US carmakers paying the piper for low-interest sales come-ons
Paying the price for sales-boosting incentives, domestic auto industry profits are down for the third quarter. Chrysler Corporation chairman Lee Iacocca announced Thursday that his company's net earnings tumbled $81.3 million, to $234.9 million. But while he and industry analysts see that as a strong showing, there is much greater concern about the figures reported Wednesday by the nation's largest automaker, the General Motors Corporation.
GM's after-tax profits dipped to $263.7 million, compared with $516.5 million for the same quarter in 1985. Significantly, the decline came despite record sales of $22.8 billion, and strong performances by the company's electronics, financial, and aerospace subsidiaries.
``Their really strong earnings really surprised everybody,'' says auto analyst Bill Pochiluk of Autofacts in Paoli, Pa. ``The real disappointment is the automotive side.''
In fact, General Motors posted a $338.5 million loss on its car, truck, and bus operations, compared with a $20.9 million deficit the year before. So only the company's non-automotive earnings, along with a $311 million tax credit, allowed it to go into the black.
By contrast, Ford Motor Company Thursday reported profits of $693 million for the third quarter, up 121 percent over the same period a year ago and 91 percent over the previous record for a third quarter. While Ford also suffered the cost of third-quarter incentive programs, it has seen a tremendous increase in demand for its new Taurus/Sable line and has made major gains in productivity and thus profitability, analysts say.
GM's automotive problems are considered among the worst the company has ever faced and indicate that its more than half-decade-long modernization program, with capital spending often topping $10 billion a year, has failed to achieve the desired results.
A number of the automaker's newest factories, such as the Detroit-Hamtramck Assembly Line, have been beset by balky automation systems and other problems. Meanwhile, the reorganization of vehicle operations that was supposed to have streamlined the company has not done so.
GM has the lowest productivity rate of any of the Big Three carmakers, Mr. Pochiluk says. In an effort to deal with this problem, company chairman Roger Smith noted in a news release that an ``intensive review of costs'' will lead the company to close ``several'' of its assembly lines and other plants by the end of next year, a move that has been long expected, but until now not confirmed.
While Mr. Smith did not say how many plants would be affected, Pochiluk and other analysts say anywhere from three to six North American assembly lines, including ones in California, Michigan, Massachusetts, and Ontario, Canada, are likely to face closure. Such cutbacks would potentially affect tens of thousands of GM employees. In addition, efforts are being redoubled to trim the blue- and white-collar work forces even further: perhaps by 100,000 over the next 18 to 24 months.
Another reason for the decline in automotive earnings, not just at GM but throughout the domestic industry, was the hefty cost of the recently ended incentive programs, with the lowest financing rates in history.
Analysts say those programs trimmed General Motors' pretax profits by as much as $250 million. Chrysler chairman Iacocca estimated they cut his company's earnings by ``about $100 million.''