Can Big Three Automakers Keep Up Profit Bonanza?
Booming sales and tighter management brighten the revenue outlook
THE Big Three United States automakers recorded big profits in 1994. But auto industry executives don't know how much longer they can keep going in financial high gear.Skip to next paragraph
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Ford Motor Company, General Motors Corporation and Chrysler Corporation racked up a combined total of $13.9 billion in profits last year. Ford's $5.3 billion in earnings not only broke the company's own record but surpassed any other carmaker in history.
US carmakers have come a long way. Only a few years ago, Detroit was posting record losses. In 1991, GM's core North American Automotive Operations was going into the red at the rate of nearly a million dollars an hour. The recovery has been fueled by a variety of factors, including job cuts, plant closings, and changes in management methods.
The Big Three have also gotten good at borrowing management concepts, such as ``Just-In-Time'' production, perfected by their Japanese rivals. Underlying the better management is the boom in US car and truck sales. Americans bought 15.1 million vehicles last year, the best figures since 1988.
If anything, the manufacturers have been struggling to keep up with demand. Chrysler can't build enough Jeep sport-utility vehicles to meet dealer orders. Ford was sold out of the Explorer, as well as its legendary Mustang sports coupe most of last year.
GM had its own production problems, but in many cases, shortages resulted from strikes and delays in launching new models, such as the redesigned Pontiac Sunfire subcompact. According to Pontiac General Manager John Middlebrook, the GM division could have sold another 30,000 vehicles during the final quarter if it weren't for factory start up problems.
GM seems to have worked its way through most of those snags, and Ford and Chrysler are working hard to expand capacity without adding new brick and mortar. Ford, for example, has launched production of the Explorer at a second assembly plant. That's why industry executives are exceedingly bullish, predicting sales could jump by as much as another 1 million units this year.
``We believe there is plenty of steam left in this recovery,'' says Ford Treasurer David McCammon, who predicts that 1995 sales will run between 15.8 million and 15.9 million. Indeed, Mr. McCammon expects sales may even top the 1986 record of 16.3 million before the next economic downturn.
But not everyone is so optimistic. In recent weeks, even some of the more bullish forecasters have begun to back down a bit. The Federal Reserve hiked short-term rates again last Wednesday, for the seventh time in a year. As home-mortagage, credit-card, and auto-loan payments go up, consumers have less disposable income to buy cars.
Optimists believe that the Fed is simply helping to stretch out the economic expansion and then create a ``soft landing.'' The pessimists worry that the Fed will choke off the growth cycle prematurely and unnecessarily.
In past recoveries, the Big Three tended to get overconfident, hiring lots of new workers and slipping into inefficiencies.
``This time, they seem to have learned their lesson,'' suggests automotive consultant Bill Pochiluk, of Autofacts Inc., in Paoli, Pa.
While Ford has hired several thousand new workers in recent months, the total payroll has grown by only a couple of percentage points. And the new hires are working in areas where manpower shortages threatened to cut production or quality. GM continues trying to cut back its work force. Since the dark days of 1991, it has shuttered a score of plants and eliminated roughly 70,000 jobs.
But GM's fiscally conservative approach has run afoul of the United Autoworkers Union, which says that its members are putting in too much overtime at GM - some 20 hours or more a week. Over the past year, the UAW has staged a series of strikes at GM, costing the carmaker thousands of units in lost production. GM has grudgingly hired a few new workers to end those walkouts, but it is refusing the union's call to hire more employees throughout the company.
Smoothing over those labor problems will be one of GM's key challenges, according to chief financial officer J. Michael Losh, who says ``We've made some progress, but we've got some ways to go.''
Perhaps the most significant breakthrough is that Detroit's top managers are buying into the idea of continuous improvement. ``There are no goal posts in this game,'' is how Chrysler President Robert Lutz puts it.