TOPICS > Economy

U.S. Auto Makers Gearing Down

January 25, 2001 at 12:00 AM EDT

TOM BEARDEN: Last week the world’s automakers rolled out their new cars and trucks at the North American International Auto Show in Detroit. It’s been a heady two years. The industry is coming off 24 months of record-smashing sales.

SPOKESPERSON: And we discussed the lease prices on the sl-1…

TOM BEARDEN: But the party is over, at least for the U.S. automakers, and this industry is so vast that what happens to it ripples through the entire economy. Sales slowed dramatically in the last half of 2000. Detroit is idling plants and laying off workers in the first real slump in years.

SPOKESPERSON: Look at this.

TOM BEARDEN: David Fischer owns several dealerships in Troy, Michigan. He says a combination of things are responsible: A falling stock market, lowered consumer confidence, and higher gasoline prices.

DAVID FISCHER, Dealer: Last year, I believe we set a record at 17.4 million cars and trucks. We feel this year, it’s kind of looking like 16 million, perhaps 16.4 million. The domestic manufacturers seem to foresee a little larger decline. Some are saying it’s not going to be as severe.

TOM BEARDEN: Sean McAlinden thinks it will be worse than what’s being forecast now. He’s the director of economics for the Center for Automotive Research in Ann Arbor.

SEAN McALINDEN, Center for Automotive Research: We’re probably looking at a 10% decline in sales from last year. And this is sort of a record length… period of length since our last downturn, so it looks like the inevitable is going… has happened and will happen.

TOM BEARDEN: The big three U.S. automakers– Ford, GM, and Daimler-Chrysler– launched a series of temporary plant shutdowns during the fourth quarter of last year. That will continue this quarter, with announced production cuts ranging from 17% to 26%. This week alone, General Motors has shut down three plants, 12 at Ford and two at Daimler-Chrysler. Workers will lose some money, although United Auto Workers members enjoy contract guarantees and state unemployment insurance that will provide them with 95% of their usual base income. The problem is that nearly everybody has been making a lot more than their base, thanks to overtime work during the recent boom times.

SEAN McALINDEN: Probably see workers that work for motor vehicle firms, their wages decline by about 30% because of the loss of overtime. They’ve been working record overtime throughout most of the 1990’s, and that will be the first kind of compensation to be cut – cut to 40 hours.

TOM BEARDEN: That’s got to hurt.

SEAN McALINDEN: It definitely will. A lot of them have had the overtime for so long that they base the kind of home they live in, the kind of vehicle they own, or boat, on that kind of income and it is going to hurt.

TOM BEARDEN: The people who work for parts suppliers like Johnson Controls have no wage guarantees, and thousands have already lost their jobs. Suppliers provide carmakers with everything from carpeting to windshield wipers to spark plugs. Paul Ballew is the director of market and industry analysis at General Motors.

PAUL BALLEW, General Motors: The suppliers have a tough road. And the suppliers have had a tough road over the last decade plus, all of us have because of the competitive nature of the business. But if you’re a supplier in this day and age, you’re trying to become more efficient and more effective simultaneously. On a unit basis, your prices are declining 3% or 4% a year, and then on top of that now, with the softness in demand– production from us– that complicates things.

TOM BEARDEN: Delphi Automotive, which produces electrical components, will temporarily lay off about of 4,300 of its employees this week. Visteon Corporation, which sells automotive components and systems, said its profit dropped 67% in the fourth quarter. This week they’ll idle 6,000 workers. All of this impacts the economy, locally and regionally. The deepest pain will be felt in Michigan, Indiana, and Ohio, but McAlinden says the effects will be widespread.

SEAN McALINDEN: About three out of every four jobs in the American auto industry today are located in the supplier sector. That’s an all-time record high. And those jobs are more dispersed. They’re not located in just Michigan and Ohio, but everywhere from Michigan through Alabama and Mississippi; pretty much through the entire center section of the country.

TOM BEARDEN: In fact, some analysts think the automotive downturn may be a bellwether for the entire country, the canary in the coal mine gasping for air. They point to the fact that domestic automakers are losing market share to imports, despite selling record numbers of vehicles. South Korean makes, in particular, continue their meteoric rise. Daewoo sales surged 122% last year. The Europeans and most Japanese makers are thriving, too. Honda sales increased by 6% last year; Volkswagen by 12.6%. The imports are also beginning to offer larger pickup trucks and sport utilities, which have been Detroit’s most profitable vehicles for decades.

PAUL BALLEW: If we look at foreign manufacturers right now, they have about half the passenger car market, so they’ve made significant inroads there, and they gain a couple of share points on the truck side of the business, which, of course, is very important to GM, Ford and the Chrysler portion of the Daimler-Chrysler division.

TOM BEARDEN: Another ominous sign is that faced with a lot of unsold vehicles, domestic automakers offered record financing and rebate deals.

SEAN McALINDEN: We had a profit recession here in Detroit in the industry long before we saw sales fall, probably dating back to last spring — as rebates at Chrysler, for example, exceeded $3,000 a vehicle and for the industry well over $2,000. And I can’t expect to see rebates rise any higher than that level. In fact, they may fall a bit as companies toughen up what they’re willing to sacrifice to gain another unprofitable sale.

TOM BEARDEN: George Pipas thinks generous incentives have to stop. He’s sales analysis manager for Ford.

GEORGE PIPAS, Ford Motor Company: We’re not likely to see much higher levels of incentives than we are today. Today, consumers are concerned about their prospects six months down the road. Their current situation, they feel fairly good about, but they’re concerned about their job and income prospects six months from now and that kind of proposition generally means that you can’t… an extra $500 or a $1,000 doesn’t put somebody in a new car when they are concerned about the outlook.

TOM BEARDEN: Both Pipas and Ballew are optimistic that the current downturn won’t last much beyond June.

PAUL BALLEW: It’s always an interesting challenge in this industry to begin with because it’s a capital-intensive industry that’s cyclical. The economy can grow somewhere between negative 1% and 3%. Well, in this industry, we can go plus or minus 20%.

GEORGE PIPAS: Living with strong sales and weaker sales and moderates sales is something that we’ve had to adapt to for 95 years. And it’s not that much of a concern.

TOM BEARDEN: McAlinden is more pessimistic.

SEAN McALINDEN: I think we’re going to have a good solid year of a downturn. It’s not going to be the worst recession, by far — a soft landing, you could title it, but not that soft — and double digit, at least.

TOM BEARDEN: Carmakers are hoping that the Federal Reserve might lower interest rates or that the Bush administration might succeed in putting more money into car buyers’ pockets with a tax cut. And some even see a silver lining, believing they might be able to prove to Wall Street and nervous investors that Detroit today is much better prepared to manage a downturn than in years past. Of course, they actually have to do that to prove the point.