US: In Ford's and Chrysler's earnings, auto industry comeback shows slowdown

The New York Times (Detroit) - Just when the American auto industry appeared ready to hit a higher gear, its comeback has shifted into neutral.

Two of Detroit's Big Three, Ford and Chrysler, reported tepid second-quarter earnings on Tuesday, providing more evidence that the industry revival had slowed to a crawl.

Both companies said that revenues increased in the second quarter compared with the first quarter of this year, but profits dropped partly because of higher costs.

In Chrysler's case, the company posted a loss as a result of paying off government loans associated with its 2009 bailout and bankruptcy.

In addition, the mediocre results underscored market conditions in which demand had fallen short of expectations.

Rebecca Lindland, an analyst with the research firm IHS Automotive, said, "2011 was originally slated to be a recovery year." She added, "Instead, it's just become sort of a get-through-it kind of year."

Some of the slowdown can be attributed to product shortages in the wake of the March earthquake and tsunami in Japan, which disrupted the automakers in that country. However, weak employment numbers and high vehicle prices have also contributed to the lower sales.

Through the first six months of the year, overall United States sales have been running at a rate below 13 million for the full year. While that represents a solid improvement over the 11.6 million vehicles sold in 2010, it is not yet the recovery the industry had hoped for.

"The market is not as buoyant as one could possibly expect," said Sergio Marchionne, the chief executive of Chrysler and its parent company, the Italian automaker Fiat.

Chrysler reported revenues in the second quarter of $13.7 billion, up from $13.1 billion in the first three months of the year. However, it reported a loss of $370 million, in contrast to a profit of $116 million in the first quarter.

The automaker would have reported a $181 million profit in the second quarter, but had to take a $551 million one-time charge for costs associated with the repayment of loans from the Treasury Department and the Canadian government.

Ford also reported higher revenue in the second quarter than in the first — $35.5 billion versus $33.1 billion. But its net income dropped to $2.4 billion, compared with $2.55 billion.

The lower profits were partly a result of higher prices for parts and materials, as well as Ford's continued efforts to pay down debt and invest in new products.

Ford's chief financial officer, Lewis Booth, said the overall United States market continued to be hurt by spotty demand and cautious spending by consumers.

"We never really expected to see a drastic recovery this year," said Mr. Booth, adding that Ford still projected the full year to produce sales of 13 million to 13.5 million vehicles for the entire industry.

He said consumer demand was "getting pent up," but declined to predict when buyers might return to new car showrooms in larger numbers. "Employment levels are one of the biggest things" needed for the market to improve, he said.

Mr. Marchionne said Chrysler was not expecting sales of more than 12.7 million vehicles for the year. The challenge for Chrysler, he said, is to continue to bring out fresh products that allow it to gain share in a bland sales environment.

"We have never been overly optimistic about 2011," he said. "The car business will not have a tremendous year, but it won't have a lousy year either."

Industry analysts said companies were now resigned to the fact that the comeback was unfolding more slowly than predicted after miserable years in 2009 and 2010.

IHS Automotive, the research firm, is also projecting 12.7 million sales for the full year. Given that slow pace, the financial results by the Detroit companies is somewhat of a surprise. "It's a minor miracle that they're doing as well as they are," said Ms. Lindland, the analyst.

General Motors, the largest American automaker, will not report its second-quarter results until early August.

While they grapple with slow market conditions, Ford and Chrysler are taking steps to improve their operations and position themselves for better times.

Ford reduced its automotive debt by $2.6 billion in the second quarter, to $14 billion, and increased its cash reserves by $700 million to $22 billion.

Chrysler has now paid off its entire $7.6 billion in loans to the American and Canadian governments, and is poised to merge more operations with Fiat, which owns a 53 percent stake in it.

Mr. Marchionne said Tuesday that he expected soon to announce a major management reorganization that would better integrate Fiat and Chrysler.

"What is important for us is that we start acting as a team that manages the business on a global scale," he said.

Both companies, as well as G.M., are also opening talks this week on new contracts with the United Automobile Workers.

Ford's chief executive, Alan R. Mulally, said Tuesday that the negotiations represented an opportunity for the company and the union to show "what we can do together to continue to improve the competitiveness of our business."