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In the coming years, automakers have to spend billions of dollars to develop vehicles that meet new fuel efficiency standards. This transition is expected to cost the industry about $100 billion. However, the turmoil in the U.S. credit market, mounting debt, and falling sales make it difficult for these companies to obtain private loans at reasonable rates.
The U.S. lawmakers through last year's energy bill had authorized $25 billion in loans to help the companies. The House of Representatives approved the loan on Wednesday. However, with the situation turning terrible, the automakers demand that the Congress should expand the funding to $50 billion for the subsequent years.
The news that seeps out from the sector now-a-days are stories of dismal performance despite massive job cuts and reorganization, shrinking domestic market share, and growing threat from Asian manufacturers who are keen to rule the U.S. market.
What went wrong with the U.S. auto sector? Is it just the consumers' general aversion to travel, trips and gas-guzzling vehicles due to soaring living costs and gas prices, or something beyond that which is really dreadful?
Economic Weakness
The world economic outlook has witnessed a further deterioration due to the troubles plaguing the financial sector. Although the U.S. economy has grown at an annualized sequential rate of 3.3% in the second quarter helped by the government's stimulus, the outlook for the second half of 2008 is not all that bright. While Euro-zone and Japan experienced a contraction in growth in the second quarter, emerging economies remained resilient in the first half of 2008. However, tighter monetary policies introduced to fight growing inflationary pressures imply slower growth ahead for the emerging economies.
Poor credit conditions are expected to continue as a drag on the U.S. economy in the coming quarters as consumers retrench. U.S. Federal Reserve's report on consumer credit for July 2008 substantiates the fact. Total consumer credit growth for July was 2.1% while it rose 5.1% in June. Hinting at the paucity of dispensable income, non-revolving credit, which is mostly tied to auto loans, rose only 0.5% in July compared to 6.1% growth in June. Also, the country's corporate earnings outlook is bleak, portending a lackluster investment outlook, and consumer expenditure is expected to remain weak for the rest of the year.
Federal Reserve's latest Senior Loan Officer Survey showed that about 75% of U.S. banks have tightened standards on prime mortgage loans, higher than 60% in the prior survey. The country's housing sector also remains in a recession, with existing home sales falling by 2.6% in June to its lowest level in a decade. On a year-over-year basis, existing home sales for the month of July was down 13.2%.
Soaring crude oil prices, which had remained stable for a century, have a predictable effect on the price of petrol. Although oil prices are showing some recess in recent weeks, prices have more than doubled from last year to $135 a barrel, impacting consumers and businesses alike. In monthly terms, OPEC's Reference Basket began July with a sharp rise in prices, which peaked at over $140 a barrel. Geopolitical tensions in the Middle East and the weakness of the U.S. dollar led to the bullishness. However, slower demand growth amid weak economic activities lowered the Basket by about 10%. This trend continued in August and the Basket fell to a three-month low of $109.08 a barrel on August 12.
The fuel price shoot-up has altered consumer behavior. In the U.S., peak summer driving season lost its momentum due to reduced travel, resulting in a total oil demand decline of 0.15 mb/d in the first seven months of the year. However, global food prices have skyrocketed in the first six months of 2008, hurt by higher bio-fuel costs.
Sliding Sales
In August, U.S. auto sales were down for the 10th consecutive month, pushing the industry towards its lowest annual total since the early 1990s, according to Autodata corp., a provider of automotive market specific content and technical manuals.
Total U.S. auto sales were down 15.5% in August to about 1.2 million. While car sales dropped 7.7%, light trucks sales fell 22.1%. Only Nissan North America (NSANY | Quote | Chart | News | PowerRating), the U.S. operations of Japan's Nissan Motor Co., Ltd. reported positive growth.
According to the companies, falling sales reflected the tough economic environment and high gasoline prices as consumers are now focusing more on value and cost-efficiency.
Monthly auto sales figures of the U.S. commerce department for the period between October 2007 and August 2008 also show a declining trend. For the month of August, total sales were 67510 units, a sharp decline from 78066 units in the same month last year. July sales reached 67927 units, lower than 75926 units recorded a year ago.
The worst is yet to come, according to Standard & Poor's, which issued a bleak outlook for this year and next year. The firm expects that U.S. light-vehicle sales will fall to 14.2 million units in 2008 and 14.1 million units in 2009 from 16.1 million in 2007. Standard & Poor's also sees a 20% chance for 2008 and 2009 sales to be as low as 13.6 million and 11.7 million, respectively.
GM - Leaving No Stone Unturned
General Motors, founded in 1908, is the world's largest automaker based on sales. GM employs about 284,000 people around the world, with car and truck manufacturing facilities in 35 different countries and brands such as Buick, Cadillac, Chevrolet, GM Daewoo, GMC, Holden, Hummer, Opel, Pontiac, Saab, Saturn and Vauxhall.
In the late 1990s, GM's was a scintillating performer in the auto industry with market share gains and stock price of over $80. However, the Federal Reserve's twelve successive interest rate hikes in 2000 and the steep stock market fall following the September 11, 2001 attacks led GM and many other American companies to a pension and benefit funds crisis. Increasing retiree health care costs and a deficit in Other Post Employment Benefit, or OPEB, fund forced the company to implement a broad restructuring plan.
In fiscal 2005, GM posted a loss of $10.6 billion following which the company acted quickly to implement the restructuring plan. From then onwards, the sales leader for the last 77 calendar years has been attempting to find an equilibrium amid the tough downturn in the U.S. market. In a latest announcement, the company said that it plans to boost its liquidity by $15 billion through 2009 by various initiatives, including dividend suspension, a 20% cut in salaried payroll, asset sales and other financing measures.
However, GM's actions have been derailed by labor disruptions and a steep decline in the U.S. sales of pickup trucks and sport-utility vehicles, or SUVs, in the face of record gas prices and poor credit.
In the second quarter of fiscal 2007, GM's sales fell 13.2%. However, the company reported a net income of $891 million in the quarter compared to a loss of $3.38 billion in the in the year-ago quarter, which included net special items of $520 million.
In the third quarter, GM incurred a net loss of $39 billion including a net non-cash charge of $38.6 billion. Total net sales and revenue declined more than 10% in the quarter. For the fourth quarter of fiscal 2007, the company posted a net loss of $722 million, including special charges of $768 million. Total net sales and revenue were down 7.3%.
The scene was not different in the first quarter of fiscal 2008, in which the net loss totaled $3.3 billion. Total sales and revenues were down 1.7%. A second-quarter loss of $15.5 billion, the third-biggest in the company's history, was announced on August 1. Sales and revenues fell 18.3% in the quarter.
As of March 24, 2008, GM's cash position was $24 billion, a decline by $6 billion from what was on hand on September 31, 2007.
In early September, GM reported over a 20% decline in total vehicle sales for August 2008, with total car sales dropping 13.9% and total truck sales falling 24.3%. The company's July sales were down about 27%.
In addition, Toyota's emergence as a formidable player is posing a challenge to GM's supremacy. The 2008 first-half sales confirm the fears. GM's global sales fell 3% in the first six months of the year to 4.54 million vehicles. In contrast, Toyota's first-half sales were up 2.2% from last year to 4.82 million vehicles.
Ford - No 'Way Forward'?
Ford Motor Co. (F | Quote | Chart | News | PowerRating), founded by Henry Ford and incorporated on 1903, is the real loser of the game in which Toyota now seems to have an upper hand. In 2007, Ford became the third-ranked automaker based on U.S. sales, behind GM and Toyota, falling from the second position for the first time in the last 56 years. Globally, Ford fell to the fourth spot after Volkswagen.
In addition to the Ford, Lincoln, and Mercury brands, the Dearborn, Michigan-based company's international brands include Sweden's Volvo and Japan's Mazda. The company has been focusing on big pickup trucks and SUVs all these years. However, higher incentives to offset declining demand led to lower profit margins on the company's large vehicles. According to Ward's Automotive Reports, a source for automotive industry information, sales of large pickup trucks have dropped 25% thus far this year while SUVs are down 32%.
By 2005, corporate bond rating agencies downgraded the bonds of both Ford and GM to junk status, citing the companies' high health care costs, soaring gasoline prices, eroding market share, and dependence on declining SUV sales for revenues.
In early 2006, Ford, similar to GM, introduced a restructuring plan, dubbed 'The Way Forward', to return the company to profitability by resizing it, dropping unprofitable and inefficient models, consolidating production lines, and shutting fourteen factories and cutting 30,000 jobs. The planned cutbacks were consistent with the decline in the company's U.S. automotive market share of roughly 25% since the mid-late 1990s.
Since Alan Mulally took over as the automaker's president and chief executive officer in September 2006, he has accelerated the initiative, chanting the mantra "One Ford, One Team, One Plan, One Goal." In the past two years, Ford slashed over 46,000 North American jobs, equivalent to about one-third of its work force.
In addition to higher labor costs, Ford faced challenges in taming United Auto Workers, or UAW, which represent about 46,000 hourly workers in North America. The company, however, succeeded in reaching a contract settlement with the UAW in November 2007.
Last month, Ford announced the elimination of as many as 350 more jobs from its Australian manufacturing workforce. The cut represents 15% of Ford's Australian manufacturing staff, and comes on top of the 600 job reductions announced earlier this year.
The company, which posted a loss of $12.6 billion in fiscal 2006, the largest annual loss in its history, significantly narrowed the loss to $2.72 billion in 2007. Ford's target is to become profitable again in 2009, a year later than projected. The company has reported a profit of $750 million in the second quarter.
Ford sold off its Aston Martin brand in March 2007. In March 2008, the company sold its UK brands Jaguar and Land Rover to Tata Motors of India for $2.3 billion.
Ford's U.S. sales for the month of August were down 26.6%, hurt by economic weakness and a lower demand for large trucks and sport utility vehicles. July sales slipped nearly 15%. The company has also lowered its vehicle production forecast for the second-half of 2008 by 50 thousand vehicles.
Recently, there were reports that Ford is eliminating about 500 jobs at its Canadian facility in Oakville, Ontario, as a part of its effort to reduce vehicle output by 30% due to continuing sales drop. The Oakville facility produces the company's three crossover models namely Lincoln MKX, the Ford Edge and the Ford Flex.
Chrysler - Good Old Days Fading?
Chrysler LLC, which has been in the auto industry since 1925, was previously part of the German company Daimler AG (DAI | Quote | Chart | News | PowerRating). Chrysler suffered a series of setbacks in recent years, leading to the company's sale. In 2007, Daimler, DaimlerChrysler at that time, sold 80.1% of its stake in Chrysler to private equity firm Cerberus Capital Management LP of New York. The U.S. company adopted the name Chrysler LLC when the sale was completed in August 2007. On September 24, Daimler confirmed its talks with Cerberus regarding the sale of its remaining stake in Chrysler.
Through most of its history, Chrysler had been the third largest among the U.S. auto makers. However, currently, the company is in the fourth place behind GM, Toyota and Ford. Chrysler is facing industry experts' scrutiny over its ability to weather the downturn in the U.S. auto sales, which is expected to stretch through 2009. Analysts are wary of the company saying it is poorly positioned to endure the current crisis as it will have fewer new models out in 2009 than Ford and GM.
In 2006, Chrysler reported a loss of $1.5 billion. The company's U.S. sales were down 25% so far this year. The company is excessively dependent on heavy trucks and sports utility vehicles, which makeup more than half of its sales volume, and this leaves the company overly exposed to the U.S. consumers. The company also failed to diversify its markets while others are looking for expansion into emerging markets for long-term growth.
For the month of August, Chrysler's total U.S. sales fell 34%, reflecting the industry-wide slowdown, segment shifts and reduced fleet sales. However, sequentially, August sales rose 12%, supported by the company's enhanced financing offers and efforts to shift lease-oriented customers to purchasing, and better demand for key vehicles.
Toyota - Not Immune to Slowdown?
Toyota Motor Corp. (TM | Quote | Chart | News | PowerRating), the Japanese conglomerate in the automobile sector, was founded in 1937 by Kiichiro Toyoda as a spin off from his father's company Toyota Industries to create automobiles. The company now includes 522 subsidiaries, with manufacturing facilities all over the world.
Toyota has grown to a large multinational corporation from where it started and expanded into different markets and countries, especially in the U.S. Toyota Motor Sales, U.S.A., Inc. is the seller and distributor of Toyota vehicles in the U.S., with over 16% of the U.S. market share.
With the introduction of hybrid vehicles, which use a mixture of power and fossil fuels, Toyota gained an upperhand in the highly competitive U.S. auto market that had been ruled by the three Detroit giants. In addition, the company's larger truck brands like Tundra are raising challenges to Chrysler.
Although Toyota has been in a better shape compared to its peers, the recent industry turmoil has hit the company as well. Toyota's U.S. auto sales were down about 12% from last year. In August, the company posted a 9.4% decline in sales with truck sales dropping over 16%. According to Toyota Motor Sales USA president Jim Lentz, the U.S. housing market remains a drag on auto sales, and the industry is unlikely to go back to its previous peak levels until sometime next decade.
In light of the difficult market conditions, Toyota has cut its worldwide and U.S. sales outlook for 2008. The company now expects to sell 9.5 million vehicles worldwide in 2008, down by 3.6% from its initial estimate of 9.85 million. The new forecast represents the weakest growth since 2001.
In the U.S., the company currently expects to sell 2.44 million units, a 7% drop from 2007. The auto giant also lowered its 2008 sales targets in Japan by 4,000 units to 2.23 million units. Toyota's European sales are now projected to decline 4% to 1.19 million units.
The company also expects the U.S. auto sales to be relatively flat in 2009.
Strikes
The U.S. auto sector, which is already lamed by rising input costs and fuel prices, has been hit hard by strikes. The recent 87-day strike at parts supplier American Axle and Manufacturing Holdings Inc. (AXL | Quote | Chart | News | PowerRating) has resulted in a production loss of 230,000 vehicles in the second quarter. The strike, which lasted from February 26 to May 22, was the auto industry's longest strike in more than 40 years.
American Axle lost $370 million in sales and $125 million to $130 million, or $1.60 per share, in earnings during the strike. American Axle's biggest customer GM had to reduce or halt production of many pickup trucks and large SUVs as it ran out of stock for parts. The strike cost GM $800 million in the first quarter.
Drying Oil Wells
How long will our energy and oil resources last? No one knows! However, scientists and oil industry experts warn that if the world's natural resources continue to be exploited at current levels, the day of total energy resource exhaustion will not be that far. It would be quite exaggeration to say that all oil sources in the world will dry-up one day. There will always be some oil somewhere, but it may be too costly and technically difficult to extract. According to an article published in Scientific American in March 1998, the real issue will be the end of abundant and cheap oil on which all nations depend. This situation will have far-reaching effects as 90% of the world's transport depends on oil and many other industries use oil as a feedstock.
The Middle East is the biggest oil producer, providing more than 55% of the world's total oil production. Saudi Arabia alone possesses about 25% of the world's proved reserves, owning Ghawar oil field, one of the largest deposits in the world. But, the kingdom's total daily production has declined by about one million barrels in 2007. Although Europe, Eurasia and Americas are the other major oil producers, they do not produce enough to meet their domestic requirements. Also, U.S. oil reserves have dropped about 20% since 1990. The North Sea and Canada have substantial reserves, but they are very expensive to extract.
According to various reports, about half of the available petroleum resources in the world have been exploited. In 2007, world crude oil production was 73.27 million barrels per day. Current oil consumption has increased to 85 million barrels per day and analysts expect that higher consumption will lead global oil production from all possible sources, including shale, bitumen and deep-water wells, to around 90 million barrels per day by 2015. Industry experts also predict that peak of extraction will occur in 2020 at the rate of 93 million barrels per day.
All these show that a reduction in consumption is the only way to prolong oil's life. Meanwhile, OPEC's estimates a slowdown in oil demand. OPEC currently expects that world oil demand for 2008 will grow by 1 mb/d to 86.9 mb/d on average, a reduction of 0.03 mb/d from its previous forecast. OPEC also continues to project 2009 world oil demand growth of 0.9 mb/d, which would be the lowest since 2002 due to a major slowdown in transport and industrial fuel consumption globally.
What It Takes for a Complete Turnaround in the Industry?
The current turmoil in the U.S. market shows that mere sales growth would not be enough to rekindle the stagnant auto industry. A complete turnaround of the sector by setting realistic targets in changed circumstances and attempts to achieve them by all ways and means will only help. The companies also have to speed up the introduction of fuel-efficient vehicles to bring back consumers to shops. Many have already started attempts towards this direction.
Attempts Toward Fuel Efficiency
Ford is among the Detroit-based makers, which realized the necessity to change its primary emphasis on fuel-thirsty large trucks and SUVs to smaller cars. The company is now making a broader bet on new fuel-efficient small vehicles. According to the company, by the end of 2010, two-thirds of its spending will be on cars and crossovers, up from the current one-half.
Ford also intends to accelerate the introduction of fuel-efficient four-cylinder EcoBoost engines. These engines use gasoline turbocharged direct-injection technology to provide up to 20% better fuel efficiency, up to 15% lesser CO2 emissions and superior driving performance. These engines are planned to be introduced in North America and Europe in 2010. Ford, Lincoln and Mercury brands will be upgraded by the end of 2010, setting new standards for quality, fuel economy and product features, according to the company.
To take advantage of the growing demand for small cars, Ford plans to build nearly 2 million units a year in its C-car platform and 1 million units in its B-car platform within five years. The success of Ford Focus, a small car introduced in 1999, gives the company a firm grip in the market. Focus sales have increased 26% so far in 2008.
Recently, Ford announced its plans to bring six small vehicles from its European lineup to North America by 2012. As part of the plan, the company intends to introduce the new Fiesta small car in North America in early 2010 and the new Ford Focus small car later in 2010. Further, the automaker will convert three of its existing North American large truck and SUV plants for small car production, beginning this December.
Ford's peer GM also is planning to introduce fuel-efficient models of all of its gas-guzzling trucks in 2009. The company's brands like Chevy Tahoe, Chevy Silverado, GMC Sierra, GMC Yukon, and Cadillac Escalade will be equipped with gas saving technology. The company also plans to introduce a hybrid vehicle every three months for the next four years. In addition, GM plans to introduce plug-in hybrid vehicle in 2010 and said that 50% of the company's fleet will be FlexFuel by 2012. At Reuters Autos Summit last week, GM said that it will produce 10,000 Volts in its first year of production, eventually increasing that to about 60,000.
Meanwhile, the Japanese maker Toyota has a vast array of fuel-efficient vehicles such as the Prius, Corolla and Yaris. Toyota was the first among the automakers to commercially produce and sell hybrid vehicles, and Prius turned out a big hit. The company has also started providing the hybrid option in its main smaller cars such as Camry, and luxury vehicles such as Lexus. As part of developing more fuel-efficient small vehicles, Toyota has decided to idle its truck plants, while shifting production at other facilities to manufacture in-demand vehicles.
Also, Chrysler has recently announced a production deal with Nissan that would give it the small car it lacks by 2010. The company will sell these cars in South America and, eventually, in the U.S. Chrysler has also inked a deal with Chinese carmaker Chery Automobile Co. to make small cars. This will make Chrysler the first company to bring Chinese autos to the U.S.
Production Shrinks and Cost Cuts
While combating with the task of introducing fuel proficient vehicles, the companies are keen to bring costs and inventories under tight lid. Toyota has slashed its global production forecast for this year to 9.5 million vehicles from 9.95 million. Sales plan for North America has been lowered to 2.67 million vehicles from 2.84 million vehicles expected earlier. The company has also cut production at its Tundra plant in San Antonio for three months to reduce inventory level.
For GM North America, third-quarter production forecast remains unchanged from last month at 900,000 vehicles, which include 456,000 cars and 444,000 trucks. This is down about 12% from last year due to production adjustments in response to market changes. In July, GM North America produced 238,000 vehicles, down 6% from last year.
The auto giant also dropped its advertising for the upcoming 2009 Academy Awards and the Emmys in September, citing cost cutting and a return to marketing that works best. American automakers have cut $414 million in advertising spending in the first quarter of 2008 alone.
Further, there were reports that GM is looking to sell its truck lines to Isuzu Motors. In addition, the company's partly-owned mortgage business GMAC Financial Services has announced that it would close all of its 200 retail mortgage offices and lay off about 5,000 employees at its mortgage lending division, Residential Capital LLC.
Meanwhile, Chrysler said in early 2008 that it will reduce its product line from 30 models to 15 models. The company previously had announced its plans to lay off 13,000 employees, close a major assembly plant and reduce production at other plants in order to restore profitability by 2008. Additionally, the company has signed a cost-cutting contract with the UAW, while planning to cease production of four vehicles, cut production by more than 1 million vehicles and lower its dealership pool.
Fuel Alternatives
In the difficult market, a decline in oil and gas prices may be a welcome relief. But, this would be for a short term, and the development of alternative fuel sources that are cheaper in price and more competitive in quality is equally important for the panting auto industry. Currently, research and development is largely centered on hybrid options. Development efforts are also taking place on fuel cells and the stored energy of compressed air.
Further, attempts have been made to use alcohol as a fuel for internal combustion engines, either alone or in combination with other fuels, mostly because of its environmental and long-term economical advantages over fossil fuel. Both ethanol and methanol have been considered for this purpose. Compressed Natural Gas, hydrogen, LPG, solar power etc. have also been tried out as options. However, a concrete solution is yet to be identified, without which the troubles in the automobile sector are unlikely to be resolved.
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