Can Detroit Accelerate?
Tom Van Riper, 04.26.07, 6:00 AM ET
First, Toyota passes General Motors as the top selling car company in the world. Then, Honda announces a quarterly profit on Wednesday that blew away the numbers expected from Ford a day later. It all makes for a dour mood in Detroit, where losses, layoffs and restructuring plans have become the order of the day.
But while there's more pain to come, don't necessarily bet long term on GM (nyse: GM - news - people ), Ford (nyse: F - news - people ) and Chrysler to go down meekly before their Asian counterparts. Detroit's product mix, which got slammed in the face of rising gas prices a couple of years ago, is steadily growing more competitive. And while there's still a lot of work to do on the cost cutting front to get out from under piles of long-term obligations, there are at least signs of progress. Over 30,000 GM workers have accepted buyout offers from the company as it attempts to downsize it reflect the market share reality of the global marketplace.
"Yes, it's possible," says auto analyst David Healey of Burnham Securities on whether GM could outperform Toyota (nyse: TM - news - people ) as a five-year investment.
"Toyota has been a terrific stock, doubling in value [since late 2003]. It's got to slow down some.... GM has been making progress on its legacy costs, though more needs to be done," he says.
After losing a combined $12 billion in 2005 and 2006, General Motors reported a 5.5% drop in sales for this year's first quarter. Ford, when it reports on Thursday, is expected to report a first-quarter loss of 60 cents a share, or 35 cents after one-time items, following $12.6 billion in losses last year. Meanwhile, Honda (nyse: HMC - news - people ) continued its roll in the first quarter, announcing a 9% jump in revenue to $26 billion, even as profit slipped 20% from last year due to the elimination of a pension reimbursement from the Japanese government that it counted on its books in 2006.
Still, investors have at least shown some willingness to give the top two U.S. automakers some rope as they execute their turnaround plans, bidding shares up in recent months. GM shares have risen to $30 from $19 since early last year. Ford's stock, while it's worth half what is was five years ago, has quietly crept up 27% since last June.
Most encouraging for the Big 3 is that their Asian rivals, while on a relative roll in recent years, are hardly invulnerable. Nissan (nasdaq: NSANY - news - people ), after a nice surge of popular new vehicles a few years ago, has not had a hit in quite awhile. The company, which reports earnings along with Ford on Thursday, cut production 10% in March while announcing 1,500 layoffs.
Honda, which increased production in March while raising units sales 6.2% during the last quarter, is benefiting from a consumer trend toward fuel efficiency and environmental concerns over the past couple of years. But its product lineup, while solid, is not exactly exciting. Analysts point out that the company is not particularly competitive in the pickup and SUV markets, which are still important high margin vehicles even with unit volumes well below the peaks of a few years ago. And the trend of fuel efficiency and hybrid engines it's been cashing in recently may prove to be just that--a trend.
"That's the market coming to them," says Kevin Tynan, an analyst at Argus Research. "For what it does, Honda's portfolio is good. But as a growth driver it's not."
Toyota, which enjoyed a robust 11% jump in sales last quarter as it sprinted past GM, still dropped output by 1% in March. The company has expressed some caution going forward, voicing concern that a more competitive pickup truck market could crimp ambitious sales goals for the Toyota Tundra. Also, its manufacturing costs are rising in the U.S. And that's where politics potentially come in.
The Democrats who now run congress have historically been friendlier to Japanese carmakers that invest in factories in the U.S. rather than export vehicles from overseas, because it means American factory jobs. So Toyota and Honda may have to live with those rising production costs--the alternative is to risk trade restrictions if they try to produce more back home and ship cars to North America.
Meanwhile, Ford's redesigned F-Series pickups are expected to compete strongly with the Tundra. And after exiting the minivan market, the company has enjoyed some initial success with its Ford Edge and Lincoln MKX crossovers, a growing segment. General Motors, Healey reports, is accelerating the redesign of its large SUVs, sharply improving their production, sales rates and pricing in the first half of last year. The company is also quietly eliminating low margin cars that it's been selling to rental fleets. The lineup at Chrysler, where employees sit and await a likely sale from parent DaimlerChrysler (nyse: DCX - news - people ), still seems a bit "truck heavy," according to Tynan, though its leadership in minivans should benefit from the decision by Ford and GM to get out of the segment.
And the Big 3 are finally seeing some benefits from rising prices, as they wean consumers off the heavy discounts of a couple of years ago.
For sure, the clock is ticking in Detroit as its automakers scramble to get their financial houses in order. But unlike the past, when each company got SUV-happy during $12-a-barrel oil, the cars and trucks rolling out of the factories now better reflect the diverse tastes of the marketplace. Plus, their backs are really against the wall this time.
"If this latest restructuring round isn't successful, it won't be five years before something dramatic happens," Tynan says.
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