Businessweek- Could 2007 Be Even Worse for Detroit?
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Businessweek- Could 2007 Be Even Worse for Detroit?
2007 will be a very interesting year to say the least.
http://www.businessweek.com/autos/co...x+page_insight
http://www.businessweek.com/autos/co...x+page_insight
Could 2007 Be Even Worse for Detroit?
Despite drastic cost cuts and new vehicles, history and market forces could conspire to do even more damage to U.S. automakers next year
It is a given that 2006 will go down as one of the most brutal years ever for Detroit. But could 2007 be worse?
It's a tough question, and one that no one in Detroit can truthfully answer today. Over the past nine months, General Motors (GM) and Ford (F) were forced to offer early retirement to virtually their entire blue-collar workforce, while shrinking the size of their salaried staff and reducing benefits for their employees. They have been forced to watch as many of their major parts suppliers either fall into bankruptcy or cannot devise a legitimate plan to exit debtor's court.
The grim possibility is that even if Detroit is able to cut away the fat and replace many of its tired models, U.S. automakers could still find 2007 an even more hostile selling environment, where keeping this year's market share becomes an impossibility.
Obviously, GM is putting a great many of its eggs—and a $400 million ad campaign—into the introduction of its new line of trucks, due by month's end. Likewise, it appears that inside Ford the No. 1 concern would be to find the "floor" where its F Series trucks(see BusinessWeek.com, 4/19/06, "America's Favorite Pickup")—the company's best seller—are headed in terms of sales. Meanwhile, DaimlerChrysler's (DCX) Chrysler division, the company that has been most dependent on light truck sales, has seen sales plummet.
INCENTIVE DEMANDS.* On Oct. 3, all major automakers reported their September sales. Chrysler saw a 3.8% drop; GM, despite maintaining its turnaround strategy is working, also saw a 3.1% decline from a year earlier to 334,025; and Honda (HMC) and Nissan (NSANY) also dipped. Ford, however, saw a modest 4.6% rise, its first monthly gain since January. Toyota (TM) blew past everyone with a 25% jump over last September.
One thing is for sure: Detroit is going to have to find a way to sell its cars and trucks without the benefit of the large incentives that have come to define its marketing strategy since 2001. It is a financial certainty that carmakers cannot offer large retail incentives and keep factories open, if they also have to pay large rebates to customers as well as compensate idled workers whose factories are on furlough.
Yes, as a car company, you can pay a rebate and keep the factory open or you can pay your employees to sit at home, but you can't do both. According to CNW Marketing Research, this situation becomes even more complex when one considers that the average new car buyer 11 years ago was hoping for a mere $1,100 discount on his next purchase, but last year believed that it was going to take a full $5,000 worth of discounts and incentives to move him to acquire a new vehicle.
It will take years to fully retrain the buying public—at least those in the market for Detroit's bread-and-butter cars and trucks—to accept less of a discount to close a new car deal. Without the benefit of supersize rebates, it could prove tough next year to motivate the potential new car buyers that might demand a real incentive to sign their names to a five-year note.
GAS CRUNCH HISTORY.* The biggest question remains how well light trucks will sell for all three Detroit makers. Even if gas prices soften, how long will it take for drivers to feel that they won't be held hostage at the pump in the future? In this case, there is a historical precedent to examine.
When the first oil embargo took place in 1973, the nation quickly fell into recession. But by 1975, as gas prices fell, auto prices rose thanks to the removal of President Richard M. Nixon's price controls of a few years earlier, and to Detroit's need to make higher margins on its products due to the lower overall volumes. By 1978 there was an all-time record for the amount of new cars sold against the number of American families (1 to 3.24). In other words, from the Arab oil embargo and resulting recession to massively higher window stickers to full recovery of the new-car market, total time elapsed was less than three years.
Then came the second energy crisis in 1979. This time, things were far more serious and it would take far longer for a complete recovery to take hold. Certainly Honda, Toyota, and Nissan benefited from that crisis, but if one is counting the years from the start of that problem to hitting the next all-time high for new-car sales in America (1986), it counts off as seven years.
ROARING '90S.* More importantly, sales of compact cars continued to climb until 1988, when those vehicles accounted for 28% of all new vehicles sold. The object lesson is that when Americans were burned once on the price of gasoline, as in 1973-74, they recovered from that shock in a reasonably quick fashion. However, the second time they were burned on the price of oil and gas, the recovery period was twice as long.
It would take another three years until the introduction of the first Ford Explorer as a 1991 model to start the light truck and sport-utility vehicle craze of the last decade. However, it should also be noted that when those extremely popular vehicles were first introduced, Explorers were at first powered by V-6 engines putting out a mere 155 horsepower. That indicates just how fuel-sensitive the public still was at the time.
While the SUV and light truck craze continued to expand throughout the 1990s, it really didn't kick into full gear until the Asian financial crisis in 1997 left America with $1-per-gallon gasoline the next year. At that point, 19 years had passed since the Iranian Revolution threw American motorists into the hard decision to purchase the most fuel-efficient vehicles.
FUTURE IMPONDERABLES.* Today the situation is eerily similar. As a result of high oil prices, many buyers who owned and loved their SUVs took huge wholesale losses to buy more fuel-efficient vehicles, while the price structure for those smaller vehicles climbed upward.
Therein lies the challenge for the auto industry today. Will the Japanese hold the line on the price of their vehicles and maximize the size of their new audience? Can the Germans deal with the continuing weakness of the dollar against the euro and still gain market share? Will Detroit realign its priorities and move quickly into the vehicles the public will demand in 2007, not knowing what the next big automotive trend is going to be? Will the falling price of energy be enough to kick off a new round of consumer spending, or will the deflating housing market more than offset that windfall?
One thing is for sure: There are more than 210 million vehicles on the road today, and sooner or later, all will be traded in for something newer no matter what economic conditions exist. The only question is: Which car companies will win when that happens?
Stay tuned. I don't know either. But I can promise you that, for some car companies, it won't be pretty.
Despite drastic cost cuts and new vehicles, history and market forces could conspire to do even more damage to U.S. automakers next year
It is a given that 2006 will go down as one of the most brutal years ever for Detroit. But could 2007 be worse?
It's a tough question, and one that no one in Detroit can truthfully answer today. Over the past nine months, General Motors (GM) and Ford (F) were forced to offer early retirement to virtually their entire blue-collar workforce, while shrinking the size of their salaried staff and reducing benefits for their employees. They have been forced to watch as many of their major parts suppliers either fall into bankruptcy or cannot devise a legitimate plan to exit debtor's court.
The grim possibility is that even if Detroit is able to cut away the fat and replace many of its tired models, U.S. automakers could still find 2007 an even more hostile selling environment, where keeping this year's market share becomes an impossibility.
Obviously, GM is putting a great many of its eggs—and a $400 million ad campaign—into the introduction of its new line of trucks, due by month's end. Likewise, it appears that inside Ford the No. 1 concern would be to find the "floor" where its F Series trucks(see BusinessWeek.com, 4/19/06, "America's Favorite Pickup")—the company's best seller—are headed in terms of sales. Meanwhile, DaimlerChrysler's (DCX) Chrysler division, the company that has been most dependent on light truck sales, has seen sales plummet.
INCENTIVE DEMANDS.* On Oct. 3, all major automakers reported their September sales. Chrysler saw a 3.8% drop; GM, despite maintaining its turnaround strategy is working, also saw a 3.1% decline from a year earlier to 334,025; and Honda (HMC) and Nissan (NSANY) also dipped. Ford, however, saw a modest 4.6% rise, its first monthly gain since January. Toyota (TM) blew past everyone with a 25% jump over last September.
One thing is for sure: Detroit is going to have to find a way to sell its cars and trucks without the benefit of the large incentives that have come to define its marketing strategy since 2001. It is a financial certainty that carmakers cannot offer large retail incentives and keep factories open, if they also have to pay large rebates to customers as well as compensate idled workers whose factories are on furlough.
Yes, as a car company, you can pay a rebate and keep the factory open or you can pay your employees to sit at home, but you can't do both. According to CNW Marketing Research, this situation becomes even more complex when one considers that the average new car buyer 11 years ago was hoping for a mere $1,100 discount on his next purchase, but last year believed that it was going to take a full $5,000 worth of discounts and incentives to move him to acquire a new vehicle.
It will take years to fully retrain the buying public—at least those in the market for Detroit's bread-and-butter cars and trucks—to accept less of a discount to close a new car deal. Without the benefit of supersize rebates, it could prove tough next year to motivate the potential new car buyers that might demand a real incentive to sign their names to a five-year note.
GAS CRUNCH HISTORY.* The biggest question remains how well light trucks will sell for all three Detroit makers. Even if gas prices soften, how long will it take for drivers to feel that they won't be held hostage at the pump in the future? In this case, there is a historical precedent to examine.
When the first oil embargo took place in 1973, the nation quickly fell into recession. But by 1975, as gas prices fell, auto prices rose thanks to the removal of President Richard M. Nixon's price controls of a few years earlier, and to Detroit's need to make higher margins on its products due to the lower overall volumes. By 1978 there was an all-time record for the amount of new cars sold against the number of American families (1 to 3.24). In other words, from the Arab oil embargo and resulting recession to massively higher window stickers to full recovery of the new-car market, total time elapsed was less than three years.
Then came the second energy crisis in 1979. This time, things were far more serious and it would take far longer for a complete recovery to take hold. Certainly Honda, Toyota, and Nissan benefited from that crisis, but if one is counting the years from the start of that problem to hitting the next all-time high for new-car sales in America (1986), it counts off as seven years.
ROARING '90S.* More importantly, sales of compact cars continued to climb until 1988, when those vehicles accounted for 28% of all new vehicles sold. The object lesson is that when Americans were burned once on the price of gasoline, as in 1973-74, they recovered from that shock in a reasonably quick fashion. However, the second time they were burned on the price of oil and gas, the recovery period was twice as long.
It would take another three years until the introduction of the first Ford Explorer as a 1991 model to start the light truck and sport-utility vehicle craze of the last decade. However, it should also be noted that when those extremely popular vehicles were first introduced, Explorers were at first powered by V-6 engines putting out a mere 155 horsepower. That indicates just how fuel-sensitive the public still was at the time.
While the SUV and light truck craze continued to expand throughout the 1990s, it really didn't kick into full gear until the Asian financial crisis in 1997 left America with $1-per-gallon gasoline the next year. At that point, 19 years had passed since the Iranian Revolution threw American motorists into the hard decision to purchase the most fuel-efficient vehicles.
FUTURE IMPONDERABLES.* Today the situation is eerily similar. As a result of high oil prices, many buyers who owned and loved their SUVs took huge wholesale losses to buy more fuel-efficient vehicles, while the price structure for those smaller vehicles climbed upward.
Therein lies the challenge for the auto industry today. Will the Japanese hold the line on the price of their vehicles and maximize the size of their new audience? Can the Germans deal with the continuing weakness of the dollar against the euro and still gain market share? Will Detroit realign its priorities and move quickly into the vehicles the public will demand in 2007, not knowing what the next big automotive trend is going to be? Will the falling price of energy be enough to kick off a new round of consumer spending, or will the deflating housing market more than offset that windfall?
One thing is for sure: There are more than 210 million vehicles on the road today, and sooner or later, all will be traded in for something newer no matter what economic conditions exist. The only question is: Which car companies will win when that happens?
Stay tuned. I don't know either. But I can promise you that, for some car companies, it won't be pretty.
Last edited by johnsocal; Oct 5, 2006 at 10:29 AM.
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From: The Golden State
Re: Businessweek- Could 2007 Be Even Worse for Detroit?
In this case, media doom & gloom has a point.
Toyota's 25% sales gain against the decreases of our industry can't be brushed off. Neither can the fact that our industry has put all it's eggs in the one basket of trucks & suvs. Finally, you'd be hard pressed to find anyone who doesn't think the deficit and the roughly $125 billion we're throwing into the money pit of Iraq isn't going to create a financial train crash sooner or later.
Everything today has a sense of urgency. There's this feeling like the clock is about to run out, and everyone is scrambling like mad. I think the theme of the article picks this up.
Toyota's 25% sales gain against the decreases of our industry can't be brushed off. Neither can the fact that our industry has put all it's eggs in the one basket of trucks & suvs. Finally, you'd be hard pressed to find anyone who doesn't think the deficit and the roughly $125 billion we're throwing into the money pit of Iraq isn't going to create a financial train crash sooner or later.
Everything today has a sense of urgency. There's this feeling like the clock is about to run out, and everyone is scrambling like mad. I think the theme of the article picks this up.
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From: Michigan's left coast
Re: Businessweek- Could 2007 Be Even Worse for Detroit?
At some point, external factors will affect the auto industry. How will a broad slowdown in the overall economy affect each of the players? That's what everyone should be asking themselves right now, because a recession is going to happen at some point, folks.
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Re: Businessweek- Could 2007 Be Even Worse for Detroit?
Doom and gloom might well have a point but to just read about Toyota's % gains at the expense of Detroit's automakers each month just peeves me, no end. Toyota also have a few poor selling models but they don't get the caning from the media like GM and others do. 
No wonder Toyota make gains each month. The media do a great job of selling more and more vehicles for Toyota with that kind of free publicity!!! The way the reports are written absolutely sucks and is a totally irresponsible way of conveying 'facts' when they're just looking at negatives to write about. Are these so-called analysts and scribes manic depressants or what? You wouldn't talk to your kids that way so why write about it, time and time again?
//End rant.
No wonder Toyota make gains each month. The media do a great job of selling more and more vehicles for Toyota with that kind of free publicity!!! The way the reports are written absolutely sucks and is a totally irresponsible way of conveying 'facts' when they're just looking at negatives to write about. Are these so-called analysts and scribes manic depressants or what? You wouldn't talk to your kids that way so why write about it, time and time again?
//End rant.
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Re: Businessweek- Could 2007 Be Even Worse for Detroit?
It simply never ceases to amaze how, when anyone raises legitimate points/questions, some people just choose not to listen or dismiss them out of hand.
People can be “peeved” all they want and choose to ignore what is happening but as I’ve said many times, if those who want the domestic car industry to survive, let alone thrive; they had better hope that the leadership at GM, Ford and Chrysler don’t have their head in the sand as some aficionados do..
I think one of the most pertinent sections of the article is that about incentives whether those incentives are expanding warranty limits (as if vehicles suddenly became more reliable), “Zero %" financing (as if money suddenly became free) or outright cash rebates.
I’ve heard Scott’s argument for the rebates; I understand it; maybe it really had to be done – but it’s still a mess for the industry.
When GM entered the rebate game in full force it took an alligator by the tail and now they can’t let go without getting their asses bit off (and worst of all, they drug all other manufacturers into the swamp with them).
I surely wish they would find a way out of the swamp – I wish I had an answer for them!
People can be “peeved” all they want and choose to ignore what is happening but as I’ve said many times, if those who want the domestic car industry to survive, let alone thrive; they had better hope that the leadership at GM, Ford and Chrysler don’t have their head in the sand as some aficionados do..
I think one of the most pertinent sections of the article is that about incentives whether those incentives are expanding warranty limits (as if vehicles suddenly became more reliable), “Zero %" financing (as if money suddenly became free) or outright cash rebates.
I’ve heard Scott’s argument for the rebates; I understand it; maybe it really had to be done – but it’s still a mess for the industry.
When GM entered the rebate game in full force it took an alligator by the tail and now they can’t let go without getting their asses bit off (and worst of all, they drug all other manufacturers into the swamp with them).
I surely wish they would find a way out of the swamp – I wish I had an answer for them!
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Re: Businessweek- Could 2007 Be Even Worse for Detroit?
Eric Bryant,
By the way, not to hijack the thread, but the your Impala is fast and handles well...in Solo2 a beautiful black/grey Impala SS always provided very good competition for my '00 Z28 and several other cars in F-Stock.
By the way, not to hijack the thread, but the your Impala is fast and handles well...in Solo2 a beautiful black/grey Impala SS always provided very good competition for my '00 Z28 and several other cars in F-Stock.
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Re: Businessweek- Could 2007 Be Even Worse for Detroit?
Negative news gets readers. Doom and gloom gets readers. Readers get advertisement money to flow in.
If Toyota was suffering they would be writing the same articles about them as well.
If Toyota was suffering they would be writing the same articles about them as well.
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Re: Businessweek- Could 2007 Be Even Worse for Detroit?
Originally Posted by Robert_Nashville
I think one of the most pertinent sections of the article is that about incentives whether those incentives are expanding warranty limits (as if vehicles suddenly became more reliable), “Zero %" financing (as if money suddenly became free) or outright cash rebates.
If GM didn't build its cars as though it were expecting to discount them, maybe it wouldn't have to
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Re: Businessweek- Could 2007 Be Even Worse for Detroit?
I'm working feverishly on an older lady who works with me, and is currenty driving a yota appliance. She starting to get my point, hopefully soon she will be converted, and driving a real car. I love it when people who refuse to see the obvious bias in the media, claim that it's enthusiasts whose heads are in the sand! This free publicity by the WMD is nothing new to me, no matter how much the sheep deny, remember de-nile is not just a river.
This free publicity by the WMD is nothing new to me, no matter how much the sheep deny, remember de-nile is not just a river.
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From: Michigan's left coast
Re: Businessweek- Could 2007 Be Even Worse for Detroit?
Originally Posted by Robert_Nashville
Eric Bryant,
By the way, not to hijack the thread, but the your Impala is fast and handles well...in Solo2 a beautiful black/grey Impala SS always provided very good competition for my '00 Z28 and several other cars in F-Stock.
By the way, not to hijack the thread, but the your Impala is fast and handles well...in Solo2 a beautiful black/grey Impala SS always provided very good competition for my '00 Z28 and several other cars in F-Stock.
Back on topic, I'm curious to hear where people see the economy going in the next 2-3 years, and how they think that might impact the various car companies who are currently fighting it out for the top 3-4 spots in the domestic market.
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Re: Businessweek- Could 2007 Be Even Worse for Detroit?
Originally Posted by SSbaby
Doom and gloom might well have a point but to just read about Toyota's % gains at the expense of Detroit's automakers each month just peeves me, no end. Toyota also have a few poor selling models but they don't get the caning from the media like GM and others do.
No wonder Toyota make gains each month. The media do a great job of selling more and more vehicles for Toyota with that kind of free publicity!!! The way the reports are written absolutely sucks and is a totally irresponsible way of conveying 'facts' when they're just looking at negatives to write about. Are these so-called analysts and scribes manic depressants or what? You wouldn't talk to your kids that way so why write about it, time and time again?
//End rant.
No wonder Toyota make gains each month. The media do a great job of selling more and more vehicles for Toyota with that kind of free publicity!!! The way the reports are written absolutely sucks and is a totally irresponsible way of conveying 'facts' when they're just looking at negatives to write about. Are these so-called analysts and scribes manic depressants or what? You wouldn't talk to your kids that way so why write about it, time and time again?
//End rant.
Actually, I feel Toyotas gains are the result of continuing momemtum from what can't be called anything but our own industry's screwups.
Consider:
1. Toyota's growth has been almost exclusively because of cars. Not trucks or SUVs.
2. Toyota has invested time & resources in constant improvement in their vehicles. It's the exact same thing Ford did in the 1980s and raked in a bonanza in quality rankings, sales numbers, and image.
3. Ford has agressively set in motion plans to dominate markets beyond the borders of their own country. Toyota investing heavily in NASCAR is like Ford investing heavily in the French Grand Prix. Toyota is actually starting to pull off being known as an American company. Imagine Pontiac or Chevrolet being thought of as German?
4. The Prius hybrid success isn't being measured by profit. It's being measured by advertizing effectiveness. Although Toyota isn't doing very well in fuel economy, they're seen as "Green" almost exclusively because of the Prius.
5. And finally, instead of leapfrogging over, our makers are in a game of catch up. For instance, GM might tear apart a 2006 Camry in order to use what's learned on a car hitting the streets in 2008 instead of coming up with ways to make something far superior to what they are looking at. Meanwhile, that Camary is going to be even better in 2008, while GM is as good as the Camry was 2 years before.... and still seeming to be playing catch-up.
When I have a '97 Z28 that went through 2 clutches in 4 years, 3 alternators, & 2 power window motors, and I now have a 2002 Camaro that ate a transmission before I bought it, and at this very moment has TWO power window motors on the fritz, and a GM person once told me (when I brought up the issues I had with the '97) that there are some parts designed to break, doesn't exactly make you feel warm and fuzzy about American cars.
(For the record, I've never owned an import, and the Fords I've owned were far better cars mechanically than the GM cars. Never an issue with alternators, pw motors, clutches, etc... )
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Re: Businessweek- Could 2007 Be Even Worse for Detroit?
Originally Posted by guionM
Consider:
1. Toyota's growth has been almost exclusively because of cars. Not trucks or SUVs.
1. Toyota's growth has been almost exclusively because of cars. Not trucks or SUVs.
From C&D September 2006
"Trucks were only 26.7 percent of the 1,083,709 vehicles Toyota sold in 1995. By 2005, Toyota had more than doubled it's US sales to 2,260,296 vehicles, and of this much larger total, trucks had increased to 43 percent. Put another way, Toyota sold more than three times as many trucks in 2005 as it did in 1995."
Given a long term sampling, this would seem to indicate a very large chuck of their growth was due to SUVs and trucks.
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Re: Businessweek- Could 2007 Be Even Worse for Detroit?
Originally Posted by guionM
(For the record, I've never owned an import, and the Fords I've owned were far better cars mechanically than the GM cars. Never an issue with alternators, pw motors, clutches, etc... )
