On The Brink
Monday, September 18, 2006
Detroit's carmakers are entering a period of crisis. For the next half-year car sales are likely to decline because of rising interest rates, bad news from Iraq and, above all, the climb in the price of gasoline. Even as that price retreats below $3, the damage has been done. People will have reason to worry about buying fuel, and that's bad for the car business.
It is especially bad for Detroit's car business, dependent as it is on pickup trucks and big sport utility vehicles: Chevy Silverados and Suburbans, Ford (nyse: F - news - people ) F150s and Expeditions, Dodge Durangos and Jeep Grand Cherokees. These parts of the business are hurting the most. The Japanese and the Germans sell heavy vehicles, too. But they aren't as dependent as Detroit is on heavy iron.
Until recently the country was buying cars and light trucks at the rate of 17 million a year. So far this year sales are running more than half a million units behind, so maybe the year will end at 16.3 million. Sales will be sinking in the first quarter, too. General Motors (nyse: GM - news - people ), Ford Motor and even Chrysler are still losing market share. Losing market share in a falling market doubles the pain.
More pain: Lots of the all-new 2007 vehicles from Detroit are these big babies, the pickups from GM, the big SUVs from Ford. They were expected to lead a sales resurgence and, at last, a move to profits.
We've already seen GM cut some overtime, and Ford, which is more conservative in planning, has cut 168,000 units (21%) out of its fourth-quarter schedule and chosen a new president and chief executive, Alan Mulally, the Man from Boeing (nyse: BA - news - people ). GM is talking about chopping 12% from its fourth-quarter plan. I expect more chopping by early next year.
Not everyone will agree. The optimists can tell you how GM, which has already introduced its new sport utilities and will be introducing new pickups this fall, will do well. Having new trucks helps, of course, but I think the results are going to be disappointing. There will be a rush of sales to fill early orders and then a falloff. GM also may steal sales from Ford and Chrysler, which doesn't do anything for Detroit's collective ability to fight off foreign brands.
Ford has some new small (4,000-pound) sport utilities coming, and they will balance out the new 6,000-pound Expedition and Lincoln Navigator. But I think Ford will sell fewer of its small crossover vehicles (like the Ford Edge and the Lincoln MKX), not because there's anything wrong with them but because competition is so great. Everyone has small crossovers. Chrysler has a big new SUV called the Aspen coming out, at just the wrong time. There are some smaller Jeeps and a midsize car, too. Nothing wrong with them, but they will be coming into a hotly competitive market.
All the vehicles were logical when the decisions were made three years ago to produce them. At the time gasoline cost less than $2. But historical logic isn't going to save Detroit.
It will be tougher for the manufacturers to hold to the new no-giveaway pricing. GM, and even Ford, have done a good job in keeping prices up. But the pressure to give away the vehicles--no money down, 0% interest, employee pricing, less than wholesale--will grow if times are rough, as I think they will be.
Operating losses (that is, before one-time writeoffs) will be considerable despite all the factory closings. I'm pretty sure that the proposed GM/Renault/Nissan confederation will not happen. I don't know about the possibility that Ford might team up with Nissan (nasdaq: NSANY - news - people ), especially with a new Ford chief executive and the problem of agreeing on whose name goes first in a combined company.
Pressures for management change abound. At GM, after all these years, the management hasn't been able to turn around the company. The improvements being made, and they are being made, could be washed away by a downturn. At Ford, management changes always come quickly--I can name ten living ex-Ford presidents--but none has really worked since 1996. Now a new chief is named, a Boeing man who knows nothing about the car industry. Maybe it will work. I remember, though, the last time they brought an outsider in to be president--by outsider, I mean Semon (Bunky) Knudsen, who came from GM. It was Cry Havoc! and let slip the dogs of division. So we'll see.
Detroit's luck has run out. A growing car market has covered up the failures of the past decade. Those days in all likelihood are gone for now. Saving the American industry will take dynamic leadership, energy, talent and a fighting spirit. Sure it's possible. We saw it once, when Lee Iacocca saved Chrysler.
Can today's managers at GM, Ford and Chrysler save their companies? I don't know the answer, but I keep thinking of the words of Oliver Cromwell to the Rump Parliament: "You have sat here too long for any good you can do. Depart, I say, and let us have done with you. In the name of God, go."
Jerry Flint, a former Forbes Senior Editor, has covered the automobile industry since 1958. Visit his homepage at www.forbes.com/flint.