July 2008 - What do you do when the piper comes calling and knocks your bread and butter off the table on his way past? You find some more bread and a new way to butter it.
That’s the task that Detroit’s Big Three automakers have before them as they try to choke down two bitter pills in the first half of 2008.
The first pill is an overall downturn in the economy. Recession is popularly defined as two consecutive quarters of decreasing GDP. However, the National Bureau of Economic Research defines a recession as the time between the most recent peak of the economy’s business activity and the point at which it bottoms out. However it’s defined, the consensus is that the United States is in one, even though the GDP statistics don’t yet bear that out.
The real problem isn’t the rise in crude oil and gasoline prices, either (Texas intermediate crude for May delivery was trading at $118.70 per barrel as of this writing). After all, "pickup trucks aren’t as impacted by fuel prices as you might think, simply because if you have to have a pickup truck there’s little alternative," says Erich Merkle, vice president of forecasting at IRN, Grand Rapids, Mich., an automotive consulting firm.
The second, and worst, pill is the slump in the U.S. housing market. Housing has been sent into a tailspin by the subprime mortgage debacle, punctuated by the recent collapse of iconic Wall Street investment bank Bear Stearns. Privately owned housing starts decreased in March (the latest data at press time) by 11.9 percent from February and 36.5 percent from March 2007, according to the U.S. Census Bureau.
That steep drop in new housing means fewer jobs for the contractors, electricians, masons, plumbers and other people in trades who make their living from construction--and make up a large bloc of the nation’s buyers for trucks such as Ford’s F-Series, GM’s Chevy Silverado and GMC Sierra, and Dodge’s Ram pickups. With trucks claiming about 30 percent of the vehicle mix at Ford and GM, that crunch on truck buyers means that the Big Three have some big work to do this coming year.
"It’s going to hurt them badly," says Global Insight automotive analyst Hank Stoddard of the housing decline. "Their product mix favors more of those large trucks than do most of the other companies that sell in the United States.
"We believe that the country is already in an economic recession," he says. "So that in itself is going to put a big damper on demand, of course."
That damper has already been felt by Chrysler, which shut down shifts at five of its North American plants late last year at a minimum loss of 8,500 hourly jobs. Chrysler also eliminated four models for 2008--the Chrysler PT Cruiser convertible, Pacifica, Crossfire and Dodge Magnum--in an effort to right-size production and inventories.
"These actions reflect our new customer-driven philosophy and allow us to focus our resources on new, more profitable and appealing products," Jim Press, Chrysler LLC vice chairman and president, said in a release at the time.
Global Insight believes that the recession will last through the second quarter of this year. How badly that will hurt overall light vehicle sales in the United States depends on who you ask. Estimates among companies interviewed by Modern Metals range from 15 million units (Global Insight) all the way up to 16.1 million or 16.2 million (GM).
IRN forecasts sales of 15.4 million units for 2008 and predicts rocky times for the remainder of the year. "There’s no question that the economic environment this year is going to be difficult," Merkle says. "People don’t buy a new vehicle because they have to; they buy one because they want to. They can delay that purchase. And I believe there’s going to be a number of people that delay that purchase this year. That’s going to make for a difficult year for the Detroit Big Three.
"I think that they’ll be able to get a little more stabilization by this time next year," he says. "However, if you’ve got stable market share and the macro market is moving lower, your sales are still going to be dropping. That poses some problems, and I don’t see them overcoming that until next year."
Merkle believes that Ford, which increased its U.S. market share in January and February, will prove the stoutest of the Big Three headed into the 2008 famine on the strength of its new and revised product launches.
Crossovers to the rescue
Among those is the Ford Edge, one of the leaders of a new generation of crossover vehicles with the interior feel of an SUV but more of the ride and fuel efficiency of a sedan. Other 2008 crossover offerings from the Big Three include the GMC Acadia, Buick Enclave, Saturn Outlook and Lincoln MKX. The Dodge Journey, developed under the code name JC49, debuts later this year for the 2009 model year, about the same time as the new Ford Flex crossover.
Crossovers present an intriguing option for automakers and buyers looking for something novel to showcase and drive. The revolutionary styling does come with a price tag: The Edge represents the entry model for crossovers with an MSRP of $25,565. The Acadia has an MSRP ranging from $30,500 to $39,000, while the Enclave has a starting MSRP of $33,500.
"Of all the segments in the U.S. market, crossovers is the one segment that’s continuing to grow, even in this environment," says John M. McDonald, a spokesman for GM in Detroit. "Many of them, including ours, have seating up to eight. Some have the towing capacity of an SUV, but they have the car-like ride and fuel economy of an automobile. So it really gives people the best of all worlds."
The good news for the Big Three is that they’re finally starting to introduce competitive crossovers into the market that are successfully competing with the likes of the Honda Pilot, Merkle says. "Crossovers are hot right now," he notes.
Domestic crossover sales are brisk, despite lower consumer confidence of late. One automotive industry blogger reports that dealers have a 3,000-name waiting list for the Enclave, which has one of the quickest turn rates in the industry, about five days. At Ford, demand for the Edge was up 46 percent in February, and sales of the Lincoln MKX climbed by 22 percent, the company reports.
In that time, the Conference Board’s Consumer Confidence index dropped 12 points in February to 75, a sharp decline from January’s 87.3 reading that represents one of the lowest U.S. consumer confidence levels in 15 years.
"There’s a lot of uncertainty right now," says Ford spokesman Jim Cain. "It’s difficult to predict. Things are weak right now."
If it’s any comfort to Detroit, Japanese competitors are hurting, too, after years of eating up more and more domestic market share. Toyota sales in the United States dropped 6.6 percent in February from the year before following a 2.3 percent dip in January.
"If you look at what’s happened to Toyota in the last six months and what’s happened to all the domestics the last six months...we’re all in the boat together from an economic standpoint," McDonald says. "The volume is shrinking for everybody."
Stoddard considers crossovers a true bright spot in the market right now. "All three companies are doing pretty well in getting back in sync with the market in terms of where demand is by market segment, especially GM and Ford," Stoddard says. With its lineup of crossovers--and the North American Car of the Year, the Chevy Malibu--GM might have the upper hand in Detroit in the down market, Stoddard believes.
"They do already have a lot of good, new products out on the market," he says. "They’re getting a lot of better press, and there’s a lot better feeling about them in general with the public."
Ensuring future success
The question on the table, then, is what GM, Ford and Chrysler must do to keep the momentum they’ve built with crossovers and other new models while netting more money and taking back market share. "First of all, realize it’s going to be a long-term process to do that," Stoddard says. "It’s concentrating on coming out with some quality products and not over-producing. And at the same time, they also have to be unafraid to make cuts where they need to, in terms of production capacity and employment. That’s not a good thing, but they’re in the position where they have to deal with those realities."
Merkle believes Detroit can’t, and shouldn’t try to, compete with Japan for left-brain staples such as Toyota Camry or Honda Accord. Rather, it should concentrate on thinking ahead and serving its dishes with flair.
"I think the biggest challenge for the Big Three is anticipating where the market is headed and then developing products and basing business decisions not on the data that’s presenting itself today, but the data that will present itself five years from now," Merkle says. "It’s always been in the past that they’ve followed. They wait for the market to arrive. The problem with that is, you’re always going to be last to market."
There have been sparks of innovation, however, with vehicle designs such as the Ford Edge, GMC Acadia, Cadillac CTS and Chrysler 300C, which Merkle says are probably styled better than anything on the road today. However, Detroit has to positively deluge the automobile world with better style because it’s not going to beat Japan on sheer utility. Toyota’s doubling of its American market share the past 10 years, from about 8 percent to almost 16.4 percent, should offer proof of that.
"I always tell people that we’re in the fashion industry," Merkle says. "People wear their watch and they wear their suit, and they wear their car. What the Big Three automakers have to understand is that they’re not in the transportation business. It’s the style of the vehicle that ultimately attracts people to it. If they’re going to beat their competition, it’s going to be on style. It’s going to be on design." MM