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However, GM is not alone in its woes. Toyota Motor Corp. (TM | Quote | Chart | News | PowerRating), the Asian auto giant racing to the No.1 spot, earlier this month said it might report lower annual sales in the U.S. and was re-evaluating sales expectations for its pickup trucks, thanks to a worsening outlook for pick-up trucks and other big vehicles in the company's largest market. GM's peer Ford Motor Co. (F | Quote | Chart | News | PowerRating) also has announced slashing of production and closure of plants.
Tough environment
The housing market crisis, surging gasoline prices and competition from Asian counterparts have made business tough for U.S. automakers. With the economic slowdown and a decrease in dispensable income, consumers are now more than ever focusing on utility value and cost-efficiency, preferring small cars to gas-guzzling ones. For the month of May, GM revealed a sales decline of 27%, while sales at Ford dropped 16%.
Hinting that the increase in gasoline prices has begun to pinch the Asian automakers in the U.S. market too, Toyota said adjusted for one additional selling day, total sales fell 7.9% in May. Though the company's smaller cars and the Prius hybrid reported increase in sales, the rise was offset by the decline in demand for SUVs and large pickup trucks. Toyota had said earlier that it expected U.S. sales to edge up 1% this year, helped by its Tundra pickup truck.
While announcing the May sales figures, GM said it lost 15,000-18,000 unit sales in May due to various work stoppages including the strike at its parts supplier American Axle & Manufacturing Holdings Inc. (AXL | Quote | Chart | News | PowerRating). The company said though sales increased in categories such as fuel-efficient cars and crossover vehicles, the increase wasn't good enough to make up for soft truck demand and the decline in fleet deliveries due to the American Axle strike.
The housing slump has hurt the economy deeply and has directly and indirectly reduced the purchasing power of consumers. The Mortgage Bankers Association's weekly applications survey revealed earlier this month that mortgage application volume continued to fall during the week of May 30. Applications declined 15.3% to their lowest rate in six years. S&P/Case-Shiller said on June 24 that home prices in 20 cities declined 15.3% in April from last year. Home prices in the index decreased 1.4% from the previous month. Another report from the Office of Federal Housing Enterprise Oversight showed that prices dropped 4.6% in April from a year ago.
The price of crude oil accounts for over 55% of the retail price of gasoline. According to the latest data from the Energy Information Administration, gasoline prices reached $4 per gallon in many parts of the country. Goldman Sachs has predicted that oil prices, now around $136 per barrel, could hit $200 per barrel by 2010, which could lead to gas touching $5 or $6 per gallon. If that happens, demand for large vehicles will weaken further.
From January through April this year, sales of pickups dropped 16.8%, SUVs declined 9.9% and luxury vehicles decreased 12.9%, according to Autodata Corp. However, sales of small cars increased 7.5%. Sales of hybrid cars in the first four months of 2008 jumped 25% from last year. The trend grew stronger in May with sales surging 58%, exceeding a gain of 18% in April, The Los Angeles Times reported.
When gas was cheap, GM and its U.S. competitors made profits of $10,000 - $15,000 per vehicle on some of their biggest trucks and SUVs. Small car manufacturing involved costs that did not match the profit earned on them. But now there seems to be no choice. Accepting the consumer shift to small cars, GM said June 3 that it would build a new generation small car starting in mid-2010 at a factory in Lordstown, Ohio, which currently makes the Chevrolet Cobalt. The company believes it has lowered costs enough with new labor contracts and other measures to report a profit.
According to John Casesa, an analyst for Casesa Shapiro Group in New York, apart from bringing in Detroit's biggest chunk of revenue, pickups and the larger lines of sport- utility vehicles have generated almost all of the industry's operating income. Casesa added that pickups and sport utilities have more than made up for losses on all Detroit's other vehicles for the last 20 years.
Lehman Brothers forecasts 2008 sales of a little over 1.5 million pickups, which is down 35% from average annual sales of about 2.3 million for the past five years. The investment bank estimates that deliveries of SUVs in 2008 will decline 31% to 462,000 units from last year's 665,78l units.
Lehman Brothers analyst Brian Johnson compares the drop in demand for trucks and SUVs to a similar situation in the late 1970s, when consumers turned away from large cars due to an increase in gas prices.
Reflecting the difficult times, Ford last month announced reduction in truck production and also gave up its goal of returning to profitability in 2009. Ford has also begun preparing to cut 2,000 white-collar jobs. Ford announced additional reductions to its North American truck production plan on June 20, while adding more small cars, crossovers and fuel-efficient power trains. The company is also delaying the launch of the new 2009 Ford F-150 by about two months due to the industry-wide slowdown in the U.S. truck market and the need to sell down dealer inventory of the current model.
Yet, Ford continues to get support from billionaire investor Kirk Kerkorian, whose Tracinda Corp. reported in a regulatory filing with the U.S. Securities and Exchange Commission on June 19 that it has increased its stake in Ford to 6.49%.
Plant closures
GM announced scaling down of production twice this month - on June 3 and June 23. The company initially said it would cease production at four plants - Oshawa, Ontario; Moraine, Ohio; Janesville, Wisconsin and Toluca, Mexico - that build pickups, SUVs and medium-duty trucks in order to focus on small cars.
With the four plants going out of work, nearly 500,000 units will be taken away from GM's overall production. These closures, along with the earlier announcement to remove shifts at two other U.S. truck plants, are expected to save, on a running rate basis, over $1 billion for GM North America by 2010. This is in addition to the $5 billion running rate reduction by 2011 that the company announced earlier this year. GM has already accomplished a reduction of $9 billion over the 2006-07 period in North America.
Nearly 8,350 jobs are expected to be eliminated when these plants close down. The Moraine plant, which assembles the GMC Envoy, Chevrolet Trailblazer, Saab 9-7X and Isuzu Ascender sport utility vehicles, has about 2400 workers and people fear the place will be a ghost town by 2010 with no jobs. The place has a poverty rate of 30%, more than twice the state average. Auto parts supplier Delphi Corp., trying to emerge from Chapter 11 bankruptcy protection, has five plants in the area.
In Janesville, which has about 63,000 people, GM is no more the biggest employer, though closure would definitely hurt the employees. However, GM is a main employer in Toluca, where most people work in manufacturing and farming. The plant makes medium-duty trucks and about 250 people will be affected by its closure.
GM plant for pickup trucks and SUVs in Oshawa was blockaded by irate workers after the company announced job cuts. The workers, who fear elimination of 2,600 jobs, demanded a reversal of the decision. If GM is not able to settle its labor problems, the company's bottom line will continue to take a beating.
The automaker said June 23 that it is reducing its North American pickup and SUV production by about 170,000 units in the second half of 2008. The company will add 47,000 units of car and crossover production.
Meanwhile, auto parts supplier Lear Corp. (LEA | Quote | Chart | News | PowerRating) on June 4 lowered its sales forecast for the fiscal year 2008, citing downward revisions announced by its major customers, including GM and Ford, in their estimates for 2008 North American vehicle production, owing to lower sales rates for pickup trucks and large sport utility vehicles.
On the other side of the globe, faced with soaring prices of raw materials such as steel, Toyota announced cost-cutting efforts on June 3. The Japanese automaker will reduce costs in the manufacture of new models and intends to cut costs of existing models as well. The company is not in a position to pass on the higher costs to consumers, as the domestic market is currently sluggish. The overall cost reduction efforts are expected to save the company over 300 billion yen in fiscal 2008.
GM's dwindling market share
It is reported that until a decade ago, GM executives wore pins with the number 29, signifying their determination to hold 29% of the U.S. market share. By 2006, the number came down to 26, and in April, GM's share of the U.S. market hit a record low 20.5%.
GM, founded in 1908, has been the annual global industry sales leader for 77 years. However, now the only market where Toyota is not a major threat to GM is China. GM is the first automaker to sell 1 million vehicles in China in a single year. Probably, apart from making small cars, what GM can do to retain its Numero Uno position is by growing abroad.
GM has been witnessing a steady decrease in its stock value. The company now has a market cap of $7.47 billion, compared to Toyota's $150.90 billion. Yet there is optimism around the U.S. automaker's shares. Many expect the shares to rise to at least $30 and maybe as much as $45 once the big cost reductions start reflecting in net income in 2010.
GM's profitable future now hinges on a variety of factors - its ability to penetrate the small car segment, restructuring efforts translating into higher earnings and the company's overseas growth. And it seems the company will have to be No.2 at least for a while.
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