Autos: Year of Big Sales, Little Profits

For Detroit's Big Three automakers, 2001 was the best of times and the worst of times as sales surged to near record highs while profits sagged or evaporated.

The problem for GM, Ford and Chrysler, especially after the attacks of Sept. 11, was how to lure consumers who were reluctant to spend in a slowing economy. The solution was interest-free loans, initiated by General Motors Corp. and matched by the others.

Not only did that strategy pump up sky-high industry marketing costs at a time when GM was the only U.S. automaker expected to book a profit for 2001. But it set the stage for more of the same in 2002, including an ongoing price or incentives war.

Even GM, the world's largest automaker, is seen losing money if annual U.S. light vehicle sales dip below the low end of expectations of about 15 million units.

``It (zero percent financing) set off the first vicious cycle in terms of pricing for the automakers,'' said Diane Swonk, chief economist at Bank One Corp.

``I think it's a difficult year ahead, difficult even for the best,'' said U.S. Warburg auto analyst Saul Rubin, who sees 2002 U.S. light vehicle sales coming in about 12 percent below this year's total.

Rubin and other industry experts say Asian automakers, led by Japanese juggernauts Toyota Motor Corp. and Honda Motor Co Ltd., will still be making money in 2002, and profiting from their relentless assault on the U.S. market despite its weakened economy.

But GM, which benefited from new truck and sport utility vehicles it rolled out this year, could see its automotive business hover somewhere around the break-even level at best, barring any major upside surprises.

For Ford Motor Co. and the Chrysler side of DaimlerChrysler AG the outlook is decidedly bleak, meanwhile, as they undergo broad restructuring programs that have cut or delayed new product development and led to widespread layoffs.

Chrysler, which announced it was cutting 26,000 mostly U.S. jobs earlier this year, has said it hopes to break even in 2002 after 1-1/2 years of losses. But analysts question whether that target can be met in an industry downturn.


When automakers kick off the new year at the Detroit auto show, one of the industry's premier annual events, the focus is usually on sheet metal and snazzy new models of cars and trucks. But this time, when the show opens for a three-day media preview on Jan. 6, the spotlight is more likely to be on Ford, which has been bleeding money all over the place in the past year.

Until last spring, Ford was widely seen on Wall Street as the best managed of Detroit's Big Three automakers.

But the company, which ousted Jacques Nasser as chief executive in October, has been pushed into an accelerated tailspin by a catalog of problems that include the Firestone tire crisis, declining revenues and seemingly endemic quality glitches. The world's second-largest automaker is now on track to post a full-year operating loss, its first since 1992, of about $822 million.

Highlighting the negative view of the company, shares of rival GM have outperformed Ford's by about 47 percent since the start of the year. After hitting a 52-week high of $30.71 on April 18, Ford's shares have fallen to about $15.

The challenge now, for new chief executive and family scion William Clay Ford Jr., will be to unveil a convincing turnaround plan for the company his great-grandfather founded nearly 100 years ago.

Ford itself has been coy about the timing, and company insiders have sought to play down expectations of ``major announcements'' of quick-fix solutions to the company's woes.

But Wall Street analysts say the restructuring plan -- first promised in August when Ford announced it was cutting up to 5,000 white-collar jobs -- will be unveiled when they meet Ford executives at the company's Detroit-area headquarters on Jan. 11, immediately after the auto show preview.


Economic recession, worldwide overcapacity, environmental concerns and the weak yen are issues all major automakers will have to grapple with in 2002. Ford's problems reflect many industry-wide troubles, however, amid growing competition for market share, falling profit margins and the need to get cost structures in line with real demand for new vehicles.

``The key things are pricing, volume and then with each company they've got to figure out ways to cut costs and introduce new products,'' said analyst Nicholas Lobaccaro of Lehman Brothers, when asked about the main issues automakers face in 2002.

``I think it's going to be a pretty brutal year,'' he said.

``The business model of this industry in my view is broken,'' added David Cole, veteran director of the Ann Arbor-based Center for Automotive Research. ``As an industry it is producing at high volumes with very marginal profitability.''

The most effective way to shore up Ford's finances would be to concede that it is becoming a smaller player in the worldwide auto market, and downsize accordingly, he said.

``They've got to shrink to become profitable,'' Cole said.


The problem, however, is that the contracts between Big Three automakers and the powerful United Auto Workers union have put a moratorium on assembly plant closings in the United States. Those contracts are valid until September 2003, and auto analysts and sources close to Ford say the company is highly unlikely to break them.

Following in the footsteps of Chrysler, which announced its own restructuring earlier this year, Ford could eliminate shifts at some North American plants and slow down assembly line speeds to cut output.

It could also conceivably follow Chrysler's lead by negotiating early retirements with the UAW, or laying off hourly workers who would then be entitled to 95 percent of their take-home pay for the life of the UAW contract.

Apart from more white-collar job cuts, which are expected, Ford's turnaround could take years, however. And, as Chrysler's now threatens to do, it may fail to yield enough cost savings and revenue growth to return the company to profitability any time soon.