Detroit's three auto makers fight to make money on home turf

They've cut thousands of jobs, closed plants and tried to shift their products away from trucks and sport utility vehicles, but the three U.S.-based auto makers still aren't making money in North America, the place that made them industrial powerhouses.

Executives from General Motors Corp., Ford Motor Co. and Chrysler LLC, as well as many industry watchers, seem confident that the home-turf profits will come, but a lot depends on how quickly the companies can cut costs and raise productivity by taking advantage of making cars across the globe.

Ford turned a profit last quarter for the first time in two years, while GM recently made money worldwide for a third straight quarter. In both cases, the money came from selling vehicles outside the United States, something that would have been unheard of in the past.

It's the worldwide presence that eventually will help the companies make money in North America, with billions of dollars saved across the world in designing, selling and building essentially the same cars in all markets.

"We're going to be a global company," Ford CEO and President Alan Mulally said at a recent industry conference. "Up until now we've been mainly a regional company with very different Fords. So we're going to leverage the assets of Ford worldwide."

That means more models built on the same underpinnings, with more parts common to multiple models to reduce the complexity of manufacturing. And it also means billions in savings from selling the same vehicles across the globe with minor modifications rather than designing and engineering different cars for different regions.

GM, by nearly all accounts, is farther along in its globalization efforts than the other two, but all three remain behind their Japanese competitors — Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co.

GM, Ford and Chrysler lost a combined $15 billion last year due in large part to high gasoline prices prompting a shift in consumer demand away from trucks.

"They had to have a crisis to enable them to deal with some of their structural problems," said David Cole, chairman of the Center for Automotive Research. "Absent a crisis, they didn't have a prayer."

Those structural problems include high labour costs and factory capacity designed for a much larger market share. In July, The Detroit Three's share of the U.S. market dropped below 50 per cent for the first time in history.

Fixes included shedding thousands of factory jobs and closing plants to match the lower sales. But the cost savings still haven't brought black ink even to GM in North America, which has some analysts troubled.

Ford has warned not to expect a profit for the remainder of this year, and Mulally would only predict a worldwide return to profitability in 2009.

GM Vice Chairman Bob Lutz predicted the company will make money on its home turf, although he would not say when. He pointed at how much the company has narrowed its losses from the second quarter of 2006 to last quarter. GM lost $39 million last quarter in its home territory, far less than the $3.95 billion loss it posted in the second quarter of 2006 due mainly to restructuring costs.

Lutz also said that as GM grows across the globe, its home territory becomes less important to its earnings picture.

"General Motors is not North America with a few little international appendages that don't really matter that much," he said. "General Motors is now a rapidly growing global enterprise that is probably the fastest-growing automobile company in the world outside the United States and still has an important presence in North America. Yes, we want to get North America profitable, but this company has a tremendous global future."

Still, Michael Robinet, vice president of global forecast services for CSM Worldwide, an auto industry consulting company based in Northville, said GM hasn't fully taken advantage of cost savings from globalization.

And Ford needs to move quickly to accomplish Mulally's goals of becoming a more global company, Robinet said, while Chrysler will have to take on foreign partners quickly because it has little presence overseas and won't have the same cost savings as Ford and GM will achieve.

"Chrysler is almost uniquely a North American company competing against globally integrated players," said Cole.

That's not lost on Chrysler executives, who know they must globalize fast.

Last month Chrysler signed an agreement with China's Chery Automobile Co. for it to produce small cars for export to the U.S. and other markets, and Frank Klegon, the company's executive vice president of product development, said other partnerships are possible. The company, while 80.1 percent owned by Cerberus Capital Management LP, still is 19.9 percent owned by DaimlerChrysler AG, the maker of Mercedes automobiles.

But Klegon conceded that Chrysler is behind its domestic competitors in terms of globalization.

"I think we're counting on our partnerships and things that we're developing to help on that acceleration curve," he said.

He said Chrysler still is predicting a profit next year.

Despite the companies' progress, Jeff Schuster, executive director of global forecasting for J.D. Power and Associates, isn't ready to declare recovery just yet.

"I don't think it's completely off the chart, can't happen. I think it's difficult. I think given the globalization, if they get a little success, you can take that and build upon that," he said. "We're just too early to see that yet."

Schuster is among analysts who think that it's critical for the companies to get major concessions from the United Auto Workers, including a solution to billions in unfunded long-term retiree health care costs. The current UAW contracts with the Detroit Three expire Sept. 14.

But cost cuts and labour concessions alone won't make the auto makers profitable, according to those who study the industry.

They still have a major uphill fight to convince consumers that they build quality products with features and durability comparable to the Japanese, said Laurie Harbour-Felax, managing director of Stout Risius Ross, a financial and operational advisory firm, who has studied competitive differences between auto makers.

Ford still isn't offering many products that people want to buy, she said. And GM's problem, she said, is that it has some great vehicles on the road but can't get buyers back in the dealership to show them.

The global cost savings should free up more dollars for features that people want, bringing more sales to the domestics, Harbour-Felax said.

"Why do people by a Toyota car? Great quality, Great features," she said. "All the things we take out of domestic cars when were in the 11th hour because we don't have any money to build them."