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Auto Industry Still Trying to Right Itself After Tough Year

The terrorist attacks, a faltering economy and wholesale shifts at the executive level combined to create turmoil amid high sales, low profits.


After a record year of sales in 2000, what could the auto industry do for an encore in 2001?

Against all expectations of a year ago, the industry is set to record its second-best sales year, projected to come in between 17 million and 17.2 million units when results are announced Thursday, just short of last year's 17.4 million.

But the robust numbers come at a withering cost for the traditional U.S. Big Three auto makers. Because of the unprecedented cheap financing deals offered to reverse plunging sales after the September terrorist attacks, the near-record volume brings little or no profit--or even losses.

Crisis after crisis brought down Chief Executive Jacques Nasser at Ford Motor Co. Rival General Motors Corp. hired veteran product guru Robert Lutz to oversee a revamping of its lineup. Both companies overhauled their North American executive leadership.

Japanese and South Korean auto makers, meanwhile, continued their assault on domestic dominance, scoring their biggest gains in a decade and largely without following the Big (but Dwindling) Three down the interest-free financing chute.

GM pioneered the no-interest deals when sales stalled nationwide as consumers stayed away from showrooms in the days after Sept. 11. The no- and low-interest financing saved sales in the fourth quarter, clearing out accumulated dealer inventory. But the auto makers don't foresee the strong demand continuing, and they have eased production going into the new year.

"There's no question" that the cutbacks will hit sales hard in the first and possibly second quarters of the new year, said Diane Swonk, chief economist with Bank One Corp. in Chicago, noting: "We've got sales with no production. They've still got to replenish the bare cupboard."

Still, said David Littmann, chief economist for Comerica Bank in Detroit, there are signs of recovery beyond the short-term profit woes.

"The Big Three are cutting costs pretty dramatically. I don't think next quarter will go to hell in a handbasket," he said. "For the first quarter, I think they can show a turnaround in the profit situation."

The auto makers, though grateful the metal is moving, groan at the cost.

"Whereas October was ridiculous, now it's only horrific," Ford Chief Financial Officer Martin Inglis said. He noted that Ford offered fewer no-interest loans in December and a greater mix of low-interest financing.

But he is not saying goodbye to rebates and cheap loans by any means.

"If the industry falls off, what will manufacturers do? My hypothesis," he deadpanned, "is they'll juice the market up" with more marketing and incentives.

To Inglis, any marketing costs above 10% or 12% of revenue are of concern, but third-quarter costs leaped from 14% to 16%, with October even higher than that.

"I do believe that after 9/11 the industry needed to be jump-started," he said. "The only question was: Is this the way to jump-start it?"

Ford Stumbles

It was a tumultuous year in Michigan, with the steady exodus and reshuffling of top automotive executives continuing from 2000.

Nowhere were things more in turmoil than at Dearborn-based Ford, which suffered financial setbacks, extraordinary charges related to the Firestone tire recalls, delayed vehicle launches and finally the ouster of CEO Nasser. William Clay Ford Jr., the nonexecutive chairman and a great-grandson of company founder Henry Ford, took Nasser's place, putting a family member at the helm for the first time since 1979.

Trouble appeared on many fronts.

Lawsuits continued to mount in the wake of hundreds of deaths in Firestone-related crashes, mostly involving Ford's Explorer sport-utility vehicles. By last January, the auto maker had spent $500 million to replace 6.5 million tires recalled the previous August by Bridgestone/Firestone Inc.; Ford in May announced its own recall of 13 million additional Firestone tires at a cost of $3 billion.

The redesigned 2002 Explorer was recalled twice, and the all-new 2002 Thunderbird was delayed, making it the fourth new Ford in a row plagued by launch setbacks.

Ford Europe veteran Nick Scheele was brought in to oversee North American operations, even as Ford announced it would slash up to 5,000 white-collar jobs and cut its earnings forecast and dividend for the first time in a decade.

The September attacks hurt sales at Ford and at the other major auto makers, but Ford's third-quarter loss marked the first back-to-back quarterly red ink in nearly 10 years, to the tune of $692 million.

Finally, in late October, Bill Ford showed Nasser the door.

As if the sea of bad news weren't enough, analysts warn that Ford will suffer from a lack of new product hitting the market.

"GM has a relatively low but steady replacement rate," said John Casesa, Merrill Lynch's senior auto industry analyst in New York, in a December report on the U.S. auto market in 2002-2005.

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