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Detroit's carmakers seem to have turned the corner
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| Mira Oberman |
Sun, Nov 11, 2007
AFP
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>CHICAGO, Nov 11, 2007 (AFP) - Despite a worsening economy and a flood of red ink on their balance sheets, Detroit's Big Three 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 Corp., Ford Motor Co and Chrysler LLC have laid off nearly 100,000 workers, shuttered dozens of plants and lost more than 75 billion dollars 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 labor costs by about two thirds by 2010, essentially closing a labor-cost gap of around 30 dollars an hour with the non-unionized 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 stabilized 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," Healy said in a telephone interview.
Key to the turnaround is that the Big Three have finally started focusing on matching products to consumer demands after years of neglecting quality, style and handling, said Jeremy Anwyl, president of the online car buying guide Edmunds.com.
"GM is ahead - they've been bringing out product that's been pretty well received for a couple years," he told AFP.
Ford has a few hot models in the showroom but "is probably another year or two away" from revamping its full lineup.
Chrysler is even further behind, he said, but the new owner, Cerberus Capital Management, has dumped four unpopular models and is adding four more,
including two hybrids.
"They're showing they can be competitive, which they haven't in a while," he said.
"The product share swings are going to be much harder all around ... it's going to be a real dogfight for every sale."
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