February 17, 2009 - The Detroit Three, Detroit MI

Don't call them the Big Three; they're the Detroit Three — for now

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General Motors, Ford and Chrysler weren't labelled the Big Three just because they produced the most vehicles in North America.

As giant employers, they had big influence, energizing entire economies with their big union wages and benefits packages. Just because you build it, doesn't mean they'll buy it. The Detroit Three had their worst 12 months in 26 years.

As giant manufacturers, they created style. Status was instantly signalled by black Lincolns and pink Corvettes. Seatbelts, reduced vehicle emissions and electric cars had to wait until the carmakers were good and ready.

As giant political contributors, they had big power. The L.A. Times recently calculated that since 1990, the auto industry as a whole has donated $100 million US to Republicans and $34 million to Democrats.

And then it all slipped away like a tank of gas through an SUV.

It must have been humbling for the chief executives of the Big Three, now the Detroit Three, to sit before the U.S. Congress as supplicants in December, lectured for flying to Washington in their private jets and getting only half the cash they said they needed.

The automakers were promised a total of $17.4 billion in direct loans from Washington — and they had to present restructuring plans by Feb. 17, 2009, if they wanted a second installment. While Ford opted out of the process, saying it doesn't need a loan just yet, the plans GM and Chrysler came up with are costly.

GM said it would need up to $30 billion from the U.S. Treasury Department to continue operating. GM has already received $13.4 billion of the money, but the other $16.6 billion would be new.

Chrysler wants $2 billion on top of the $4 billion it has already received and the $3 billion it is expecting from Washington.

The plans are now being vetted by the Treasury and other officials. If they are rejected, bankruptcy is a real possibility. GM has said it could run out of money by March.

Where things stand

General Motors Corp.: The biggest of the domestic North American automakers, GM hasn't turned a profit since 2004 and has lost at least $73 billion US since then.

In 2008, GM cut about 2,500 salaried workers and 16,000 hourly workers as a result of buyouts. It sped up production cuts announced in the summer of 2008, when the automaker announced it was closing a truck plant in Oshawa, Ont., affecting approximately 2,500 workers. Three other truck plants in North America would also shut. The job cuts followed the 30,000 layoffs announced in 2006 as part of a major restructuring.

In early February 2009, GM said worldwide salaried staff would be cut to 63,000 from 73,000, affecting about 3,400 of its 29,500 salaried staff in the U.S. GM now employs about half as many people in the U.S. as it did at the end of 2000.

Under the restructuring plan presented Feb. 17, GM said it will cut another 47,000 jobs, 26,000 of them from outside the U.S. It's not clear what the impact will be in Canada. Five more factories will be shut down by 2012, reducing GM's total number of plants to 33.

Ford Motor Company: Ford was for many years the No. 2 automaker but fell to No. 4 behind Toyota and Chrysler in January 2007, as U.S. sales continued to decline. Ford lost a breathtaking $12.7 billion US in fiscal 2006 and was $2.7 billion in the red for 2007. Ford cut 15 per cent of its salaried workforce costs, or around 2,000 employees, by August 2008. The restructuring followed a January 2006 announcement of as many as 30,000 job cuts and the closure of 14 plants, including the Windsor, Ont., casting plant.

It cut back on truck and SUV production.

Ford's house, however, is the most in order of the Detroit Three. It has yet to require any bailouts but says it may need help in the future.

Chrysler LLC: Chrysler is in the worst financial shape.

Chrysler Group, the North American division of the company that Cerberus Capital Management bought in mid-2007, lost $680 million US in 2006.

In 2008, Chrysler cut about a quarter of its salaried workers through buyout and early retirement offers, amounting to about 5,000 job cuts. It has cut about 38 per cent of its workforce since the end of 2006, ending 2008 with 54,007 employees. In the restructuring plan it presented to the U.S. government, there were no further cuts outlined, and many analysts believed Chrysler would find nothing else to cut.

They were wrong. It plans to cut another 3,000 jobs this year.

In Canada, the cuts began in February 2007, when it announced 13,000 job cuts — 2,000 of which were in Canada — along with the closure of two U.S. facilities and shift reductions at two others.

By fall, Chrysler had cut another 1,800 U.S. positions and was looking to reduce 5,000 more positions throughout the buyout route.

Under the restructuring plan presented Feb. 17, another 3,000 Chrysler employees will lose their jobs, although no Canadians will be affected.

Sales at a 26-year low

If only they could sell some cars. U.S. sales are at a 26-year low, and auto sales are dropping in other parts of the world as well. Keep in mind when you read this next set of figures that January is usually the worst month for sales. But, yikes.

GM Canada said it sold 14,254 cars and trucks last month, down from 26,668 from January 2008. The company sold 5,034 cars, off more than 60 per cent year-over-year, while truck sales fell 34 per cent to 9,220.

GM dealers in the U.S. sold 129,227 vehicles in January, down 49 per cent compared with a year ago. Ford Motor said its sales for January were down 40 per cent for the month. Chrysler reports U.S. vehicle sales were down 55 per cent .

As recently as 1998, the combined market share of the Big Three in Canada and the U.S. was 70 per cent. Just 10 years later, that share had skidded to 47 per cent in both countries.

How did Detroit automakers lose so much traction?

Analysts cite several reasons for Detroit's woes. Many of them come down to two things: product and labour costs.

Product: North American automakers made a big commitment to large sport utility vehicles in the 1990s. For a while, that was the segment that was selling. But SUV sales peaked in 1999 and have slid since.

The gasoline price surges in the second half of 2005 hurt sales of SUVs even more. This continued into April 2008, as gas prices inched closer to $4 a gallon in the U.S. Year-over-year sales of trucks dropped 17 per cent while large SUVs plunged by 29 per cent.

Japanese automakers, long perceived as the leaders in the smaller, fuel-efficient vehicle market, aren't nearly as dependent on SUV models. While Detroit was rolling out one giant SUV after another, Japan was busy churning out gas-electric hybrids.

Other industry observers say Detroit has also taken too long to bring more new and redesigned vehicles to market. Falling sales and falling market share have meant that plants have been operating below capacity. For instance, GM's plants were reported to be operating at 85 per cent capacity in November 2005, well below the plants of its Asian competitors. Hence the production cuts, plant closures and layoffs.

There's also the issue of perceived quality and reliability. In the past, Japanese automakers scored much better in initial quality ratings than North American nameplates. That's not as true any more. GM and Ford models have sometimes beaten Japanese models in recent surveys by J.D. Power and Associates. In fact, GM's Oshawa No. 2 plant was ranked as the best vehicle assembly plant in North America in 2005 in terms of initial quality. But getting the car-buying public to realize that hasn't been easy.

Labour: Another big reason why the U.S.-based automakers are having problems. GM, for instance, used to pick up the entire cost of funding health insurance premiums of its employees, their survivors and GM retirees. Those costs have risen at double-digit rates every year. A recent agreement with the UAW will allow GM to trim billions from its annual health care bill. But the non-unionized Japanese automakers, with their younger American workforces (and far fewer American retirees) will continue to enjoy a cost advantage.

One of the conditions of the bailout package is that the Detroit Three reach labour-cost parity with Japanese automakers that have U.S. plants.

The issue of labour productivity is also cited by many. The 2005 Harbour Report estimated that Toyota's lead in labour productivity amounted to a cost advantage of $350 US to $500 US per vehicle over North American manufacturers.

The United Auto Workers union on Feb. 17 said it had reached a tentative agreement with Chrysler, GM and Ford to modify existing labour contracts. The exact terms were not announced, but the union was expected to agree to measures to make labour costs competitive with the companies' Japanese counterparts

The Canadian Auto Workers union said its leaders have agreed to restructuring talks, and those talks should begin in a few weeks.

"Based on the global financial crisis and based on what the government is going to put on their terms and conditions, the CAW is going to have to make some compromises," CAW president Ken Lewenza said Feb. 17.

What the future holds

The Detroit automakers are now busy introducing more fuel-efficient vehicles. So-called CUVs — car-based crossover vehicles — are the fastest-growing vehicle segment, with 41 models now available in the North American market.

That's good news for the Canadian auto industry, Scotiabank economist Carlos Gomes says. "We estimate that Canada produces about one-third of all CUVs assembled in North America [at Ingersoll, Alliston, Cambridge and Windsor, all in Ontario] — more than double its share of total vehicle production."

Ford's Escape is the biggest-selling CUV, but here again, the Japanese have an overall lead. Imported brands have a market share of almost 60 per cent, according to a recent analysis by Scotiabank's Canada Auto Report.

The automakers say they can turn this thing around. Analysts say they'll need to chop vehicles, models or brands.

GM is considering eliminating the Hummer brand, phasing out the Saturn brand and selling its Pontiac and Saab brands. The company wants to focus on Chevrolet, Cadillac, GMC and Buick, and make sure that all new vehicles built between 2009 and 2014 are fuel-efficient or crossovers.

Chrysler plans to cut three models — the PT Cruiser, Dodge Durango and Chrysler Aspen — and is considering a partnership with Fiat, which might supply it with smaller cars and market Dodge and Jeep trucks in Europe and Asia. China's Chery has expressed interest in buying Volvo from Ford.

The Detroit Three also need to modernize an outdated dealer network and boost investment in their remaining plants and products.

As far as new products are concerned, Ford has announced a gas/electric Fusion hybrid, a Mercury Milan hybrid and increased the efficiency of its vehicles. GM has pioneered new battery technology for its Chevy Volt and come up with a fuel-cell-powered concept car called the Chevy Equinox. Chrysler is experimenting with hybrids with its 200C EV sedan, the Jeep Patriot EV, the Chrysler Town & Country EV and the all-electric sports car — the Dodge Circuit EV.

New products, more efficient plants, fewer employees, renegotiated contracts and government loans are all the right ingredients for success. But with the president of the United States saying he hasn't closed the door to a government-backed bankruptcy for struggling automakers and many taxpayers convinced the bailouts are poorly conceived, the automakers have to consider something that was once almost unthinkable.

They may not be too big to fail.

Original Story - CBC News