The Ugly Road AheadDavid Welch
A week after Ford said it would slow down truck production, General Motors followed with a similar move. This time, GM is slowing down production at seven truck and suv plants. That pretty much says that the gas-guzzlin’ suv business is wheezing its last breath. With it goes Detroit’s profit center. The only thing that mitigates the damage from the loss in suv sales is that GM said that the company is adding shifts at some passenger car plants to meet growing demand as consumers trade down to smaller vehicles. GM also said it would slap 0% financing on most 2008 models to spark sales. That’s sure to hit profits.
Wall Street is holding its collective nose. GM’s stock dropped 6% to a close of $12.91 a share today. At that price, GM is worth $7.3 billion, or, a little more than Toyota makes in six months. Ford’s stock dropped to $5.28 a share, giving the company a market cap of $11.8 billion. Only the the courageous value players are in at this point.
That makes sense. These days, Detroit’s carmakers can’t catch any kind of break. Sooner or later, fuel prices were likely to undercut the suv business. But the national housing slump has also hammered the pickup truck business, Detroit’s other cash cow. Then there is the spike in steel and oil prices. That adds hundreds of dollars in cost to every vehicles every carmaker builds. Remember, oil prices not only shift sales from big sticker suv to lower-priced cars, they add to the cost of plastic materials used inside. GM will try to recoup some of that with price increases for the 2009 model year. But the Big Three will also have to take write-downs on all of those suvs coming off lease that will be tough to resell. As if that list of troubles isn’t long enough, there is the overall health of the economy that is keeping buyers out of showrooms.
On one hand, Detroit’s executives have themselves to blame. They didn’t invest enough in fuel-saving technologies and their passenger car lines during the suv boom. Foreign carmakers did. On the other hand, Ford, GM and Chrysler are taking just about every body blow possible right now. No one could have foreseen the confluence of problems they are facing. The year ahead will be very rough. They may have to come up with something radical to get through it.