Keller

During the share prices of Ford, General Motors and Chrysler to new highs as the companies reported spectacular profits fueled by record sales of light trucks, low inflation and reduced fixed costs stemming from actions taken to lower breakeven points. But by 2001, the auto group was under selling pressure as investors began to fear the consequences of an economic slowdown and competitive pressures from European and Asian manufacturers who were relentlessly claiming more market share. The auto stocks always lose their appeal in the face of a recession, with its corrosive effect on margins and overall profits but the group rallied briefly in early 2002 when it seemed that the economy was turning up. However, the year ended with the individual stocks close to their lows for the year with investors questioning not just the cyclical outlook but whether these companies could reverse long-term, negative trends.

In the mid 1990s, investors were told by automakers that this time everything would be different. Breakeven points had been reduced through plant closings, while remaining capacity had been shifted to popular trucks. Meanwhile, variable profits on those light trucks climbed each year as material and component costs were stable and customers accepted higher prices and more content each year. Incentives had virtually disappeared by the late 90s as new vehicle demand set new records. A buoyant stock market minimized inflating the value of pension assets. Actions to curb health care cost inflation seemed to pay off for a time.

These were heady times for auto companies, even as executives at the auto giants complained that their stocks were ignored by the rush into high tech. The boom years masked the underlying problems of this industry, which have been laid bare by the recession and the stock market collapse.

In 2002, GM, Ford and DaimlerChrysler accounted for less than 60 percent of the cars and light trucks sold in the country. GM succeeded in taking market share away from Ford but the three together failed miserably in the car segment while, as a group, they lost ground to foreign competition in light trucks. That American brands, even the best, should have warranty and recall costs five and 10 times greater than Toyota is an embarrassment in 2002. I believe that the methods by which the Japanese maintained high quality were revealed in various studies in the early and mid 1980s, more than enough time for them to have been employed by Detroit. Incentives have been the curse of the industry for decades and they never work. Oh sure, in the short term people flood showrooms. But after a year and a half of the same message, shoppers realize that the deals will be there when they are ready to buy a car.

In addition, billions of shareholder dollars were wasted on questionable acquisitions and investments. GM might luck out so lucky with Kwikfit or the mega bucks spent on Internet silliness.

In 2003, the auto industry will sit down with the UAW to discuss its predicament. The UAW has not succeeded in unionizing any foreign-owned assembly plant. As the numbers of these facilities increases, the massive burden that the Big 3 carry in post retirement costs becomes even more crippling. GM’s unfunded pension liabilities were probably more than $16 billion at year-end and retiree healthcare costs are more than three times that level. GM’s market value of about $25 billion appropriately recognizes that the company is “gowned” by its retirees who have first claim on its assets. Without a booming stock market, the Big 3 will have to satisfy pension claims from operating results.

2002 revealed how little progress Detroit had made in closing competitive gaps with its rivals while it had the chance and had the cash. Now investors are wondering what’s in it for them if industry sales are weak, price deflation continues and post retirement costs claim cash needed to revitalize factories and product lines. I think I won’t sell my Treasury bonds yet!