Why Detroit is Stuck in Second Gear

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.

Before it's here, it's on the Bloomberg Terminal.