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Can US auto giants cut their way to health?

By Staff writer of The Christian Science Monitor / February 15, 2007



It's official. Now all of America's home-grown automakers are moving to cut jobs and close factories in a bid to restore financial health.

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The Chrysler Group, which not long ago looked like the success story among Detroit's Big Three, plans to shed 13,000 workers and close one plant, company officials announced in a Detroit-area news conference Wednesday.

Such moves, similar to cutbacks under way at General Motors and the Ford Motor Co., could provide some short-term financial relief.

But the moves only underscore the longer run challenge: It's hard for companies to cut their way to success in an industry that is both capital-intensive and fiercely competitive.

With Toyota and other rivals rolling out new models, Detroit has to find a way to keep designing new cars as fast as ever, as well as adapt to a marketplace shift toward fuel-efficient cars.

In that effort, the Big Three are increasingly hindered by a cost structure that is higher than their competition's.

"You can always lift your profits by cutting back for a short period.... But you keep getting into trouble again," says Peter Morici, an economist at the University of Maryland who tracks the automotive industry. "Their labor costs are just too high."

This doesn't mean that Chrysler, Ford, and GM can only survive by maintaining their current production volume. Many analysts believe that the Big Three must become a smaller three on the road toward profitability.

But to survive, they need to do two things, experts say. First, they must cut the cost of making each car or truck, so that it can be sold at a decent profit. Second, they must plow those profits into successful new design efforts – meeting consumer demands for style, comfort, fuel-efficiency, and reliability. However, the smaller they get, the less cushion there will be to make mistakes.

It doesn't help that concern about higher gasoline prices has shifted consumer tastes away from large sport utility vehicles, a Detroit mainstay. And growing concern about global warming raises uncertainties about how government policies, such as carbon-emission goals, could affect automakers in the future.

Among Detroit's Big Three, analysts say Ford and Chrysler have deeper troubles with their product lines than does GM.

"Some of Chrysler's new offerings have gotten off to a rocky start," says Michelle Krebs, editor of Edmunds' AutoObserver.com, in an e-mail interview. The company needs to "shift faster away from truck-type vehicles to carlike vehicles – and ones consumers really want to buy."

The German-based management of DaimlerChrysler appears to be scrambling to fix the troubles at the division it acquired through a merger nearly nine years ago. Chrysler's parent company said Wednesday it was considering "far-reaching strategic options with partners" and that "no option is being excluded," which analysts interpreted as opening the door to a possible sale.

Interested buyers may include private-equity firms, the large funds of big-investor cash that fueled a global wave of buyouts over the past year.

The possibility helped send DaimlerChrysler's stock higher in trading Wednesday morning. Regardless of a sale, analysts say the challenges ahead are significant.

"It is an absolute necessity to cut costs," says Ms. Krebs. But if Chrysler remains within the Daimler family of carmakers, "management has to be extremely artful in how this works. It cannot allow the Mercedes brand to be devalued and can't hinder Chrysler's styling creativity."

The job cuts represent a 16 percent reduction of Chrysler's production workforce, and includes the loss of some 2,000 salaried jobs.

The Big Three will hope to win concessions on labor costs from the United Auto Workers in contract talks that will ramp up later this year.

Some analysts say Chrysler is now in an even worse position than Ford, which recently had to borrow billions of dollars to fund its overhaul under a new CEO.

"The Jeeps are terrible gas guzzlers," Mr. Morici says. "On the product side, its worse off than Ford."

Material from wire services was used in this report.

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