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2011 Jeep Grand Cherokee Overland (Chrysler)
2011 Jeep Grand Cherokee Overland (Chrysler)

Autos 'an industry that's on the mend' Add to ...

North American car makers are climbing back from the financial abyss, and they're doing it even though customers are only drifting slowly back into showrooms.

Helped by a combination of taxpayer-funded bailouts, job cuts, new labour pacts and vehicle improvements, the auto makers have seen a dramatic turnaround in two years. While sales remain well below the average for most of the last decade, profits have come roaring back and the companies are forecasting even better results in the quarters to come, as Detroit takes advantage of a reshaping of its business model.

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"This is an industry that's on the mend," Chrysler Group LLC chief executive officer Sergio Marchionne declared Monday, after posting a net loss for the three months ended Sept. 30 and raising its forecast for 2010 operating profit to $700-million (U.S.), up from an earlier forecast of between zero and $200-million.

The upbeat outlook at Chrysler follows a forecast of solid third-quarter financial results at General Motors Co., a profit of $1.7-billion at Ford increases in profit expectations at the three largest Japan-based auto makers and strong results at Magna International Inc.

Two years ago Monday, GM warned it was running out of cash and might not make it through the year, bringing the industry's crisis into sharp focus. In the end, both GM and Chrysler were rescued by U.S. and Canadian taxpayers with a bailout of about $75-billion and whipped through a quick Chapter 11 bankruptcy process that allowed them to eliminate tens of billions of debt and shed tens of thousands of employees.

Ford stayed out of bankruptcy but the crisis helped it craft new agreements with the United Auto Workers in the U.S. and Canadian Auto Workers in Canada that lowered its labour costs.

Such a rebound isn't unusual in the auto sector after a downturn. "You always get this huge bounce off the bottom when you reach an inflection point," said one U.S.-based industry analyst who witnessed more than one of the cyclical downturns that battered Detroit in the past few decades.

What's Changed

The critical difference between the 2008-2009 crisis and past downturns is that Chapter 11 bankruptcy protection enabled Detroit to radically overhaul its cost structure.

Crippling health-care costs that added thousands of dollars in cost to every vehicle that came out of their U.S. factories have been jettisoned and offloaded to a trust controlled by the UAW. GM's interest costs are about 25 per cent of what they were before the Chapter 11 filing. The companies have wiped out much of their excess production capacity.

"We previously did not have a competitive cost structure," GM's chief financial officer Chris Liddell said in a video presentation about the auto maker's upcoming initial public offering.

Health care costs just for U.S. retirees amounted to $4-billion in 2005, Mr. Liddell said on the video, compared with $5-billion in total labour costs now.

Improvements in quality and features are enabling GM to charge more for its vehicles, he added, pointing to average transaction prices for the 2010 Canadian-made Chevrolet Equinox that are $3,900 higher than the same prices for the 2009 model.

GM said it expects to report profit of between $1.9-billion and $2.1-billion when it releases third-quarter financial results Wednesday. It says it will now be profitable when U.S. vehicle sales are in the range of 10.5 million to 11 million annually, compared to the 2000s when sales hovered in the 16 million range and the company lost more than $80-billion.

Fatter Margins

"With each passing quarter, it is becoming clearer that North America margins are poised to outpace prior peaks when [sales]volume recovers and perhaps even remain in the black upon the next downturn," Citibank auto analyst Itay Michaeli said in a note last week on the Ford results.

At Chrysler, Mr. Marchionne pointed to the redesigned Grand Cherokee sport utility vehicle as one factor in that company's turnaround, but also noted tight controls on inventories and a subsequent reduction in incentives by all auto makers as "lessons we've all learned as a result of this crisis."

The Grand Cherokee is the first of about 12 new vehicles Mr. Marchionne is counting on to restore sales, market share and profitability for Chrysler, which as No. 3 in Detroit has always been battered hardest by cyclical downturns.

The U.S. analyst said the challenge for the three companies will be to maintain profit margins as U.S. sales volumes move back to more traditional levels such as 15 million annually. "After a couple of years of dramatically reducing costs and reducing investment, you have to reverse, you expense back and you add investment back," the analyst said.

UAW president Bob King and CAW president Ken Lewenza have already indicated that during the next contract negotiations, they will be seeking to regain some of the ground they lost. The UAW will negotiate with Ford next year, but agreed to give up its right to strike at Chrysler and GM, where it will negotiate in 2012. The CAW is also scheduled to bargain with all three auto makers in 2012.

 
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