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Auto Industry on the Road to Recovery?

November 3, 2009 at 12:00 AM EST
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The auto industry signaled recovery after GM reported a sales gain and Ford announced an unexpected profit. Jeffrey Brown reports.
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JIM LEHRER: What’s behind some good news for Detroit automakers?

Jeffrey Brown has that story.

JEFFREY BROWN: Not long ago, bankruptcy and potential catastrophe — today, at least, some signs of recovery.

GM posted its first monthly gain in auto sales since the recession began, up nearly 5 percent from a year ago. Ford reported gains, too, one day after it announced an unexpected third-quarter profit of $1 billion.

We take a look now with Paul Ingrassia, an automotive writer. His latest book, “Crash Course,” about the bailouts and bankruptcies in Detroit, will be published in January. And Louis Lataif, dean of the Boston University School of Management and a former top executive at Ford, he currently sits on the board of the Canadian auto parts maker Magna, which has sought to buy the European company Opel, a division of General Motors.

Late today, we should report, the Associated Press said that GM has decided not to sell.

Paul Ingrassia, I will start with you.

And I want to start with Ford. It’s the monthly sales gains, but also this surprise about profits. So, how significant is this? And what accounts for the good performance?

PAUL INGRASSIA, author, “Crash Course”: You know, well, it’s very significant, Jeff.

I think that it’s not only profits, but also, more importantly, frankly, its positive cash flow. And a year ago third quarter, Ford had a negative cash burn of $7.7 billion, which was frightening. This year, in the third quarter, the positive cash flow was $1.3 billion.

And just the week before, “Consumer Reports” gave Ford quality ratings across its entire model lineup comparable to those of Honda and Toyota, which have long been the industry quality leaders. So, there’s lots of good news coming there. There’s also some reality jolts, if you will.

The company’s bond rating was raised, but it’s still deep into the junk bond territory. But it’s a steady improvement in quality and steady management. And, frankly, having avoiding bankruptcy is paying dividends.

JEFFREY BROWN: Well, Mr. Lataif, just to fill in the picture a little bit more, as I understand it, Ford’s revenues were actually down. So, the profits are really coming from cutting costs, I guess, from the plants and layoffs? Is that it? Or is it more car sales?

How do you explain it?

LOUIS LATAIF, dean, Boston University School of Management: Well, I think the car sales do contribute, but the finance part of Ford Motor Company has always been an essential part of their business model.

And the financing arm did do well in this quarter. I think, as Paul suggested, there’s lots to be encouraged about. Their products are more acceptable. The company has done a good job of restructuring.

It is not overstating their profits, because they did mention that they don’t expect to be fully profitable on an annual basis until probably a year-and-a-half from now. But this is certainly encouraging, in the face of all that’s happened in Detroit in the last couple of years.

Explaining a spike in auto sales

JEFFREY BROWN: And, staying with you, when you do look at the auto sales, the gains that we just saw, is it -- I mean, how much can you tell about how much it is because of the economy, or something that the manufacturer itself has done, or whether, of course, the big question, will it sustain itself? What do you look at to know?

LOUIS LATAIF: I think the economy is coming back slowly, quite slowly. The sales rate of vehicles before the crash was at about 16.5 million vehicles a year.

It crashed down to about nine million. And that was pretty frightening for all of us. No one could have anticipated that kind of a falloff in demand. No business plan could ever have anticipated that.

Well, before the cash for clunkers program, it was running in the nines, the mid-nine million range annualized. And then cash for clunkers did a nice job of pushing us up to about 12 million.

It's now settled down to about 10 million, 10.5 million, which is encouraging. That suggests that more buyers are finally coming back into the market. But 10.5 million is not a very exciting sales rate. In an absolute sense, you would like to see it at 12 million, 13 million, 14 million eventually. And, so, the economy still has a way to go.

But I do think the economy is starting to bubble back up and consumers are beginning to spend again.

JEFFREY BROWN: Well, Paul Ingrassia, now spread that -- fill in the picture a little bit more, the economy to GM and Chrysler, both of them out of bankruptcy, both moving forward, supposedly, with comeback plans. GM had some good news this month, Chrysler not. So, what's going on there?

PAUL INGRASSIA: Well, I think this reflects what's happened at each company in the last few years.

You know, Chrysler spent an absolutely disastrous decade of ownership under first the Germans' Daimler-Benz, and then under a New York private equity firm, Cerberus. And, basically, during this time, very little new products got developed. And the product pipeline at Chrysler is virtually dry.

General Motors had sort of the opposite problem, in a way. It rather stubbornly insisted on clinging to eight brands. And the government, as part of the bankruptcy it worked out earlier this year, whittled that down to four brands that will continue.

I mean, there's still eight for now, but four are being phased out or sold. But, in those core four brands, Chevy, Cadillac, GMC, and -- there's one more -- in those four brands -- Buick -- excuse me -- in those four brands, there are some pretty good products in there.

And, so, I think it's, GM just has more of a core product strength than Chrysler going into this crisis.

Ford's gains

JEFFREY BROWN: And, Paul, when you then look at all three, the Big Three here, when you see Ford doing well, is Ford doing well at the expense of the others? Is it possible that, to the extent that there is a recovery under way, we're going to see it affect companies in different ways?

PAUL INGRASSIA: Well, absolutely we will.

In fact, we're already seeing that. And, yes, Ford is doing well at the expense of the other companies, in part. You know, it was actually quite interesting. When the president's automotive task force early this year debated how to approach dealing with and perhaps saving the U.S. -- hopefully saving the U.S. auto industry, they were sharply divided over whether it was worth the effort, in terms of taxpayer dollars, to save Chrysler.

The task force was quite evenly split on this, and President Obama himself cast the deciding vote. And one of the reasons that the task force was evenly divided on Chrysler was that some members maintained that GM and Ford would have a better time of prospering, a better chance of prospering, if Chrysler was to go out of business, and the whole Fiat ownership and control of Chrysler was sort of a long shot to save the company anyway.

We will see.

Potential road blocks

JEFFREY BROWN: Now, Louis Lataif, in the meantime, there are potential struggles, of course, ahead here.

One could be with the UAW, which, even as Ford is talking about new profits, UAW is balking at some of the potential contract, I gather, for the next contract period.

Explain the issues there. particularly when the union is looking at the company's announcing that it's doing well.

LOUIS LATAIF: Yes, it is complicated.

I think the Ford management would like to have their contracts be on an equal footing with those that Chrysler and General Motors have negotiated. So, that's, I think, simply what they're asking for the UAW, so they would be fully competitive with these sort of government-owned companies.

The UAW, on the other hand, of course, sees that Ford is doing better and would rather not concede further, because they have already made concessions. It's a tough issue. But I think, if I were to represent what I think Ford management is thinking, unless they have a competitive cost basis, the long-term survivability of those jobs may be in jeopardy.

So, the issue is not to injure the UAW, but to preserve the company, its survivability, and the jobs long-term. And that's the dilemma that's always in these negotiations.

JEFFREY BROWN: Paul Ingrassia, how do you see this going forward?

PAUL INGRASSIA: Well, I think it's a really -- it's a tough issue.

I mean, frankly, there were three separate issues that Ford wanted from the UAW, three separate provisions. Amendments, by the way, to the current contract, not the next contract. It wanted to freeze wages for new hires. The company also wanted a no-strike provision until 2015.

And, finally, it wanted a reduction in job classifications and work rules. To be honest, the only really important one was the last one. There's unlikely to be a strike in the auto industry over the next few years. But the job classifications and work rules that basically say, you know, Bill can't touch this machine because that's a job reserved for Sue over there, and only she can touch that machine, and, you know, if she's not around, well, you just got to wait a half-an-hour for that to -- for her to get there, so the assembly line can get back in motion, those are very antiquated rules.

But, you know, the truth is, one man's featherbedding is another man's job, if you will. And that's where Ford is sort of handicapped here.

JEFFREY BROWN: All right. Well, we're talking months. We're talking quarters now. And we will look ahead to how all this continues to unfold.

Paul Ingrassia, Louis Lataif, thanks very much.

LOUIS LATAIF: Thank you, Jeff.

PAUL INGRASSIA: Thank you, Jeff.