Special Report

logo2006 Year in Review

China flexed its automotive muscles in 2006 and worldwide car and commercial-vehicle production rose to a third consecutive record, this time totaling 68.3 million units. That was a 4.4% gain from the 65.8 million built a year earlier.

Government efforts to dampen domestic demand and put the brakes on some of China’s overly ambitious export-minded producers apparently had little effect in slowing production.

In a harbinger of what might lie in store, China led all other countries with a 1.5 million-plus increase in 2006 output, to 7.3 million units, accounting for 10.6% of world production. That was up from 8.7% in 2005 and enough to slip past Germany’s 5.8 million vehicles (a 62,000-unit decline from the previous year) to become the world’s No. 3 producing country for the first time.

China alone accounted for 55% of the 2.8 million-unit net gain in 2006 world output.

The production surge would likely have been even stronger had not Beijing officials decided to limited the number of export licenses. The limits were designed to keep China’s automakers from launching new export drives until such time as their vehicles met the quality levels needed to make them truly competitive in Western markets.

Still, an agreement between DaimlerChrysler AG and Chery Automobile Co. Ltd. to supply U.S.-based Chrysler Group with entry-level ’09 small cars was likely to be the beginning of a flood of Chinese vehicle exports.

On the other hand, strong exports helped Japan reclaim the top spot in world output in 2006 for the first time in 13 years. Not since 11.2 million units where turned out in 1993 had Japanese plants topped the 11 million mark, but still fell short of the 12.5 million built in 1992.

While local demand remained strong despite a still-large number of recalls that somewhat tarnished the quality image of the country’s largest producer, Toyota Motor Co., increased exports helped fuel the resurgence of output.

Production of 11.5 million cars and trucks in Japan in 2006 was up 6.7% from 10.8 million in 2005, allowing it to slip past the U.S., where production was down 5.8% to 11.3 million units.

At the same time, twelfth-ranked India built 316,000 more cars and trucks in 2006 than it did a year earlier, a 19.2% increase to just under 2.0 million. An emerging middle class fueled local demand and most of the world’s automakers viewed the country as the “next China.” Accordingly, they proceeded with expansion plans geared to meet domestic maker conditions and to use their Indian plants to export vehicles in the future.

The Asia/Pacific region as a whole built 28.0 million vehicles in 2006, a 9.8% gain from 25.4 million in 2005 to account for a record 40.7% of world output with nearly all countries increasing output.

That Germany was overtaken by China for third position was due in part to a continuing effort by German producers to rein in high labor costs by outsourcing production to countries in Eastern and Central Europe.

Output in Eastern/Central Europe rose 18.2%, or 802,500 units, to a total of 5.2 million vehicles. Single country increases ranged from 10.9% in Russia to 42.0% in the smaller Czech Republic.

For car makers in Western Europe, 2006 was another off year, although the decline was smaller than in the prior year..

Output there fell 1.6% to 16.5 million units compared with 2005’s 2.3% drop to 16.8 million. Among the higher volume countries, France and U.K. were down 10.6% and 8.5% respectively, while Germany was up just 1.1% and Spain by 0.9%.

Meanwhile, plants in South America continued to hum in 2006, if not quite as loudly as the previous year.

Output in Argentina and Brazil rose 4.4%, to just under 3.0 million units, including record output of 2.61 million units in Brazil, fueled by near-record local sales and strong exports.

Aside from Western Europe, the only other “trouble” spot in 2006 was North America, where production was off 2.7% to 15.9 million units.

In the U.S., where vehicle assemblies were off 5.8%, the industry was bested by Japan for the first time since 1994 by some 200,000 units.

The U.S. drop was due largely to weaker retail demand for the larger, thirstier pickups and SUVs that American consumers had become so enamored of in recent years due to a second year of spiking fuel prices.

Record global output was of little comfort to three of the world’s top five auto makers, particularly for employees of their North American operations.

Ford Motor Co. and DaimlerChrysler AG’s Chrysler Group continued to bleed red ink in 2006, while General Motors Corp. turned a profit only if costs related to restructuring and downsizing were excluded.

Ford, despite shedding workers and closing plants, lost an amazing $12.6 billion in 2006 after turning $1.4 billion profit the prior year with most of the loss centered in its troubled North American Operations.

GM also lost money to the tune of $1.98 billion despite its cost-downsizing efforts. Still, that was a sharp improvement from the $10.4 billion in red ink posted in 2005.

Contributing to GM’s losses was the cost of underwriting early retirement for workers at Delphi Corp., the auto maker’s bankrupt former component subsidiary to help it avoid a crippling strike that would have quickly snowballed into a costly shutdown of GM plants due to lack of parts.

While DC posted an overall profit of $7.3 billion in 2006, Chrysler’s net loss of $1.5 billion, before changes to account for certain restructuring costs, prompted renewed calls from German investors for DC to rid itself of the U.S. operation. They viewed Chrysler as a black hole draining away much of the profit earned by DC’s luxury-car arm Mercedes-Benz.

Continuing its drive for world supremacy, Toyota turned in a net profit of $11.7 billion in 2006, up from $10.9 billion the previous year, despite a second year of costly recalls due to lapses of quality in vehicle components.

And, while the Japanese auto maker held its lead over Ford for the No.2 spot with worldwide wholesales sales of 7.97 million vehicles vs. 6.6 million, it again fell short of GM’s 9.1 million units.

Rounding out the top five leaders, Volkswagen AG also had a strong year in 2006, nearly tripling its earnings to 3.6 billion from $1.3 billion in 2005 despite only a modest gain in wholesale vehicle sales to 5.7 million from 5.19 million units.