for their foreign-owned competitors. In addition, the three say they spent $11 billion last year on pension benefits to 739,000 retirees and surviving spouses, compared with the $23 million spent by foreign companies.

The issue will come to a head next year when contracts with the United Auto Workers union expire. If the companies are unable to reach a deal with the unions on health care costs and pension responsibilities, either GM or Ford or both will likely seek bankruptcy protection, said University of Maryland professor and economist Peter Morici. Bankruptcy courts have the power to terminate union contracts and alleviate pension liabilities. Because Chrysler is part of a German company, he said it is less likely - and more difficult - for it to file for bankruptcy.

"They simply can't pay $80 an hour for labor when their foreign competitors are paying $40," he said.

Morici likens it to walking into two restaurants for a $20 meal, and one takes $10 out of the tab to pay its cook and the other $5.

"Which one would serve you steak and which one would serve you hamburger?" he said.

allison.connolly@baltsun.com

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