Seeking Signs of Life in Detroit

A weak economy, sluggish new-car market and wrenching job cuts mean 2007 will be another tough year for domestic auto makers.

The 12 months just ended marked the lowest light-vehicle sales in eight years, as Detroit cut back on rebates, slowed production and, in many cases, further crippled already struggling suppliers.

And this year is expected to begin even more slowly, with forecasters predicting another falloff in industry sales, probably to a tepid 16.2 million units.

But here are some signs to watch for in the coming 12 months that could foretell whether the U.S. Big Three finally are headed back from the brink:

Earnings
It may be awhile before General Motors, Ford and Chrysler can be expected to post solid, consistent profits, if at all. In the meantime, look for steadily improving earnings on an operating basis. That will signal that minus all the costs of restructuring – employee buyouts, plant closings and other special items – the auto makers have learned to run their businesses day to day without losing money on every car and truck they sell. Without gains on an operating basis, the outlook on real profitability remains uncertain at best.

Quality, productivity, rebates
Keep a close eye on some of the independent barometers indicating how well Detroit is maintaining its focus on the metrics that matter – mainly the quality of the vehicles it builds, the efficiency of its plants and how much customers value what it makes. The Big Three must continue closing the quality/productivity gap with the Japanese, as measured in midyear reports by J.D. Power and Harbour Associates. They also have to continue to reduce incentive spending in order to boost brand value and their bottom lines.

Solid hits and fewer misses
GM, Ford and Chrysler will need consistent success with their new-model rollouts. A couple of product homeruns would be nice, but more important might be an all around steady performance with no big flops. Keys to watch include Chrysler’s new minivans due in the fall and its Sebring/Avenger midsize cars now hitting the market; Ford’s new Edge/MKX cross/utility vehicles and revamped ’08 Focus; and GM’s Outlook/Acadia/Enclave CUV trio. Are they critical successes? Are volume targets being achieved? Are incentives still needed to entice buyers?

Mood swings
The Big Three will be battling the blues in 2007, as collectively they eliminate nearly 100,000 jobs and further a downsizing effort that will see two-dozen plants closed in the next couple years. There’s also the prospect of contentious negotiations with the United Auto Workers union, as contracts expire this fall. But by the end of September, most of that should be winding down, and if all is going well the focus should be shifting to the future.

If by year’s end auto executives are still talking about plant closings, health-care costs, unfair yen-dollar exchange rates and legacy issues and not about improving market shares, upcoming new models and an otherwise growing light at the end of the tunnel, then by all means please remain buckled up.

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