Complete coverge:

Detroit's bumpy road to better times

U.S. automakers struggle with weak sales, ongoing losses as Detroit auto show kicks off, but lower labor costs, overseas growth could help in future.

Subscribe to Companies
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Chris Isidore, senior writer

2008 Chevrolet Malibu
Chevy's champ
GM wins car of the year award for the second year in a row.
2009 Ford F-150
2009 Ford F-150

DETROIT ( -- The Detroit News welcomed Detroit auto show attendees to town over the weekend with the headline "Carmakers try to overcome gloom."

Oil at $100. The worst sales since 1998. Billions in continuing losses. New fuel economy regulations on the horizon.

There's plenty weighing on the industry, especially the U.S. automakers, as they gather for what is officially called the North American International Auto Show. Forecasts are that U.S. sales are going to be down again this year from last year's weak level, as both high gas prices and a weak housing market weigh on car buyers.

But while there's plenty of trouble facing the industry, there are also signs of hope for U.S. automakers, in the form of new labor deals, new management and new opportunities overseas.

"As bad as it is, it could be worse," said Tom Libby, senior director of industry analysis for J.D. Power and Associates. "If you think about it, all three have taken big steps. None of them will have the strength they used to have in the near term. But they have some good new product in the pipeline and the drop in costs is going quicker than they anticipated."

Still, Libby and other experts agree it's going to be another tough year ahead for the industry in general but for the Detroit based automakers, in particular, as Ford Motor (F, Fortune 500), General Motors (GM, Fortune 500) and Chrysler LLC try to stem ongoing losses from their auto operations.

During press preview days that started here Sunday, U.S. automakers are unveiling new vehicles they are arguing will help them complete the turnaround. In particular, they are hyping "green" technology and fuel economy more than ever.

Still, the fact is that that these companies are still depend on the larger, less fuel efficient vehicles for most of their sales and profits. And it's clear that those vehicles are still a key to their future.

Ford unveiled a new version of the F-series pickup truck on Sunday. The F-series till the nation's best selling vehicle and one that is responsible for more than one in four of the company's U.S. sales last year, even as sale of the outgoing version plunged 13.5 percent.

Chrysler, which was sold last year by German automaker Daimler (DAI) to a U.S. private equity firm Cerberus Capital Management, also unveiled its new Dodge Ram pickup, which accounted for more than one in six of Chrysler's sales.

The large pickup, a favorite of contractors, has been particularly hard hit by the downturn in housing and home building. But the entire industry was hurt by declining home values, industry experts said, as loss of home equity and value caused potential buyers to delay or drop plans for a new vehicle purchase.

That's one reason that total U.S. sales fell 2.5 percent to 16.1 million vehicles in 2007, and why consultant CSM Worldwide is forecasting sales of only 15.8 million in 2008, even if the overall U.S. economy avoids falling into a recession. And sales are likely to fall even further if it does, which a growing number of leading economists now believe is likely, if it hasn't already begun.

Bob Schnorbus, chief economist for J.D. Power, said that if there's a relatively shallow recession, he could see sales in the 15 million to 15.5 million range this year, while a deeper downturn, comparable to the 1990-91 recession, could quickly drop sales under 15 million vehicles.

But he said there is even a silver lining in this forecast of slower sales, a sign that Detroit automakers now have cut capacity enough that when faced with lower demand, they won't have to keep churning out cars and trucks no one wants to buy, and then offer deep discounts and other sales incentives to move the unwanted vehicles. That should limit losses even if the downturn is steeper than now forecast.

"We're seeing a greater willingness on the part of the Big Three to cut production," said Schnorbus. "Even with weak demand, that you're not going to see the blow-out sales offer during the summer or at the end of the year. The consumers are learning they won't necessarily be able to wait out the manufacturers to get a much better deal."

But weighing on both the consumers and the industry are record oil prices at or near $100 a barrel. The traditional SUV, for years one of the major drivers of profit for the Big Three, is undergoing a sharp sales decline, as buyers move towards so called "crossover" vehicles which have some of the attributes of an SUV while providing a more car-like ride and somewhat better fuel economy.

While the Big Three have had some success in this category, the shift has left them with excess capacity at plants that made the SUV. Just 10 miles from the Cobo Arena where the auto show is being held, Chrysler is preparing to eliminate the second shift in the coming weeks at its Jefferson North plant that makes the Jeep Grand Cherokee and Jeep Commander mid-and full-size SUVs.

While the automakers are trying to put more emphasis on developing improved car models and stressing fuel efficiency, they are having trouble selling that idea to American car buyers who still see the Big Three as a source of trucks.

The Saturn Aura, which won the "Car of the Year" at the show last year, had disappointing sales despite critical acclaim.

Sunday at the show the Chevy Malibu picked up a second straight "Car of the Year" honor for parent GM, following a fall of great critical acclaim. But it's not clear that the Malibu is ready to take a significant bite out of the sales of the competing Toyota Camry or Honda Accord.

Looking up

Despite all the problems facing U.S. automakers, there are also reasons for optimism, which is why a growing number of auto executives are forecasting improve profitability going forward, according to a survey by audit firm KPMG..

First, there are the new labor agreements that General Motors, Ford and Chrysler reached with the United Auto Workers union this past year.

While those agreements preserved the wages of veteran autoworkers, they allowed the traditional Big Three to pay many future new hires a lower hourly rate. In addition it shifted nearly $100 billion in future health care coverage for retirees and their family members to union-controlled trust funds, which the automakers will pay into with a combination of cash and other assets.

Lifting the post-employment cost burden from the unionized automakers and allowing them to cut wage costs going forward will allow them to close much of the labor cost gap that they have had compared to U.S. plants operated by nonunion overseas automakers such as Toyota Motor (TM), Honda (HMC), Nissan (NSANY) and Hyundai.

Sean McAlinden, vice president for research for the Center for Automotive Research, said that cost savings won could actually give GM a cost advantage over Toyota within a few years, although he expects Toyota to respond to the challenge and make further cuts in its labor costs to retain an edge. Even so, that is likely to be a much slighter edge than in the past.

In addition, the automakers are seeing improve outlook elsewhere around the globe, as developing markets such as China, now the world's second largest market for cars, as well as India, Brazil and Japan, are soaring.

"It's important we don't look at the industry through North American blinders," said Michael Robinet, vice president of global vehicle forecasts for CSM. "The global industry is growing by 2 million to 3 million units a year. You've got developing markets that are on fire now, it's mainly because their GDPs are rising and incomes are rising to the point where more and more people have the ability to buy vehicles. Virtually everyone is making money in Brazil and China."

In all, while things still look cloudy in the short term, things may be starting to brighten a bit in Detroit. To top of page

Photo Galleries
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Royal wedding: How much will it cost? Meghan Markle's wedding to Prince Harry could cost millions once security is included in the bill. See how the costs break down. More