The Detroit Three have a new model and although it has no shiny sheet metal, turbocharged engine or new-car smell, it’s the most important model Motown has developed in more than a decade. It’s called price discipline.
The Great Recession forced Chrysler Group LLC, Ford Motor Co. and General Motors Co to slash excess production capacity but they have emerged from that wrenching transformation as profitable companies that no longer have to discount their vehicles to hang on to market share.
Their determination to hold the line on pricing will be severely tested this year as the Japan-based auto makers battle to regain the sales they lost in the U.S. market during their year of natural disasters in 2011.
Senior executives vowed in Detroit not to slide back to the days of profit-sapping, brand-destroying incentives. “It is a fundamental change in the way the automobile industry has been run,” Alan Mulally, Ford’s chief executive officer, told a small group of reporters over dinner at the North American International Auto Show.
If the Detroit Three can maintain that resolve and their blizzard of new models sells briskly in a U.S. market that is expected to grow by 10 per cent – outperforming a flat market in Canada – the three companies could produce some of their healthiest financial results in decades.
Rebates and other incentives dropped to $2,500 (U.S.) a vehicle on average in the U.S. market last year, down from more than $3,000 a vehicle in July, 2009, when two of the companies were in chapter 11 bankruptcy protection.
“To put this in perspective, at a demand level of 12-million units, every $500 per unit decrease results in $6-billion improvement in profit for the whole industry,” Matthew Stover, auto industry analyst for Guggenheim Securities LLC, wrote in a report on the industry last week.
The “behavioural dysfunction” that Chrysler, Ford and GM exhibited in the past is not happening in the market now, Chrysler CEO Sergio Marchionne said. “None of the Detroit Three are doing things that are crazy.”
That transformation is a result of the crisis that led Chrysler and GM into bankruptcy protection and those “crazy things” Mr. Marchionne referred to were among the main cause.
The three companies were caught in a vicious cycle in which soaring health care costs, rigid labour agreements and eroding market share forced them to offer massive incentives and unload vehicles at tiny profits to fleet buyers in order to keep their assembly plants running.
This went on for two decades, but reached its peak in the months immediately following the 9/11 U.S. terrorist attacks in 2001, when GM offered interest-free loans on its entire lineup as a way of jolting the U.S. economy out of its malaise.
The tactic, which was matched by GM’s cross-town rivals, sent sales soaring. But profits evaporated, creating an era of so-called profitless prosperity in the middle of the decade when auto makers sold record numbers of vehicles in the U.S. market – as many as 17-million annually – and lost tens of billions of dollars.
But they unloaded the health care costs during the crisis and closed dozens of plants.
Mr. Mulally said one of the critical moves Ford made was to trim capacity so that production is more closely aligned to vehicle demand.
“We are also gratified that most of our competitors are doing the same thing,” he said.
Last year, Americans bought about 12.5-million vehicles and although that’s almost 5-million fewer than they bought during the peak of the market in the 2000s, each of the Detroit Three reported profits as of the end of the third quarter.
They all increased market share and posted higher transaction prices in 2011.
“We can’t remember this consistent a period with Detroit Three share and pricing gains,” Citibank auto analyst Itay Michaeli said in a note to clients.
As another sign of the companies’ growing health, Ford reinstated a dividend during the fourth quarter after eliminating it during the crisis and added Tuesday that it expects full-year financial results to be solidly profitable.