Car Makers React to the Reality of Higher Gas Prices
(WWJ/AP) For those who thought they had a handle on the pace of change in the U.S. auto market, vehicle sales figures for May were a startling wake-up call. The Detroit Three are not wasting any time responding to the changes those numbers represent.
Hit by gasoline prices that rose faster than anyone expected, vehicle makers found themselves in a market that had shifted suddenly – and radically – away from trucks and SUVs and toward smaller, lighter cars.
General Motors Corp. saw its sales 28 percent in May compared to a year earlier, with a 37 percent decline in truck and SUV sales and a 14 percent drop in car sales. Ford Motor Co. sales fell 16 percent for the month, while Chrysler LLC's sales were down 25 percent and Toyota Motor Corp.'s sales slipped 4 percent. Overall sales were down 11 percent compared to last May.
The three domestic auto makers are reacting quickly with new plant closings, production cuts and plans to overhaul their product lines. But only time will tell whether those changes will create enough change fast enough, said Bruce Belzowski, assistant research scientist at the University of Michigan's Transportation Research Institute.
Belzowski said the domestic auto makers "are all in the game" when it comes to developing new technology. But the big question is whether they will deliver vehicles customers want at a price they can afford. He says the marketplace will favor the companies best able to use new technology in a competitive way and leverage global resources effectively.
For example, Belzowski said, the highly anticipated Chevrolet Volt plug-in hybrid might not be successful if it comes to the market as a $40,000 two-seater. But if it has four seats and costs less than $30,000, it could be a big hit.
Also vital, Belzowski said, will be the companies’ ability to bring to the U.S. the kinds of fuel-efficient vehicles they are already producing for other markets. In some cases, he said, that could mean importing cars made in places like Asia and Europe. But with the value of the U.S. dollar now relatively weak, it could make more sense to produce more cars – and fewer trucks – here.
Plants Closings, Production Shifts
General Motors last week announced plans to close four North American truck plants and possibly sell or revamp its Hummer brand of SUVs. GM also said it would add shifts and products to U.S. car plants, including the addition of a third shift in Orion Township. Also announced were plans to build a $350-million Flint plant to make small-car engines, the expansion of transmission and six-cylinder engine production in Mexico, a final decision to start production on the Volt.
"We at GM don't think this is a spike or temporary shift," GM CEO Rick Wagoner said of the market’s shift toward smaller vehicles. "We believe that it is, by and large, permanent."
Traditionally, GM and the rest of the Detroit Three have had problems making money by selling small cars built in the U.S. But, according to the Associated Press, Wagoner thinks GM has lowered costs enough with new labor contracts and other measures to turn a profit.
"The direct answer is, we need to," Wagoner told reporters last week. "We believe we can build a car there profitably."
GM’s changes follow closely behind Ford’s announcement last month that it was cutting North American production for the rest of this year. Ford also says it no longer expects to return to profitability by 2009. Last week, Ford notified workers it will cut white-collar salary costs 15 percent by Aug. 1, and an unspecified number of people will lose their jobs.
In an interview Thursday with WWJ Newsradio 950, Ford CEO Alan Mulally said: "We'll come out the other side of this with a company that is competitive, with the products that people want, and we'll start to grow again. But in the near term, we're just so sorry that we have to see some of our employees leave the operation."
Jim Farley, group vice president of marketing and communications for Ford, said that company, like the whole auto industry, is dealing with fast-moving changes in what customers want to buy.
“May was a watershed month, we are, as an industry catching up with the breathtaking choices that customers are now making,” Farley told WWJ’s Jeff Gilbert, “…there are a lot of economic indicators that we’re all watching in this industry. But one broke out in May, and that’s fuel prices.”
He said the compact-car segment is now “clearly the core segment in the U.S. industry,” representing about 25 percent of the vehicles sold. He calls that “a breathtaking shift.”
Like GM and Ford, Chrysler also is widely expected to announce further production cuts. In November, the company announced it would cut 8,500 to 10,000 hourly jobs and 2,100 salaried jobs through the end of 2008, or about 15 percent of its work force. In the past year, the company has cut shifts at seven vehicle assembly factories in Detroit; Sterling Heights; Warren; Belvidere, Ill.; Toledo, Ohio; Brampton, Ontario; and St. Louis.
Belzowski said he thinks Chrysler is a bit farther behind GM and Ford when it comes to the development of new technology. But, he added that that the company also should benefit from its access to research and development at Daimler AG, which still owns 20 percent of the Chrysler.
Some Good News
A new report indicates that the Detroit Three have not been caught flat-footed by the changes they are facing now.
According to the influential Harbour Report, all three have nearly erased the productivity gap between them and their Asian rivals – thanks to worker buyouts, leaner plants and other improvements. Chrysler made the biggest improvement. It tied with Toyota to lead the industry by averaging 30.37 hours to fully assemble a vehicle.
Ron Harbour, a partner in the automotive consulting firm Oliver Wyman and the author of the report, said the Detroit Three's ability to improve productivity under those circumstances has been impressive and will help them as competition grows fiercer and consumers move to smaller, less profitable vehicles. Harbour said automakers have to sell as many as 10 small cars to squeeze the same profits they can get from one truck or SUV.
"It's almost like Rocky. They're in the fight of their lives, but at least they're going into this fight as fit, from a manufacturing standpoint, as they've ever been," Harbour told the Associated Press. "That part is the bright spot.
This report includes information from the Associated Press.
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(WWJ/AP) For those who thought they had a handle on the pace of change in the U.S. auto market, vehicle sales figures for May were a startling wake-up call. The Detroit Three are not wasting any time responding to the changes those numbers represent. 
