In the U.S., 2005 was year of mixed results for the auto industry, almost like a replay of the prior-year’s events, but with aftereffects of a massive hurricane as well.
At 17.4 million units, retail new-vehicle sales were at a 4-year high, due in part to a record 497,000 medium- and heavy-duty trucks. Light-vehicle sales rose modestly to 16.95 million units in 2005 from 16.87 million in 2004 and were highest since the 17.12 million deliveries posted in 2001.
That good news didn’t carry over to the traditional Big Three producers. Sales ofCorp., Motor Co. and Group vehicles fell for the fifth consecutive year to 9.97 million from 10.22 million in 2004, and that included Ford and GM import brands.
Higher interest rates were credited for part of the slowdown that saw the larger SUVs’ share decline to 14.3% of the light-vehicle market in 2005, the third straight dip from the record 17.7% share garnered in 2002. It was the only market segment to post a significant decline. That was especially bad news forand GM, which dominated the high-profit segment.
But several years of hefty incentives also had diminished the pool of available buyers.
In addition, U.S. consumers began to rethink major purchase decisions starting in the spring when gasoline prices spiked amid reports of a possible shortage during the peak summer driving season.
Rising demand for crude oil in China and other developing countries was the most oft-stated reason for the increase, but seasonal maintenance downtime at U.S. refineries –already running near full capacity – and a problem with a major Midwestern pipeline also played a role.
Gasoline prices, that had risen sharply in 2004, began climbing again in late spring 2005, reaching well over $3 per gallon (3.8L) midyear, before backing off slightly.
Then came Category 3 hurricane Katrina that slammed into the golf coast in late August forcing the shutdown of oil-rilling operations in the Gulf of Mexico and coastal refineries in Texas and Louisiana. That was followed by a weaker hurricane Rita in September.
The storms, which decimated much of the city of New Orleans and wiped out many small coastal towns, idled some 10% of the country’s refining capacity and 25% of oil production. Damage to refineries and offshore drilling platforms kept many of them closed or only partially operating for weeks after the storm.
All that put even more pressure on energy prices in general and gasoline in particular. Within days of Katrina’s passing the national average price for a gallon of regular gasoline hit $2.69 amid forecasts of $4.00 per gallon by the end of the year.
Although prices fell shy of that level, except in a few spot markets, by the end of the year the 2005 national average price of a gallon of regular reached a third consecutive annual record of $2.30, up from $1.88 in 2004. Diesel fuel spiked to a record $2.52 per gallon.
It was the first time in history regular or diesel breeched the $2.00 level.
Faced with a sales slowdown, GM, much to the chagrin of its domestic rivals, on June 1 launched its largest incentive program in history when it began offering employee pricing to all buyers on almost all ’05 models. Under the banner, “Employee Discount for Everyone,” GM boasted, “you pay what we pay” in a major advertising campaign that brought buyers flocking to its dealerships.
The discount program, that cut sticker prices by as much as $3,000 or more, even on many popular vehicles, originally was designed to build momentum and help clear out large end-of-model-year inventories of ’05s.
The spiff’s initial success prompted GM to extend it, first through July and then, in the aftermath of Katrina, through Sept. 30 Along the way the auto maker added some ’06-model large pickups and SUVs, the type of gas guzzling vehicles from which buyers had begun shying away.
Ford andreluctantly matched the GM offer beginning in July.
Although consumers reacted positively to the campaign, leaving many dealers with empty lots, dealer opinion appeared split. Some looked favorably on the program as a momentum builder, others called it “crazy,” saying it cut into their profits.
Many dealers were glad to see the auto makers end their programs in September, when they were replaced with various incentives ranging from free gasoline to GM’s new “value pricing” strategy in which base sticker prices of most ’06 models were thousands of dollars lower than those of corresponding ’05 models.
Although employee pricing was a great volume builder, the costly program was the last thing financially struggling Ford or GM needed.
Ford’s year-end results showed that despite an improvement in revenue to $177.1 billion in 2005 from $171.6 billion the previous year, net income fell to just over $2 billion from $3.5 billion in 2004 and its credit rating was severely downgraded.
The situation was even more desperate at GM, where earnings fell into the red and its stock was relegated deep into junk bond status. The auto maker closed its year-end books with a $10.5 billion loss compared with earnings of $2.8 billion in 2004, despite only a modest revenue decline to $192.6 billion in 2005 from $193.5 billion the year before.
Amid speculation bankruptcy was imminent, executives at GM and Ford moved to reduce costs by closing plants and enticing workers into early retirement.
Ford’s program included closing five U.S. assembly plants by 2008, along with a transmission plant in the U.S. and a castings plant in Canada. In addition, hourly and retired workers narrowly were persuaded to accept health-care cost increases among other moves.
GM’s problems resulted in its decision to close nine assembly plants over three years. In addition, an engine plant, two stamping plants and two parts distribution centers would be shuttered in the U.S., along with a components plant in Canada.
Meanwhile, the United Auto Workers union faced its own struggles in 2005 as its Big Three member-count continued to dwindle, while it was still unable to make inroads in organizing any transplant assembly facilities outside of the two it already had under contract.
Union resolve on the supplier front also was sorely tested during the year whenCorp., GM’s former parts operations, filed bankruptcy in October and threatened to petition the court for permission to end its UAW contracts. Doing so would allow Delphi to impose a wage and benefit scale that was less than half what the union contract stipulated. A court ruling in Delphi’s favor almost certainly was expected to result in a strike that likely would put Delphi out of business and force a major shutdown at GM, its largest customer, possibly triggering a bankruptcy at GM. As late as spring 2006, the two sides were still at loggerheads, although talks continued and GM stepped forward with a plan to pay early retirement costs for some Delphi workers.
Ford resolved a similar, although less desperate, situation atCorp., its former parts operations, earlier in the year. In a complex 3-way deal, Ford agreed to take back 23 unprofitable plants it planned to fix and sell or close.
While GM and Ford were cutting U.S. capacity, transplants were adding brick and mortar.
Motor Mfg. North America Inc. broke ground in San Antonio for a new pickup truck assembly plant. Then, with construction barely under way, raised the facility’s planned annual capacity 50% to 150,000 units. Toyota also outlined plans to expand its Buffalo, WV, engine and transmission plant and picked up unused capacity at Subaru of Indiana Automotive Inc.’s Lafayette plant for additional Camry output.
In Montgomery, AL,Motor Mfg. Alabama LLC opened an assembly plant with 141,000-unit annual capacity to build Sonata cars and Santa Fe cross/utility vehicles, while sister auto maker, Kia Motors Corp., began scouting for a location to build its first U.S. assembly. Early in 2006, West Point, GA, was chosen by Kia.