Detroit's automakers have been making the shift to more fuel-efficient vehicles, but consumers have been making the move even faster — to hybrids and high mileage models made overseas. Gas prices have accelerated the move away from trucks and sport utility vehicles at a furious pace, leaving the Big Three at the most critical crossroads in 30 years.
"In the early '70s, we were caught flat-footed, without smaller, fuel-efficient cars. We had nothing to sell," said Gerald Meyers, a former chairman of American Motors Corp. "That's exactly what's happening now."
What could make this worse, says Lehman Brothers auto analyst Brian Johnson, is that the Detroit Three can no longer rely on import restrictions or raising prices, which helped pull them out of the slump in the 1980s. And if gas prices stay high, they can't count on trucks and SUVs coming back, either.
"We believe that much of this reduction in full-size truck demand is structural, with many buyers downgrading to smaller vehicles who will likely not come back," Johnson said in a note to investors.
Pickup, SUV sales down
As of April, year-over-year sales of large pickups were down 17 percent and large sport utility vehicles were down 29 percent, while sales of subcompacts jumped 33 percent and the Toyota Prius hybrid was up 23 percent, according to Autodata Corp. The shift was exacerbated by a perfect storm of high gas prices — which soared 10 percent between March and April alone — as well as the weak economy, tightening credit and the slowdown in home construction.
There isn't likely to be much improvement in May. Himanushu Patel, an auto analyst with JPMorgan, predicted sales will fall 10 percent in May from the same month last year, and that General Motors Corp., Ford Motor Co. and Chrysler LLC will each see double-digit declines. Automakers report May sales Tuesday.
Despite automakers' earlier hopes for a rebound in the second half of this year, many analysts are now expecting the pain to last well into 2009 and even beyond.
"It's going to be a real critical time for the next two or three years," said Kevin Tynan, an auto analyst with Argus Research.
Ford responded by cutting North American production by nearly 40 percent through the rest of this year, and it's expected to cut thousands of salaried jobs this summer. GM is expected to announce production cuts and other restructuring efforts at its annual meeting Tuesday. Chrysler cut North American production by 16 percent in the first four months of this year but won't say if further cuts are in the works.
"'Not yet' is the operative word," Chrysler Chairman and Chief Executive Bob Nardelli said during a recent event in Virginia. "We're constantly sensing the market and would make an adjustment if we needed to."
Detroit Three hard hit
The U.S. market is difficult for every automaker, with consumer confidence weak and 2008 sales expected to be the lowest in more than a decade. But it's most difficult for the Detroit Three, who have relied more heavily on sales of trucks and SUVs than their foreign counterparts. Trucks make up 70 percent of Chrysler LLC's U.S. sales, for example, compared to 41 percent at Toyota Motor Corp.
Things are changing. Trucks and SUVs accounted for 70 percent of Ford's sales in 2004; that reversed completely in April, with trucks and SUVs accounting for just 30 percent of retail sales. GM says it has 14 cars that get 30 miles per gallon or better, more than any other automaker.
There are even more fuel-efficient vehicles in the pipeline. GM aims to have its plug-in electric Chevrolet Volt on the market in two years, and Ford and Chrysler expect to have new subcompact cars in their U.S. lineups by 2010.
"It certainly could be better. But they actually do have some products out there," said Jeremy Anwyl, chief executive of the Edmunds.com automotive Web site. "They're in a lot of pain, but it's not pushing them over the edge because they have been working pretty diligently."
Still, some fault the Detroit Three for not acting sooner. GM, for example, is the only U.S. automaker selling a subcompact — the Chevrolet Aveo — in North America, and that car is seeing sales fall in the face of newer competition from Japan and Korea.
"If there's any blame, we can blame people for not having foresight and understanding what happened in the 1970s," Meyers said.
A market shift
Joe Hinrichs, group vice president of global manufacturing at Ford, acknowledged that the company should have seen the market shift coming.
"In the past, and it's not important when that past was, we didn't prioritize cars as much as we should have," Hinrichs said during an event Friday at a small car factory in suburban Detroit. "Now we're going as fast as we can."
He said Ford is now focused on reengineering its Fiesta global subcompact to meet U.S. safety and emissions regulations for its North American release in 2010.
"Would we have liked to have had it sooner? Yes. In retrospect, should we have? Yes," he said. "Right now we're focusing on bringing it with great quality as quickly as we can."
Tynan said he is concerned the Detroit automakers won't have enough cash to restructure at the same time they're making huge investments in new technologies. GM burned through $3.6 billion in the first quarter, ending with $23.9 billion in cash and $7 billion in additional credit. Ford ended the quarter with total liquidity of $40.6 billion. Chrysler, which is now a private company majority owned by Cerberus Capital Management LLC, doesn't report earnings.
"This is not Chrysler in the '80s inventing the minivan. This is not Ford coming out with the Taurus that saved the company. Now the vehicle that saves the company is about technology, fuel efficiency, emissions," Tynan said. "Those that are ahead in that race now are the ones that are going to survive and prosper."
Bruce Clark, an auto analyst with Moody's Investors Service, said the automakers have more than enough cash to handle whatever happens in the next 12 months. He thinks their most critical challenge is overcoming consumer skepticism about domestic cars, since the Detroit Three can no longer afford to sell cars at a discount and assume they will make up for it with profitable trucks and SUVs.
Clark said that in the past, consumers have picked a domestic car over a Japanese one only if the domestic car is $4,000 to $6,000 cheaper, even though there are no significant differences in quality.
"They have got to be able to convince consumers to essentially pay a price that enables them to make profits," Clark said.
