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Major Auto Maker Losses Could Cause Economic Recession

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Hi Everyone,

I found this article in Business Week. I have a personal interest in this, as a family member is an executive with Ford. Sorry the format is messed up; I had to get rid of the ads!

Kathy

Detroit's Woe, America's Worry
The biggest problem about the missteps plaguing GM and Ford: They're likely to cause an economic pileup clear across the country




By Amey Stone in New York


These are tough times for Detroit, and they aren't likely to get better anytime soon. So motorists, consumers, and investors better all brace themselves: The effects of auto industry woes will likely rumble through the economy far beyond Motown's city line.


General Motors (GM) shocked the financial world in mid-March when it warned of staggering losses in the first quarter of this year -- $1.1 billion in red ink when the number was announced on Apr. 19. Ford (F) reported on Apr. 20 that it managed to post a profit of $1.2 billion in the period, but that was a punishing 38% drop from a year ago.


Both companies' stocks have fallen about 40% in the past year, and credit markets are reeling at the potential for credit-rating downgrades. "It's a very sad day here in Detroit," says Gerald Meyers, a professor at the University of Michigan Business School and former chairman of American Motors Corp. Even Chrysler, a division of Germany's DaimlerChrysler (DCX ) that's holding up far better than the other two members of Detroit's Big Three, is worried about what troubles at GM and Ford portend for the U.S. auto industry, says Meyers.



  • LOST IMPACT. Because of the domestic auto industry's size, its misfortunes have an amplified impact on the overall economy and on family budgets, say economists and industry experts. For example, financial turmoil sparked by a credit downgrade for the car companies could have a direct effect on many Americans' savings and retirement accounts. When debt falls in value, mutual funds and pension funds holding bonds issued by these carmakers fall, too. Rising gas prices only add to consumers' pocketbook misery.







Most shocking of all: Given the nature of this downturn, increases in car prices are likely to accelerate. "I don't think you'll see any diminution in the quality of cars or the choice, but I do expect to see higher prices," says David Cole, chairman of the nonprofit automotive think tank, Center for Automotive Research (CAR).


Auto makers are already reporting that incentives, like zero-percent financing programs, aren't stimulating buying the way they used to and are cutting them back, says Tom Webb, chief economist with Manheim Auctions in Atlanta. Used-car prices are also rising, which often presages higher stickers for new vehicles, he says.



  • TOYOTA UPTICK? The industry's root problem is that it can't really squeeze any more savings out of suppliers or the manufacturing process, says Cole. Given the rising costs of producing cars, auto makers have little choice but to raise prices to return to profitability. "A car just got to be too good a deal, and that era is over with," he says.







U.S. cars won't be the only models that get pricier. Toyota's (TM) chairman stunned the industry at an Apr. 25 news conference when he hinted that the Japanese giant would consider raising prices in the U.S. to help out American carmakers. Most analysts say Toyota would simply be using Detroit's problems as an excuse to boost its own profit margins. But such a move would also be prudent if Toyota is worried that a serious slump in the U.S. auto industry could spark a recession or lead to more protectionist policies domestically, says Cole.


The downturn in Detroit can't be chalked up merely to U.S. auto makers losing a popularity contest between gas-guzzling sport-utility vehicles and fuel-efficient new hybrid models. Instead, the industry's financial woes are due to far more intractable and long-term trends -- rising health-care and pension costs for workers, increased foreign competition from Asian manufacturers, and rising prices of commodities used to make cars.


MICHAEL MOORE'S SEQUEL. Even though auto industry employment is far lower than it used to be, CAR estimates that every job lost in an carmaking plant has the economic impact of losing 9.4 jobs elsewhere. GM alone still makes up 1% of the economy, says Cole.


Meyers worries that these trends aren't going away, no matter what the economy or gas prices do. "More and more people are going to be finding themselves idle when they would rather be at work," he predicts.


Most of the auto downturn's economic damage will hit states like Illinois, Ohio, and Indiana where carmaking is concentrated. "If you live in Flint, Mr. Moore is going [to have to] to make another movie," says Milton Ezrati, senior economist at Lord Abbett & Co, referring to the location of Michael Moore's 1989 documentary Roger & Me. "He will get rich, but they will remain poor."


What most worries economists, however, is the potential for U.S. auto makers' debt ratings being downgraded. "Any threat of default or downgrade affects assets across the country," says Ezrati, who notes that GM and Ford paper is held in virtually every pension fund and money-market account in the country. "A lot of wealth has been destroyed already, but that's not to say it couldn't be worse," he says.






What could brighten this ugly outlook? Some innovative new designs might help. "Ironically, bad times in the auto industry often brings out the best in design," says Tim Yost, director of marketing at American Specialty Cars, which works with carmakers to create specialty vehicles. "It forces auto makers to stand out from the crowd all the more. It's ironic because in tough times most businesses hunker down, but in the car business, that's the last thing you want to do." Adds Yost: "A lot of people would say Chrysler is the healthiest auto maker in Detroit. Design had a big role in that."


But rather than waiting for trendy new models and bold, catchy new designs, consumers might want to buy a car now before prices start to rise, Cole advises. As the financials of GM and Ford show all too starkly, the U.S. auto industry can't solve it's problems by sales incentives alone, and more expensive sticker prices may just be one of several ways American families share their pain.


Stone is a senior writer for BusinessWeek Online
 
If GM would stop producing ugly, crappy cars and trucks it might help a little. Just look at what Ford has done in the last couple of years with new styling for it's trucks and cars.

The exception might be the new Vette, it's a sweet ride.
 
Swass said:
Just look at what Ford has done in the last couple of years with new styling for it's trucks and cars.

It is interesting to note how Ford seems to be trying to adapt a more Euro styling note to some of the lineup. One example is the new Ford 500 as IMHO it bears a striking resemblance to the current crop of VW/Audi sedans! Personally with a number of the countries corporate and industrial 'backbones' reeling from rising costs and escalating losses, I think that the threat this poses to the economy rivals (maybe even exceeds) the threats posed by the possiblity of terrorist attacks. Without going overboard, think of the implications of what we might term economic terrorism? How much does consumer confidence have to decline before someone takes a stand although obviously such 'terrorists' would be difficult to punish - making a profit at someone elses expense is not really a crime now is it?
 
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Swass said:
If GM would stop producing ugly, crappy cars and trucks it might help a little.
I gotta agree with this one...I used to be a big fan of "the General," but --with the exception of some of their Cadillacs and the Corvette-- they haven't produced a decent passenger car (their trucks are some of the best in the business--they just don't know when to "let go" of their design and move on) for decades.

I don't wanna see an American company go under, but it's so hard to feel sorry for a company that, after more than 2 decades, STILL doesn't realize that a "cookie cutter" car full of "off the shelf" parts, cheap plastic, and stupid fad gimmicks is not what the American motoring public wants to buy.
 
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Yes, there are some new styles they are coming out with that are leaning more toward European styles. Perhaps that is because they own either all or part of the Jaguar, Aston Martin and Land Rover brands.


I knew about the information in the following article, but hesitated to say anything in case it was not public knowledge. The buyout package offered was not very substantial and I do not know how many people took it in my family member's division.

I do have to say this. At least Ford is not waiting until they show huge losses to decide to offer buyouts. It is much better for a company's culture to offer buyouts then to cut positions. However, cuts will come if enough people do not take the offer.

Kathy

Ford to eliminate 1,000 jobs by this summer

Philip Nannie

Nashville Business Journal

Ford Motor Co., the nation's second biggest carmaker, will try to eliminate about 1,000 salaried jobs by this summer as part of a voluntary buyout program, the company said Tuesday.


Ford spokeswoman Marcey Evans said the buyout packages will be offered to employees who are eligible to retire as well as some employees who aren't yet eligible.
"It's going to be based on business needs, and employees will be asked if they want to volunteer or not," Evans said.


Evans said eligible employees will be notified by the end of this month. Employees who take the offer will leave by June 30.

The program will affect employees at Ford as well as Ford Motor Credit Co. There are a total of 45,000 salaried employees at both companies.

Ford Motor Credit is headquartered in the Cool Springs area of Franklin. Local employees will be affected by the voluntary separation offer, but company officials say they don't have a firm number yet.

"We don't have any specific numbers locally," says Meredith Libbey, company spokesperson.

If an insufficient number of local employees don't agree to separation terms then cuts will follow. Details of the separation packages being offered weren't disclosed.
Evans said Ford last offered a buyout in 2003, when it cut about 3,000 jobs through voluntary buyouts and layoffs. The company also offered buyouts to around 5,000 employees in 2002.


Ford said last week U.S. sales of cars and trucks are down 3.8 percent so far this year. The company also reported a 5 percent decline in March sales.

General Motors Corp. announced in December it was offering similar buyout packages to its salaried employees. A GM spokesman didn't say how many employees have taken that offer.

Ford Motor Credit provides financing for 12,500 Ford, Lincoln, Mercury, Jaguar, Land Rover, Mazda, Aston Martin, and Volvo dealerships.
 
College Degree thing

The big three auto companies have very high costs, pensions, lifetime health care, and inflexibility caused by labor contracts entered into in good times. The papers in Detroit say this is about $1,500 per car. Therefore, they have to sell expensive cars, truck and SUV’s to break even. It does not cost much more to build a Cadillac than it does to build a Chevy Malibu. However, the Caddy brings in $20,000 more per car than the Malibu. Without this high margin, they can not be profitable in manufacturing. In fact, most profits for the big three have come from their finance arms. They have abandoned the low end of the market to the imports, now the imports are going after the high end and it is killing the big three. The trend will continue to go overseas due to the loss of US innovation and leadership in engineering and technology. The US is not producing the technical knowledge workers to ensure the US maintains its technical supremacy. The smart engineers are from China, Korea and India. Back to my common thread, students in the US go to college but do not develop the technical skills needed to keep this country in the forefront of technology. I believe we produce more Lawyers than engineers. And you remember what Adam Smith said in the “Wealth of Nations" back in 1776, “Lawyers are a parasite upon an economy for they produce no economic benefit".
 
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"A car just got to be too good a deal, and that era is over with."


It's incredible to read that cars are said to be "too good a deal". When my wife and I bought our first (and only) new car last spring, I was apalled at how much new vehicles were running. But with the economy still a little shaky and so many other items costing more these days (housing, fuel, etc.), it's not surprising that consumers are holding off on purchasing cars.

Besides, what does GM have to offer in the pony-car division to compete with the new Mustang?
 
Another problem that I see with the big three is quality. You can buy a toyota or honda and those cars will run, problem free, for many, many years. On the other hand, you can go buy a car from the big three that sucks gas and due to the cheap parts and lack of "fit and finish" on the interior, begins rattling or falling apart. And you can almost guarantee that you will have that car in the shop for something large within the first 50,000 miles.
Toyota and Honda have come out with a solid line-up of hybrids as well as some decent SUV's. Detroit had better get with the program soon because things are only going to get worse, not better.

(ps. we fly for the major supplier of bumpers and other miscellaneous parts to the detroit "big 3" and due to this, our flying in the past 5 months has seen a dramatic decline. I had the CEO on board last week and while waiting for customs at DET asked him how business is with the current woes of the big 3. His response was (very out of character), "Quite frankly, JD, "It sucks."" He then went on to talk about the overpriced and underquality vehicles that are currently being produced. The majority of the flying we are doing for them right now is to support their Toyota side of the bumper business.
 
Unfortunately, I think GM has focused on their truck class, and with gas prices the way they are, people are not buying trucks.


I agree about the car prices. The only "good deals" out there are little boxes that I am afraid to put my children in for survival in case of an accident.

But, the new Mustang is sweet.
 
That is the auto business, three years of good, and three years of bad. That is the way it goes. BAD news for the freight doggers in the Midwest.
 
Well, they are turning it around. Pontiac is improving the downtrodden looks of the GTO. Increasing the power this year, and supposedly, introducing a new look in '07. They claim it will be much more aggressive and a more representative of the real GTO. They are also releasing the Solstice, which up to now, has had some good reviews and is being looked forward to by a lot of people. Let's hope they don't dissapoint with this like with the first year of the GTO's re-introduction. Chevy I think made a major move with the 'Vette, and I think it will win a lot of people back to that beauty. They are also brining back the Camaro for '07 as well, directly aimed to attack the Mustang, with retro-styling and the power it needs to be a true Mustang basher. Here's the initial concept drawings:

http://popularhotrodding.com/features/0409phr_camaro_01_z.jpg

I think the Cobalt is a good replacement to the Cavalier and with the SS versions of many of their models being brought back, will help those sales as well.

I'm not sure if Buick is doing anything, though, with the resurection of so many 'classics', I think it be really nice to see a new Grand National on the scene.

For Ford, I think the major redesign of the Mustang was a much needed shot in the arm. I love the car and would buy it as my next car, once, well, if... I have the money.

As for quality, I do believe the quality of American cars has improved dramatically. The playing field is leveling out for american built cars for durability versus the imports. With agreements with GM and Toyota (same engine/drivetrain in the Matrix and the Celica for one) and between other companies, there will be a more level playing field for quality. At one point, US cars were considered the top for quality, and imports were crap. That reversed, but I think it's finally leveling out and will remaing level for some time.

I do want to add, I love horsepower, the more the better. With gas prices the way they are, I wonder if the car companies (both foreign and domestic) can keep upping the power in their models, almost every year. The infiniti G35 for example was introduced about 4 years back or so with 270 HP and is now skimming just shy of 300. This is the case across the board, in both cars, trucks and SUV's. From small cars to the big ones. Though it's nice to see the Honda Accord Hybrid pushing 260 horses instead of the 90 horses of earlier hybrids like the Prius and Insight.

To add to the reliabilty, here is the 2003 JD Power 3-year reliability ratings (meaning after 3-years of ownership how many reliaibility issues)

Brand

Problems
Per 100

Porsche

103

Toyota

196

Honda

215

Nissan

258

BMW

262

GM

264

Subaru

266

AVERAGE

273

Ford

287

DaimlerChrysler

311

Mitsubishi

339

Hyundai

342

Isuzu

368

VW

378

Suzuki

403

Daewoo

421

Kia

509
 
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why don't YOU try it

pilotyip said:
The US is not producing the technical knowledge workers to ensure the US maintains its technical supremacy. The smart engineers are from China, Korea and India. Back to my common thread, students in the US go to college but do not develop the technical skills needed to keep this country in the forefront of technology. I believe we produce more Lawyers than engineers.

Wweeeeeellllll..... as a current aerospace engineering grad student, also employed in the department as a lab instructor, also holding the undergrad degree on aero engineering and with NO INTENTION OF USING EITHER DEGREES, I must tell you that there are very particular reasons why it becomes undesirable to work as an engineer in this country. The work sucks. There's your simple answer. As far as your suggestion that internationals are picking up the slack, I consider it to be a glorified version of "I don't want to work in _______, Mexicans do that.."

I have a boatload of Indian, Chinese and African engineering students in the structures labs I teach. These kids bust their a$$es, working on ungodly insipid matters, (I don't see you doing it and I don't blame you, God knows I'm ALSO bailing out as soon as pick up a military flying slot) with a high degree of mathematical inclination, and the rewards for that effort are just not there. It's a continual raising of the bar, they have to over-achieve just to stay here, if they do not perform they get shipped back to their home countries, gone is the dream of staying in America.

On the other hand, you have the domestic students who are catching on to what is going on. The working conditions are stagnated, there job market is very cyclical and in general, folks get into the field thinking about work with cool challenging things.... then discover that in reality it is the mother of all desk jobs, that you have to relocate often if you want to stay in the particular application they're working on, that an engineer's salary caps out at 60K-70K unless you jump onto management, IF you don't totally burn out before then. In essence, engineering does not reward in proportion to the effort. Period. People here complain about pilot jobs not rewarding in proportion to the effort, HA! spoiled in my book. Case and point, you've never heard "I love engineering so much I would do it for free". Plus the suggestion that because you're mathematically inclined that you should be relegated to the sweatshop crunching-number Office Space gig is outright condescending and fortunately more American kids are saying "f%ck y&u, YOU do it!" (yours truly included)

So what happens.....most people who wise up go and get an MBA,with the intention of fulfilling more managerial type positions on these engineering markets. In essence, a way out of the dungeons and the technical junior level crunch-crunch that burns people out. So these Indian and Chinese take up what domestic students don't want to mess with, and now even the Internationals are getting burned out! I see this every day.

So this boo-hoo about American students not been challenged about technical jobs, bullcrap. As a domestic grad student I'm knee-deep in this sh%t, waiting for my ticket to get out, and do not blame anybody for feeling cheated in the engineering profession.

If you're really concerned about it, go ahead and give up flying and get into engineering...I won't hold my breath on that one. Furthermore, the stigmas of the past are gone. This whole "taking for granted" thing, the idea that the unskilled Mexican is delighted to work agriculture, hence the mathematically inclinded, socially handicapped kid pulls the pin for the rest of us and works in engineering, all these stigmas are not accurate anymore.

The rewards do not reflect the effort, and if that doesn't change, in my experience I submit that it won't, Americans will continue to realize it's not a worthwhile endeavor and I for one support that realization.
 
VampyreGTX said:
Initial Quality Results for 2004, meaning issues in the first 3 months of ownership, notice Buick and other US makers, Nissan is almost at the bottom.
I've got a buddy that's a parts guy at Brown and Brown Nissan in Tempe...he says that you couldn't GIVE him a Nissan.

He says that the engines/powertrains are awesome, but they're constantly replacing things like power window motors and the like.

I used to be a contractor for FedEx Ground, and we had the Nissan non-dedicated parts account....B and B was consistantly one of my busiest delivery stops.

It's too bad, really...they used to be great cars...I had an 88 Maxima that I loved.
 
Bitter Engineer

2020 goes to show, you make a lot more as a pilot without a college degree than an engineer with a degree, $60-$70K for an engineer working with 8 days a month off. Makes $100K in the cockpit with 13 days off per month sounds pretty good.
 
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well, ironically as it is, I never shot for an engineering job, I actually got this degree to be competitive for the Air National Guard :D

My intent was to highlight the lack of incentive towards such a profession in the context of the talk of the economy started by the thread. I do think your counter-example is atypical (considering your signature makes your post look oximoronic) but we both agree it does not pay to become an engineer.
 
I gotta give you Kudos, 20...an Engineering Masters is hell of a feat.

After I struggled and was forced to drop "materials," my major was quickly changed to sociology.

Quite a difference, huh?:D

Anywho, I understand your point completely and don't think that anything that you've said is unreasonable...in fact, very few of my engineering lab instructors (grad students) spoke discernable English....we were sort of on our own....and that was in 1992-3
 
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