American Motors faces tough decisions on overcoming its losses
Will hard-pressed American Motors become the Studebaker of the 1980s? Or will it enjoy a Chrysler-type rebound? The only bright spot in AMC's bleak picture is the Jeep, but even the profitable Jeep may face a ``tough sell'' down the road, reports John Hammond, a Data Resources auto analyst in Lexington, Mass.Skip to next paragraph
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``When you look at the product plans of the Japanese and US auto manufacturers, you see that they're all planning to bring out 4-wheel-drive versions of their passenger cars, such as the Ford Tempo-Mercury Topaz 4x4,'' Mr. Hammond says.
Thus the competition for AMC's Jeep is bound to get tougher.
AMC still insists it will spend more than $1 billion over the next three years on new products and facilities, including a $675 million assembly plant in Brampton, Ontario, in which to build a 1987 intermediate-size car from Renault.
Right now AMC is facing a disgruntled labor force at its Toledo, Ohio, Jeep plant even as it hopes to reduce labor costs at its small-car assembly plant at Kenosha, Wis. Sales of its subcompact Alliance and Encore, built at Kenosha, have plummeted. At the end of April, for instance, AMC dealers had 46,000 cars in stock, a 100-day supply. Dealers are generally comfortable with no more than a two-month supply of new cars. To pare inventories, AMC is building fewer cars and thus plunging ever more deeply in debt.
AMC ran up a whopping $29 million deficit in the first three months of 1985, more than double its slight profit in 1984. David Healy, a stock analyst with Drexel Burnham Lambert Inc., New York, predicts a $100 million loss for the year, following losses of $146 million in 1983 and $154 million in '82.
Clearly, AMC faces some hard-knuckle decisions over the next few months. It must decide whether to lock the gate of its Kenosha assembly plant and shift Alliance-Encore production to its underused Brampton plant, where it now builds the low-volume Eagle. Its French mentor, R'egie Nationale des Usines Renault, which owns a 46 percent stake in AMC, is considering building the cars in France and shipping them to the United States, thus providing more employment in France. Both options would save money over producing cars in the US.
AMC could always dump its subcompact cars altogether and focus on the Jeep, not only for the US but for Europe as well. Renault is planning to introduce the 4-wheel-drive Jeep in many of its car dealerships in Western Europe.
Hammond sees ``an 80 percent probability that Kenosha will go.'' Independent analyst Arvid Jouppi of Detroit sees the AMC ploy more ``as a bargaining position'' than an indication the plant will be shut.
As part of its plan to cut administrative costs by 25 percent, AMC last week announced the closing of four regional offices in the US, and chairman Paul Tippett Jr. took himself off the payroll as a full-time employee.
AMC's future for the past few years has been tied tightly to its French partner Renault, even as the French company itself is battling its own huge losses. Renault reported a $1.4 billion deficit in 1984, a loss that cost its chairman, Bernard Hanon, his job. Yet Mr. Hanon didn't have much choice, says an inside observer, adding: ``He had not only his hands tied by the government, but his legs and feet as well.''
The appointment of Georges Besse to fill the void is viewed a major switch by the French government to make Renault more competitive in the marketplace. The new chairman is known as an insensitive cost-cutter who knows what he wants and gets things done.
Will Renault cut AMC loose? That's highly unlikely, market analysts say. If AMC were cut adrift, ``Fiat, which did exactly as Renault has once done and pulled out of the US market, would jump at the chance to tie up with AMC,'' analyst Jouppi surmises. Ford Motor Company and Fiat also have been closeted in talks.
``Renault definitely wants to be a world auto company and one of the anticipated 15 survivors,'' says independent analyst Jouppi. ``To be a world auto company, it has to sell cars in the United States.'' Renault had earlier failed utterly on its own in the US. ``Renault will not abandon AMC,'' Jouppi observes. ``This is Renault's last chance in this century to establish a position in the American market.
``If it can't do it with internally generated funds and working in the private sector, I believe it would even go to the public sector on this one.''
Analyst Healy agrees, adding: ``My guess is that Renault will probably insist that AMC cut its costs or even close Kenosha. Since Renault sells so many parts here to AMC, Renault doesn't do too badly.'' But he adds that Renault may pull back from Kenosha and build those cars overseas at less cost. The Alliance and Encore are derived from cars Renault already produces in France.
Both Renault and AMC face a new onslaught by the Japanese, who plan to ship an additional 450,000 cars to the US this year. Japan plans to increase its car shipments to 2.3 million. ``The Alliance and Encore are right in the path of the Japanese steamroller,'' notes analyst Hammond.
Contributing to AMC's troubles is a Federal Trade Commission probe into the carmaker's auto-warranty practices concerning 1983-84 Alliances and Encores, a probe that the company is trying to quash. AMC denies there is any problem with its current-model cars and says that if there were any problems in the past, they have long since been corrected.
Meanwhile, AMC is awaiting the arrival of more Renault-based cars, including the scheduled introduction of a line of intermediate passenger cars which will be built at the company's new plant in Brampton. AMC also expects to import a low-volume, $30,000 Renault sports car, the Alpine, by the summer of 1986, plus a much-higher-volume compact. It may even have a minivan called the Espace, built for Renault by Matra.
By 1988, assuming it survives its present troubles, AMC expects to have products that will cover close to 60 percent of the total car market in the US.