Detroit auto cos back on track after painful rejig
Despite a worsening economy and a flood of red ink on their balance sheets, Detroit’s three big automakers seem to be turning the corner on a financial crisis so deep that bankruptcy once seemed inevitable, analysts say. But it has been a painful ...
By Agencies |
CHICAGO: Despite a worsening economy and a flood of red ink on their balance sheets, Detroit’s three big automakers seem to be turning the corner on a financial crisis so deep that bankruptcy once seemed inevitable, analysts say. But it has been a painful process.
General Motors, Ford Motor and Chrysler LLC have laid off nearly 100,000 workers, shuttered dozens of plants and lost more than $75 billion since 2005. Ford mortgaged most of its assets and put the majority of its premium brands up for sale to pay for the latest restructuring plan. Chrysler ended its troubled nine-year marriage with DaimlerBenz by being sold to a private equity group. GM, facing the high costs of a junk bond rating, sold half its stake in its usually profitable financial arm.
But all three automakers have revamped their product offerings to correct serious quality problems and start building cars people are willing to buy without huge cash incentives. And they negotiated landmark contracts with their main union in recent weeks, which will slash labour costs by about two thirds by 2010, essentially closing a labour-cost gap of around $30 an hour with the non-unionised US plants of their foreign rivals.
While both GM and Ford posted significant losses last week — including a record $39 billion quarterly loss after GM wrote off tax credits it didn’t think it would earn enough money to use before they expired — positive results from the restructuring are showing up in their books, said Goldman Sachs analyst Robert Barry .
“Ford’s decision to produce fewer, but higher profit vehicles continued to evidence traction in (the third quarter) via strong revenue growth,” he wrote in a note to clients. GM’s automotive results were better than expected, he said, “largely from better mix and pricing.”
One big problem remains: The critical US market is slowing down significantly just as the Big Three’s market share has finally stabilised and operating costs are falling sharply. Car sales are expected to slip to about 16 million vehicles in 2007, down from nearly 17 million last year, and sales are not expected to improve next year.
While this might delay a return to profitability and dampen how large that profit may be, there should not be any need for more downsizing, said David Healy, an analyst with Burnham Securities. “They’ve closed enough plants and reduced enough headcounts that they can cope with lower sales,” Mr Healy said in a telephone interview.
General Motors, Ford Motor and Chrysler LLC have laid off nearly 100,000 workers, shuttered dozens of plants and lost more than $75 billion since 2005. Ford mortgaged most of its assets and put the majority of its premium brands up for sale to pay for the latest restructuring plan. Chrysler ended its troubled nine-year marriage with DaimlerBenz by being sold to a private equity group. GM, facing the high costs of a junk bond rating, sold half its stake in its usually profitable financial arm.
But all three automakers have revamped their product offerings to correct serious quality problems and start building cars people are willing to buy without huge cash incentives. And they negotiated landmark contracts with their main union in recent weeks, which will slash labour costs by about two thirds by 2010, essentially closing a labour-cost gap of around $30 an hour with the non-unionised US plants of their foreign rivals.
While both GM and Ford posted significant losses last week — including a record $39 billion quarterly loss after GM wrote off tax credits it didn’t think it would earn enough money to use before they expired — positive results from the restructuring are showing up in their books, said Goldman Sachs analyst Robert Barry .
“Ford’s decision to produce fewer, but higher profit vehicles continued to evidence traction in (the third quarter) via strong revenue growth,” he wrote in a note to clients. GM’s automotive results were better than expected, he said, “largely from better mix and pricing.”
One big problem remains: The critical US market is slowing down significantly just as the Big Three’s market share has finally stabilised and operating costs are falling sharply. Car sales are expected to slip to about 16 million vehicles in 2007, down from nearly 17 million last year, and sales are not expected to improve next year.
ADVERTISEMENT
While this might delay a return to profitability and dampen how large that profit may be, there should not be any need for more downsizing, said David Healy, an analyst with Burnham Securities. “They’ve closed enough plants and reduced enough headcounts that they can cope with lower sales,” Mr Healy said in a telephone interview.
Download
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
ADVERTISEMENT
