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The Road Ahead for the U.S. Automobile Industry

January 15, 2002 at 12:00 AM EDT
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RAY SUAREZ: There’s still a lot of razzle-dazzle at this year’s North American auto show. Plenty of chrome on the fenders and big engines under the hood, like in the Ford GT-40 racecar, or Chevrolet’s concept car– the Belair convertible. And there are garagefuls of eye- catching trucks and sport- utility vehicles with eye- popping price tags to match.

MAN: Okay, this your car of the future, folks.

RAY SUAREZ: There’s also optimism about new car technologies, like the hydrogen fuel cell in General Motor’s autonomy. Last week, the federal government announced it was abandoning a program to build more fuel-efficient gasoline- powered cars, replacing it with a long-range plan to build more cars that run on fuel cells.

Fuel cells produce electricity through a chemical reaction that combines hydrogen with oxygen. When operating, fuel cells are silent and emit only water vapor. But behind all of the normal hoopla and hype, there’s also a sense of nerves in Detroit; they’re worried that 2002 could be one of the toughest years in a decade for U.S. makers.

Consumers continue to flock to the less flashy but more affordable foreign-made cars. Last year, Japanese vehicles accounted for nearly 27 percent of the U.S. auto market. And although American automakers had their second best year ever in 2001 in terms of numbers of vehicles sold– some 17.2 million-those sales records came at a price.

AD SPOKESMAN: To help America move forward with interest-free financing on all new Fords.

RAY SUAREZ: In order to attract customers, the big companies offered 0 percent financing. Such low interest loans and car leasing programs lure buyers, but in bad economic times, customers more often default on their loans, which can cost automakers dearly. Ford was particularly hard-hit in 2001.

It lost an estimated $2 billion, due mainly to the cost of replacing 13 million Firestone tires it considered unsafe for trucks. Last week, Ford Motors announced it was eliminating 35,000 jobs worldwide, closing five plants in North America, and eliminating four vehicle models to cut costs. Ford executives said the changes are painful, but necessary. Jim Padilla heads North American operations for Ford.

Explain what forces were building up inside ford that led you to take the measures you took last week.

JIM PADILLA: I think the market conditions were changing very rapidly, and the situation around September 11 accelerated that extensively. So the market was already compressing to some degree and after September 11 frankly with the incentives that were put into the marketplace, margins were brought down to almost zero across all manufacturers. The consequence of this has been that while we’re selling a lot of product today, we’re not selling it at any profit. And some might call it profitless prosperity.

RAY SUAREZ: So Ford cut back on capacity some. Is that going to have to happen do you feel in other places in the industry? Are there just too many companies able to make too many cars right now?

JIM PADILLA: Well, when you look at the marketplace and the compression there, the reduction of almost 15 to 20 percent in terms of sales volume, combined with the fact that in the industry in North America there’s about 22 million units of capacity, and we’re only going to be selling somewhere in the range of 15.5 to 16.5 million units over the next several years per year.

So there’s five or six million of excess capacity out there. At Ford we know that we own some of that, and we are taking steps to reduce that. And others, I think, will have to do the same.

RAY SUAREZ: Will the North American car and truck industry just simply need fewer people to build vehicles down the road as plants are modernized and as old plants are taken off stream?

JIM PADILLA: I suspect that there will be some efficiency over time but make no mistake, the heart and soul of any automobile company, and particularly Ford Motor Company, is the strength of our people. So we will always rely on their intelligence, on their support, on their drive to deliver great product with great quality.

So we will have to make sure that we have people with the right skill sets, not only in our engineering areas but in our factories because this is more and more becoming a knowledge-based type of arena where our people have to own the tools to get the job done and respond to our customers.

RAY SUAREZ: How do you manage a force reduction like that working with organized labor?

JIM PADILLA: It is a challenge. We have good union contracts with the United Auto Workers, with the Canadian Auto Workers; and we will live to the letter of our contract. We have spent considerable time talking with the union leaders and going to the plants where the people are affected to make sure they understand what are the business issues that we’re facing and to let them know how we will work with them towards the future as we work to provide them with alternative opportunities.

We have guaranteed employment arrangements where we will provide for their economic security over a period of time, a considerable period of time, as we work our way through these issues.

RAY SUAREZ: The Chrysler Group also estimates it lost nearly $2.5 billion last year in day-to-day operations and spent another $2.8 billion on retirement incentives and plant closings. Even though G.M., the world’s largest auto maker, is expected to show a slight profit from last year, it had to reduce its white collar work force by 10 percent and scale back production for 2002. David Cole is president of the Center for Automotive Research in Ann Arbor.

Well, Professor, we’re here in Detroit. Do we find ourselves at the annual conclave of what’s really an industry in crisis?

DAVID COLE: Well there’s no question about it. I think this industry at this point, as I would look at it, is an industry that has a broken business model. And by that I mean it’s an industry that has been producing last year at near record volume, second highest sales volume on record, and it’s just not profitable.

Now it doesn’t mean that every company is broken, but when you look throughout the industry structure, manufacturers and suppliers down through the supply tier, what you have in an industry is that it is broken and it has to be fixed.

And as we look forward, in order to attract the kind of an investment that is necessary to sustain this industry, we have to see profitability, not just in manufacturers but at suppliers as well. I think we’re looking at a future that’s bright but probably not everybody is going to be there. It still has to go through a consolidation or rationalization we’re probably right at the cusp of that right now. I think we’re going to see significant things happen over the next six months or a year in this regard.

RAY SUAREZ: Help me understand the roots of this crisis a little bit because the industry has essentially done what we ask industries to do. They’re reduced the number of worker hours that go into it, kept a lid on prices, upped quality and, what? Got in trouble for that?

DAVID COLE: Well, to begin with, if you look back ten years ago it cost, that is, for the average person to buy a car, it cost about 30 weeks of pay. That’s dropped today to the low 20s. What has happened is the industry has done a fantastic job of delivering more value in their products. They’re more affordable. There’s more features. They’re safer. They’re more durable but because of the competition, what has happened is those savings have essentially have all been passed to the consumer and the industry hasn’t been able to retain much for themselves.

It’s a fiendishly competitive industry. One of things that characterizes us is this idea of the broken business model. Now if you look at what’s happening here in Detroit, there are really three stories in my view.

One is the story related to the new cars and the concepts and the things that you see on the floor. There’s another story that underlies that, and we, of course, saw that highlighted last week with the announcement that Ford is going through a massive restructuring to try to become profitable again. They were there just a couple of years ago in this incredible change occurred in a very short period of time and the money disappeared. They’ve really got to get that back. That’s what their new leadership is focused on so that broken business model of this industry is the second story.

The third one is really one that’s a little further out. I think we saw that emerge when G.M. rolled out that fuel cell platform, the autonomy, which in a sensory defines potentially the architecture of future vehicles.

So we have concurrently, you know, hot new products, a broken industry but a future that may be very different in many ways from what we thought it would be in terms of how we might think about cars and trucks of the future.

RAY SUAREZ: Are there some players who are currently here on the floor showing their wares that simply won’t be here in 2010 or 2015, won’t be in the game?

DAVID COLE: Well, it’s hard to say. I would say by 2010 or 2015 the game is going to be pretty much over. You know, clearly there are some companies that are very strong. It doesn’t necessarily mean that they have to be large companies. Toyota is large and strong. Honda and the BMW are smaller companies that are strong. G.M. is coming on very strong and is much better shape than it was just two or three years ago.

Then we have a lot of companies that I’m confident are going to be here but they have some immediate struggles, immediate challenges. People like Ford. But when you look at the rest of the companies in the world, what you have to say there’s really too many in the game and no volunteers to step aside.

So I think what we’re looking at is a pretty bloody battle. Now there is consolidation. You have groups that are forming. Ford, for example, bought Jaguar and bought Volvo and Range Rover. G.M. has alliances with people like Suzuki and Fuji that makes the Subaru and Fiat and Isuzu.

So the groups are beginning to form. What they’re going to look like we’re not quite sure yet, but it looks like we may distill down to four or five or six major groups of manufacturers in the world, sort of major teams but what underlies this is something that we often don’t think about as a supply base, that is the suppliers that make the parts and the systems for these vehicles, there are more than three times the number of people that work in suppliers than work in those auto manufacturing plants.

And the suppliers to this industry are going through the same kind of revolution, kind of hidden from view, but you see companies that were icons of federal mogul, for example, many companies that were part of this industry that are gone have been consolidated, this is an industry that is really going through a dramatic restructuring of its entire business model, and it’s very painful.

RAY SUAREZ: Cole says the vicious competition in a crowded field of manufacturers will force tough changes in the car business but it’s a great time to be buying a car.