GM and Ford skidded toward precipice as Asian carmakers cruised through 2005

TORONTO (CP) - The past year may not have been the worst of times for General Motors and Ford. But if times get much worse, the two biggest North American-based automakers are headed for a crash. And auto-industry expectations for 2006 are not rosy, as high energy costs scorch motorists' incomes and drag down sales of high-profit large sport-utility vehicles and other trucks. "For 2005 and beyond, we're going to build great products, a strong business and better world," Ford Motor Co. chairman and CEO Bill Ford declared optimistically in January.

It hasn't turned out that way. The automaker's stock price has fallen from near $15 US when Ford made his promise to the $8 level during a year which included a bond downgrade to junk status for both Ford and industry leader General Motors Corp.

As the year drew to an end, Japan's Toyota disclosed plans to produce 9.1 million vehicles in 2006, which might depose GM after seven decades as the world's biggest-production automaker.

Symbolizing the year, Canada's top-selling vehicle in November was, as usual, the Ford F-Series pickup truck - but Honda's compact Civic was only 105 units behind the F-150's year-to-date sales total of 64,430 and gaining fast, well ahead of the Dodge Caravan minivan.

That came as the Canadian market share of the traditional Big Three - GM, Ford and Chrysler - fell under half in October for the first time ever.

"Add in dozens of suppliers tied to them that are failing, and it's pretty ugly," observed auto industry analyst Dennis DesRosiers of DesRosiers Automotive Consultants, a Toronto-area industry research firm.

The bankruptcy filing of U.S. parts giant Delphi Corp. rocked the industry, prompting fears of cascading cuts in capacity, workforces and wages through the parts sector.

For Canadian parts makers, "the lack of investment in the past decade has really hurt them because the exchange rate has moved against them," DesRosiers said, adding that another problem is that many Canadian parts producers are in energy-intensive areas.

Employment in Canada's parts business stood at 98,000 people in September, down 3 1/2 per cent from a year earlier, and job-cut announcements continued through the final quarter of 2005.

The good news for the Canadian vehicle industry is that the assembly sector has held up well and the most popular Japanese-branded cars are made in Ontario: the Civic in Alliston, near Barrie, and Toyota's Corolla and Matrix in the southwestern Ontario community of Cambridge.

"Thank God we have the new domestics," DesRosiers said. "Honda, Toyota and Suzuki will account for about 35 per cent of (Canadian) vehicle production this year."

For Ford, the year just went from bad to worse.

In January the company pulled a Super Bowl commercial showing a clergyman tempted by a pickup truck, after complaints it made light of sex abuse by clergy.

The automaker also got caught between conservative groups offended by Ford's toleration of same-sex rights, and gay-rights activists angered when Ford dropped ads from gay-oriented publications, a decision it later reversed.

Early in the year Ford halved output at its minivan plant in Oakville, Ont., as the Freestar failed to shine in a crowded market.

In May, credit rating agencies reduced GM and Ford debt to below-investment-grade status.

General Motors said in June it would cut 25,000 jobs by 2008, and raised that number in November to 30,000, including 3,600 in Canada.

Shortly after GM's June announcement, Toyota said it was building a new 1,300-worker factory in the southwestern Ontario city of Woodstock.

Ford, GM and Chrysler indulged in a summertime orgy of sales incentives, handing out employee discounts to all buyers. This kept sales rolling but when the incentives ended so did the volume gains - and the skid was aggravated by a hurricane-blown rise in gasoline prices to over $1 per litre in September, which cut sales of thirsty SUVs and other trucks.

"We think the trend is still lower, in terms of the traditional Big Three losing market share," said Carlos Gomes, a Bank of Nova Scotia economist specializing in the auto sector.

"The main reason for that is that the large increase in energy costs has really accelerated the shift to smaller, more fuel-efficient vehicles."

In negotiations in September, the Canadian Auto Workers reached agreements without a strike with Chrysler, Ford and General Motors. The three-year contracts provided annual pay raises of 1.5, one and one per cent. Each deal also provided for 1,000 or more job losses.

In October, after months of brinksmanship, GM reached an agreement with its U.S. unionized workforce to reduce health-case costs by $1 billion a year. That came as GM reported a third-quarter loss of $1.6 billion US, deepening its nine-month loss to $3.8 billion.

Shortly after that, CEO Rick Wagoner stressed that GM was not considering bankruptcy.

"The good news is, we know what we need to be successful in the business," Wagoner said. The bad news: "What we need to do is get products that people are excited about and price them the right way, supported by the right kind of cost structure."

By late in the year, the price of credit default swaps on GM's estimated $276 billion US in debt - derivatives providing insurance against default - was rising, indicating that sophisticated market players increasingly anticipate a bankruptcy restructuring.

Shares in GM, whose last brush with insolvency was in 1992, fell to the lowest level since the crash of 1987.

"There is a group within Wall Street that believes Ford is in much worse shape than General Motors," DesRosiers said. "Because Ford doesn't have GM's size some of their troubles are more problematic."

Ford managed nine-month net income of $1.9 billion US while eliminating thousands of white-collar jobs. It also left its workforce in holiday-season suspense awaiting a January announcement which was speculated to involve job cuts on a scale similar to GM's.

Ford's January purge will probably conclude "the worst of the bad news" from the automakers, Gomes said.

"My concern is that there may be still some additional jobs that are at risk on the parts side of the business, especially with the currency continuing to appreciate."

The North American automakers weren't the only ones suffering an annus horribilis.

In Germany, another high-cost, heavily unionized auto industry, Vokswagen threatened to cut 30,000 jobs while falling into a series of messy scandals amid allegations ranging from bribery to providing prostitutes to union leaders.

At DaimlerChrysler, CEO Juergen Schrempp stepped aside amid weak results and quality glitches at the Mercedes-Benz division. At year-end, Mercedes-Benz faced 8,500 job cuts.

Dieter Zetsche, after presiding over a turnaround of North American Chrysler operations, was named to succeed Schrempp.

The ornately moustachioed Zetsche brought what many regarded as an unGermanic verve to Detroit: in October his wife was fined $3,000 over a party in Bloomfield Hills, Mich., where two dozen young people were cited for underage drinking.

Britain's MG Rover Group, which at one time as British Leyland was the world's third-largest carmaker, went out of business. Its assets were bought by Nanjing Automobile of China.

In a final piece of bad news for established automakers, China said it became a net exporter of cars and trucks in 2005, as its automotive exports swelled 133.5 per cent in the first 10 months of the year.

In 2006, "we're expecting a softer market, especially in the United States," said Scotiabank's Gomes.

"The main reason for that is that the spike in energy prices will cut into disposable income quite significantly."

For Canada's industry, "I'm kind of cautiously pessimistic," DesRosiers said.

"We think the market's been overbought, highly dependent on incentives, and even a reasonably healthy economy isn't enough to allow it to grow."

© The Canadian Press, 2005