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The Big Three's bumpy road
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January 5, 2002: 4:44 p.m. ET
High incentives, increased imports suggest U.S. automakers face a tough '02.
By Staff Writer Chris Isidore
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NEW YORK (CNN/Money) - As the nation's economy sputters and stumbles along in the wake of the Sept. 11 terrorist attacks, the auto industry roars into 2002 with three months of red-hot sales obscured by mounting red ink.
So, as the industry gathers in Detroit Sunday for the 2002 North American International Auto Show, its investors have got to be wondering just how much of a good thing they can stand.
The sales boom of the last quarter was driven by a zero-interest financing war, started by industry leader General Motors Corp. (GM: Research, Estimates) following the sharp drop in sales for two weeks following the attacks. Most of the rest of the industry was forced to follow.
The strong sales left the automakers with relatively low inventories and plants set to run at a much higher level than they were a year ago at this time. But when fourth quarter financial results are released later this month, those sales will be coupled with losses at No. 2 Ford Motor Co. (F: Research, Estimates) as well as at Chrysler Group, the North American unit of No. 3 automaker DaimlerChrysler. (DCX: Research, Estimates). GM will see its profits plunge despite the increased sales.
And the profit-sapping incentives don't show much sign of letting up. While automakers reported strong December sales results Thursday that made 2001 the second best year in history for the U.S. industry, GM announced it would offer $2,002 in cash incentives and favorable financing on most new models.
GM executives said they believe that net pricing, which reflects a vehicles price less the cost of marketing and incentives, will come in at about the same level in the first quarter as it did in the fourth.
"I think the incentives are going to continue to be necessary," said Bob Schnorbus, chief economist of J.D. Power & Associates. "If you don't play the incentive game, you'll lose market share. At least in the first half of the year, even in the best case scenario you're just coming out of the recession, you'll need the support of incentives to maintain sales."
Overseas automakers gain
The Big Three automakers are also struggling with continued gains by overseas manufacturers. GM last year posted no decline in market share for the first time since 1990, but Ford and Chrysler saw their share shrink in the face of competition abroad.
There remains a perception by many consumers that imported brands are of better quality than their American-made counterparts. That, along with continued strength of the U.S. dollar, lends little hope for a quick Big Three recovery.
"Who is going to gain market share in future? When we polled those in the industry 70 percent of respondents said Asian manufacturers, and 51 percent said European would gain. Only 20 percent said North American manufacturers would gain," said Brian Ambrose, partner with KPMG LLP and the director of the professional service firm's automotive group.
He adds: "We then asked the industry what is the most important factor to consumers and they said quality, affordability and safety in that order. What have Asian manufacturers been focused on? Quality, affordability and safety."
Most projections about U.S. sales this year come in the range of 15 million to 16 million light vehicles, suggesting there is far too much domestic capacity, especially with the gains by imports. But the Big Three's labor contracts that don't expire until the fall of 2003 will effectively stop them from closing plants or experiencing the deep layoffs seen in other segments of the economy.
So while Ford executives are expected to unveil plans Friday to restore the automaker to profitability, don't expect any radical restructuring plans in the immediate future, according to the experts.
"They'll have realistic views of a difficult restructuring process," said Ronald Tadross, analyst with Banc of America Securities. "I don't think they'll go crazy and close three or five plants. They're not going to make too much noise. You don't want to get the union too uptight 21 months before you have to talk with them."
Tadross is a relative bull in terms of auto sales projections for 2002, seeing somewhere close to 15.9 million vehicles sold this year. Friday he raised his modest earnings forecasts for the year for GM and Ford.
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But that was done due to macroeconomic issues such as consumer confidence and unemployment trends, which have proven more resilient than initial projections. He still sees a difficult year for Detroit automakers in 2002.
"I think they're going to be struggling," Tadross said. "Even with 15.9 (million vehicle sales) GM can only make a little money. Ford can't make that and Chrysler probably can't." 
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