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When US catches cold, Detroit has pneumonia

When US catches cold, Detroit has pneumonia
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First Published: Wed, Jan 16 2008. 11 28 PM IST
Updated: Wed, Jan 16 2008. 11 28 PM IST
This year is already shaping up to be another tough one for Motor City’s car makers. So empty are their factories of new designs that the most talked about vehicle of 2008 is Indian manufacturer Tata Motors’ $2,500 (Rs1 lakh) “people’s car”—the Tata Nano—which isn’t even on show at the North American International Auto Show in Detroit this week. The Detroit auto show goes on through 27 January.
The outlook hardly looks rosy. General Motors Corp. (GM), Ford Motor Co. and Chrysler Llc. needed an uneventful 2008 to consolidate their recent restructuring efforts. But it looks like a recession is on the way.
Analysts already expect car production to fall another 5% or more this year. And shareholders are clearly worried, lopping 45% off GM’s stock and a third off Ford’s since groundbreaking deals on health care costs with the United Auto Workers (UAW) in October. But an economic downtown might just work in their favour.
That’s not obviously the case. If consumers postponed buying new cars, it would put further pressure on Ford and GM, which are already likely to burn through $20 billion (Rs78,600 crore) and $6 billion, respectively, in the next several years, according to Goldman Sachs Group Inc., along with now-private Chrysler.
Furthermore, lower sales would crimp earnings at their finance units, which would also have to increase reserves against souring loans. But a dire economy, lasting a year or so, could empower Detroit executives to push for further cuts in production and staff. Ford chief Alan Mulally has already pledged to reassess output every month. Tougher action now would be painful in the short term but could leave the companies on a more competitive footing when markets improve.
It would, however, be a high-wire act. Any such moves would probably incur the wrath of the UAW, and risk a debilitating strike. Even if that weren’t to happen, the longer a recession lasted, the more strain it would put on Motown manufacturers’ finances. For one thing, the price of metals and other raw material is still rising, making profits harder to eke out. Moreover, if cars get really hard to shift, offering buyers expensive financial incentives could become alluring again.
These eat into cash reserves, and an industrywide battle for market share would hurt Detroit’s Big Three the most. With their stronger balance sheets, Toyota Motor Corp. and other foreign rivals are much better positioned for a price war. Detroit executives focused on cutting production capacity might fancy the idea of a short, sharp recession, but nothing worse. It’s not, however, much of a business plan.
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First Published: Wed, Jan 16 2008. 11 28 PM IST