Make-or-break year for Big Three
GM, Ford and Chrysler arrive at Detroit auto show hoping new offerings will be hits, but looking ahead to crucial labor talks in '07.
DETROIT (CNNMoney.com) -- The U.S. auto industry gathers here this week for the annual auto show after a turbulent year, ahead of a year that promises to be even more momentous.
The automakers are hoping the focus at the show will be on new car and truck models and the glimpse of future vehicles that will be unveiled.
But looming over the show's glitz and glamour are continued market share declines and financial losses for the traditional Big Three, with crucial labor talks looming later this year.
As difficult as it was for U.S. automakers to shed tens of thousands of their workers, as well as their long-held market share position, they face their most important challenge of a generation in the coming months - to reach new labor contracts with the United Auto Workers union that could allow them to be competitive once again.
The labor deals between the UAW and GM, Ford Motor (Charts) and the Chrysler Group unit of DaimlerChrysler (Charts) all end in September. All three companies are losing money on their core North American auto operations. And experts say the new labor deals are crucial to their chances to be able to compete in the global auto marketplace going forward.
"It may well set the tone for the whole manufacturing sector, to the extent to which manufacturers can get their costs down and be competitive on a global basis," said Bob Schnorbus, the chief economist for J.D. Power & Associates. "It's going to shape the competitiveness of the whole sector for the next decade if not longer. I don't know if they can accomplish a 100 percent parity, but they need to get substantial changes that will put them back closer to the Japanese automakers."
Experts are divided on whether the automakers will get the cost savings they need to be competitive. Some believe the union realizes the dire straights facing the industry and are prepared to do what is necessary to help out, even if it means higher health care costs and a reduction in some other benefits for members and retirees.
"I think you can assume the union won't do anything to damage the Big Three," said David Cole, chairman of the Center for Automotive Research. "Labor can't afford it. They'll come up with a competitive deal; both sides are committed to that."
Others say that while they believe there's little chance for a strike by the union, and that the automakers will win some savings, it won't be nearly enough to put them on a competitive footing once again.
"I don't think that you get an industry-changing contract," said Kevin Tynan, auto analyst for Argus Research. "The union is not going to roll over and die and give the domestic manufacturers everything that flips the switch for them back to profitability."
The negotiations take place after a year of historic changes in the U.S. industry.
GM shed more then 30,000 workers, slashed its dividend by half and sold just over half of its most profitable unit, GMAC. Its largest individual shareholder, Kirk Kerkorian, dumped a 9.9 percent stake in the company after GM management passed on joining an alliance with Nissan (Charts) and Renault as he had advocated.
Jerry York, Kerkorian's key auto advisor who gave a speech at last year's auto show in which he said GM needed to be in crisis mode, briefly served on the GM board, but resigned from the board in October, writing in his letter of resignation that he had "grave reservations concerning the ability of the company's current business model to successfully compete with those of Asian producers."
But GM also trimmed losses far more than analysts believed it would and it was the best performer on the Dow Jones industrial average, with shares gaining 58 percent.
More than half the hourly workers at rival Ford Motor agreed to leave the company. Also gone was its once star vehicle Taurus - long ago consigned to the rental car fleets - as well as the long-held title as the nation's No. 2 automaker.
By the end of the year it had fallen behind Toyota Motor (Charts) in U.S. market share in most months, slipping as low as No. 4 behind DaimlerChrysler as sales of the nation's best-selling vehicle, the Ford F-series pickup, plunged in the face of high fuel prices and a weak home building market, which cut demand from its contractors.
After bucking the trend of losses at competitors GM and Ford, Chrysler slipped into red ink in the third quarter, as it struggled with the highest labor costs in the industry. It also lost market share, giving up its long-held position of No. 3 in sales early in the year, ending behind Toyota in full-year sales for the first time and falling to No. 4. Some were advocating that DaimlerChrysler should unwind its 1998 merger and sell the Chrysler unit.
Those problems, and the labor challenges ahead, are what make the auto show this week in Detroit so crucial. It's a key opportunity for the embattled Big Three to present the public and the thousands of industry media here with a vision for new cars that can be the hits they desperately need almost as much as a win at the negotiating table.
"The proper contract settlement is absolutely critical going forward," said Efraim Levy, the auto equity analyst for Standard & Poor's. "But even if they've got the right contract in place, they've got to get the right product. That's even harder."
GM sweeps honors
GM got an early lift in the competition for hot products on Sunday when the auto show kicked off giving the automaker a double helping of honors.
The Saturn Aura won the show's Car of the Year award, while the Chevrolet Silverado won the truck of the year. It was the first time GM had ever taken both honors in the same year - Honda Motor (Charts) swept last year when the Civic sedan and Ridgeline pickup won the awards.
The Aura's win was the first time GM had won Car of the Year since the Corvette won in 1998.
Still, the good news for GM was a setback for Ford Motor, which had two finalists for Truck of the Year in the Ford Edge and the Mazda CX-7.
"For Chrysler and Ford, their most dangerous factor is the reemergence of GM," said Cole. "After GM's near brush with death, they got their act together and become a more formidable force. That's more dangerous for the other domestics than the international automakers."
After a year of record gasoline prices, the U.S. car buyer seemed to suddenly become serious about fuel economy when making their purchasing decisions. Sales of car models continued the comeback that first surfaced with the higher gas prices in 2005, as car models' share of total sales climbed to 47 percent from an all-time low of 44.3 percent in 2004.
Within the light truck segment, sales of the so-called crossover vehicles, an SUV-like offering with a more car-like drive and design - and often with better fuel economy - passed traditional SUVs for the first time in 2006. Cross-over vehicles continue to eat away at not just SUV, but minivan sales. The decline in that segment caused GM and Ford to basically exit that field in 2006.
Those changes in the industry are why a lot of what the automakers are rolling out at the show this year are plans for much more fuel efficient vehicles - GM unveils a so-called "plug-in" hybrid that gets better mileage with the help of batteries that need to be recharged overnight. DaimlerChrysler is debuting some fuel-efficient diesel technology and Ford is showing off some fuel cell technology.
The challenge facing the auto industry is that none of the new products might be enough if they can't make the difficult and major changes to their cost structure. And even if they make those changes, it won't be enough to stop their recent declines if the products being shown this week aren't hits. Batting .500 won't be enough. Batting .000 spells doom.