Why Detroit is Stuck in Second Gear

Posted by: David Welch on August 3, 2007

Just when you thought Detroit was making some progress with surprisingly good profits, July sales gave their comeback efforts a real knee capping. General Motor sales dropped 22%, Ford’s fell 19% and Chrysler was off 9%. Not surprisingly, truck sales took a thumping. The Chevy Silverado, GMC Sierra and Ford F-series pickups were all down at least 18% and Dodge Ram sales fell 10%. GM is resorting to 0% financing to clear out bloated inventories. Many of the big suvs took a thumping, too. In fairness, it was a rough month for everyone. Even Honda and mighty Toyota saw sales fall 7%.

What’s more worrisome in Motown’s executive suites is that a big part of their problem can’t be easily fixed by union concessions and restructuring. In fact, we’ve already seen plenty of those moves. Some 80,000 factory jobs have been cut or marked for cutting. And still the Big Three are either breaking even or losing money in North America. There’s more to come in this summer contract talks. But as GM Vice Chairman and CFO Fritz Henderson said after announcing second quarter earnings this week, no company in this industry has ever come back just by cost cutting.

They have to ring the register. But a combination of a weak vehicle market, an economy that favors efficiency and weak American passenger car brands has Detroit’s comeback efforts stuck in second gear. They’re still reliant on suvs and oil recently hit $78 a barrel. The pickup market keeps taking a beating and will for some time. Pickup sales are directly tied to the housing market. Housing prices have fallen for 10 straight months, according to Daniel North, chief economist for Euler Hermes ACI, which insures companies that do business with potentially bankrupt businesses. We’ve only seen housing prices fall in consecutive months once since 1968, and that was just a two-month string, North says. In other words, not all of the air has come out of the bursting housing bubble. Not many of those hurting home builders are going to be buying many new trucks any day soon.

And the American compacts? Even with gasoline remaining expensive they didn’t sell so great last month. Some of the products aren’t bad, but foreign cars like the Honda Civic and Toyota Corolla are still best in class. The Mazda 3 and Scion models are more stylish the Ford Focus and Chevy Cobalt. And none of the domestic brands command respect for the small cars. Detroit has made some strides in mid-sized cars, but they still have to get consumers to take notice of new cars like the Saturn Aura and Ford Fusion. That’s what happens when you virtually ignore a large chunk of the market for years. And it’ll take years to get consumers to stop ignoring them.

Reader Comments

Alex

August 3, 2007 1:18 PM

David, Great article!

edward kon

August 6, 2007 1:40 AM

I guess we can write off Detroit's Big 3, particularly Ford and Chrysler that are profusing badly. Motown executives simply just fail to respond to the market since the Asian invasion of the North American market spearheaded by the Japanese automakers. Their strategies have gone awfully wrong, coupled with silly implementation. There is certainly no stopping now for Toyota and other Asian automakers to dominate the last bastion of Detroit's Big 3.

munidas pereira

August 6, 2007 5:54 AM

There are other reasons why Detroit has problems. One is that they are technologically backward and unwilling to spend money on up to date technology. Take the Saturn aura mentioned in your article. The base model has an out of date push rod engine and consumes a lot more gas than the overhead cam engines found on the Honda accord and toyota camry which are its direct competitors. etc; etc;

phil

August 6, 2007 8:18 AM

Well spoken!!! Respect is the name of the Game. The Civic is the sleekest, the Corolla the most proven, and the Mazda 3, the most dynmaic. The Cobalt is a joke and you would figure since Ford owns 33% of Mazda some of that goodness would translate to their small cars, no such luck. Ford could have used the last generation Protege as a platform, tweaked the engines for better fuel economy, and then you have a competitor. Toyota has the strongest lineup of economical small cars in the industry.

Jay

August 6, 2007 2:30 PM

I certainly don't have any sympathy for the Big 3. They resisted all efforts to improve CAFE and they continue to resist efforts to increase fuel efficency. Their resistance is coming back to bite them.

Storm Williams

August 6, 2007 3:26 PM

I thought only tractors still had push rods! Oh man.

logic

August 6, 2007 9:37 PM

I can't help but think part of the problem is the Midwest orientation of the US makers. I'm a Californian. If you go to the Midwest, people like big, big, mushy handling SUVs and give US makers the benefit of a doubt. Now in California (and other coastal markets) it's a completely different market. People want economical, sporty feeling, and above all RELIABLE little cars. Spend a couple hours in Bay Area or Los Angeles traffic and you'll understand why. California in particular is essentially a different country, while also being a pace-setter for the U.S. Asian makers through proximity were very dialed into the SoCal market, while Detroit found it easier not to compete.

Subbu

August 10, 2007 5:44 PM

The Big 3 are still stuck in time. Take Ford for example. 500 and New Taurus look like Army Tank. They are going to attract anyone less than 50 years in age. Explorer and Expedition continue to look and behave mammoth. The problem they are continuing to tweak their legacy instead of breaking away from the same. Why cant Ford bring the same lip smacking look Volvo and Mazda sports.

With these 3 floundering so much and on issues so basic, they are sitting ducks for every foreign competitor. I don't think Kia or Hyundai will take much time to bring more onslaught.

S.C.

August 13, 2007 11:35 AM

Seriously, I am shocked that this is even news to Detroit execs. SOOOO many layers of managers, who do nothing and know nothing; and it took SOOOO long to design a new car, the styles were outdated before the 1st car is on the street. They just never learn.

michael

August 14, 2007 3:11 PM

foriegn cars are the in thing.they earned their reputation and its paying off.i saw a new nissan yesterday,vauge styling,and im assuming lighting that looked as if it was installeds from mail order.if ford build the 4 door lincoln showcar with the all glass roof the lincoln would command repect parked next to the nissan.

JK

August 19, 2007 7:19 PM

The Big 3 forgot what got them to the top....inovation. Instead they tried to hold status quo, and they looked at short term profits over continuous growth. Obviously politics played a major role. They couldn't offer both small fuel efficient vehicles and big trucks/suv's...yeah right.

Norman Daigneault

September 18, 2007 6:34 PM

Well GM Trucks are stuck in high gear on take off. My new 2007 cannot get out of it's own way. salesman tells me one thing, the service tells me something else. When you pullout into traffic you sometime need to go quick, or have power if you are towing. The truck is great if you want to go 100 mph but in traffic it's useless. Cannot change the shifting so i am told it voids the warranty. Only in America

James

October 20, 2007 8:25 PM

The only good American Made vehicles are Trucks. American Cars are a joke from every angle. Worst re-sale, worst customer service, worst service departments, worst salespeople, biggest parts costs too! I have to laugh when people buy anything other than a Honda, toyota, Nissan, Lexus, Infiniti , BMW or Mercedes! Pick the right ones at the right time though.


American cars are a serious loss.

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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