Losses Continue to Mount for American Automotive Industry; Additional Cuts Almost Guaranteed

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Researched by Industrial Info Resources (Sugar Land, Texas)--A sense of trepidation was certainly felt at automotive facilities across North America this week as the second-quarter numbers for both General Motors Corporation (NYSE:GM) (Detroit, Michigan) and Ford Motor Company (NYSE:F) (Dearborn, Michigan) were announced. Combined, the two automotive giants, lost more than $24 billion during the second quarter of 2008, not a good sign for an industry that has been struggling for over a year to deal with a rapidly changing marketplace. GM posted losses in excess of $15.5 billion for the quarter while Ford announced a loss of $8.67 billion. Chrysler LLC (Auburn Hills, Michigan), as a privately owned company, is not required to announce its sales and profit figures publicly.

The rapid change in the marketplace that occurred during the first half of 2008 has caught the American automakers with their pants around their ankles. None of the Detroit Three has handled the changes well or has been able to adjust rapidly enough to limit losses. Within recent months, GM, Ford and Chrysler have all announced cuts within their organizations that have ranged from hourly employee buyouts to salaried employee layoffs to shift reductions and even plant closures. The Detroit Three have been attempting to reinvent themselves for over two years in an effort to regain the market share they have collectively, and individually, lost to foreign automakers. To date, their respective plans have mostly failed as the losses continue to mount.

The recent spike in oil and gas prices has only worsened a bad situation. Not too long ago, the Detroit Three had been banking on the sales of large SUVs and pickup trucks to bolster slumping car sales. With the cost of gas forcing most consumers to abandon large vehicle purchases, the entire focus of the market shifted, and the Detroit Three were not prepared. The most recent round of shift reductions and plant-closure announcements have been aimed at reducing SUV and pickup production while boosting the production of smaller, more fuel-efficient automobile production. However, such changes take some time and the automakers all had too many of the wrong plants in operation cranking out vehicles. Now those plants, not to mention their respective workers and the surrounding support infrastructure, are suffering.

The results are losses of massive scale for the quarter. The problem facing the automakers is that even with the most recent cuts, they have announced that they will face additional losses in the third and fourth quarters of the year. Cuts of this magnitude take time to kick in, and it will be some months before the effects are truly felt across the industry. In the meantime, the Detroit Three will have to suffer through more bad times before there is light at the end of the tunnel. In addition to baseline production and employment cuts, Chrysler recently announced that it will cease to lease vehicles, and both GM and Ford will both reduce the amount vehicles they lease. This will place all three companies in a tricky spot where they are even more reliant on new car sales than ever before. The effects of this combination of policies will be felt for years to come and may make or break the automakers.

Could the industry be facing another governmental bailout situation in the near future to save one of the Detroit Three? That is distinctly possible. It is also possible that the one of the Detroit Three could be absorbed by another in an attempt to maximize the best aspects of each company's vehicles into a single automotive giant. Some analysts feel that the best solution to the entire situation will be a merger of the Detroit Three into a single, massive automotive giant that could then compete with the foreign automakers more effectively. In that scenario, the new company would meld the best parts of each class of vehicle from GM, Ford and Chrysler into a single set of cars, trucks, SUV and vans, merging technologies and styles to make competitive vehicles. While this would be a potentially brilliant move, the likelihood of it happening is extremely low.

The American automotive industry was struggling to remain above water even before the oil and gas crunch occurred. Foreign automakers have been chipping away at American market share for years. Even without the rising oil and gas prices that have rocked the industry in 2008, Toyota Motor Manufacturing North America (NYSE:TM) (Torrance, California) was poised to take firm control of the No. 1 position by year's end, regardless of how the American automakers performed. However, even the mighty Toyota has seen sales dip in recent months. In order to regain what was lost, the Detroit Three will be required to take even deeper cost-cutting measures that could cut thousands of additional jobs and close many more plants. The bottom line for the Detroit Three is to streamline or cease to be a player in the North American marketplace. Difficult to achieve? Yes. Impossible? No.

Industrial Info Resources (IIR) is a marketing information service specializing in industrial process, energy and financial related markets with products and services ranging from industry news, analytics, forecasting, plant and project databases, as well as multimedia services.