Thursday, June 2, 2005

GM, Ford cut production

Demand is weak in short month of May as consumers shift away from trucks.

By Christine Tierney / The Detroit News

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In the latest troubling sign for the U.S. auto industry, General Motors Corp. and Ford Motor Co. said Wednesday they will trim production this summer after posting big sales declines in a generally weak auto market in May.

The production cutbacks, coming on top of previous reductions this year, signal that Detroit's automakers are losing faith in their earlier predictions that demand would pick up in the second half of 2005.

GM plans to cut production in the July-September quarter by 9 percent from year-earlier levels. Ford plans a smaller 2.3 percent cut.

In addition to likely layoffs of plant workers, the cutbacks will ripple through auto parts manufacturers, which are already struggling with high raw material costs and demands from automakers for price reductions.

Overall, U.S. car and light truck sales fell 8 percent in May, or to an annual selling rate of 16.7 million vehicles, down from last May's robust 17.7 million.

The decline partly reflected a lower number of selling days: There were 24 last month, compared with 26 in May 2004.

GM sales fell 12.8 percent, reflecting slumping demand for its aging large sport utility vehicles. Ford sales declined 10.4 percent, and DaimlerChrysler AG's Chrysler Group reported a 2.5 percent drop.

After more than three years of incentive-fueled sales, "there are plenty of new cars and trucks in people's garages," said Ford sales analyst George Pipas. "The consumer has taken a little pause."

Said Pipas: "The sales picture is weaker than what we encountered in March and April."

In line with recent trends, GM and Ford lost ground to Asian rivals, although Honda Motor Co. fared poorly in May. The combined market share of Detroit's automakers fell to 57.6 percent in May from 58.7 percent a year ago.

Although the economy appears on track to grow between 3 percent and 3.5 percent this year, high gas prices and rising interest rates have put a damper on auto sales after strong gains in March and April. So far this year, sales are down 1 percent, with falling light truck sales accounting for the decline.

"There would have to be a catalyst to see a sharp upward movement from where we are now," Pipas said.

GM plans to prod demand by extending its generous employee discounts to all customers during June on nearly all its vehicles.

"That's a really drastic measure -- it's one of the most drastic we've seen," said Mike Chung, market analyst at online auto research site Edmunds.com.

"It won't change prices that much, but it shows the direction in which they're heading -- they're willing to pull out all the stops to get that inventory cleared out," Chung said. GM's stocks of unsold vehicles totaled 1.2 million in May.

Production cuts at GM and Ford will help keep inventories in check, but they are likely to cause further hardships for auto component manufacturers.

"For the parts suppliers, you're going to see lower production and cash flow issues for some of the smaller guys," said Jim Sourges, vice president for the automotive sector at consulting firm Capgemini. "I wouldn't be surprised to see more of them in trouble."

Among Japanese automakers, Toyota Motor Corp. sales dipped 0.5 percent in May, in spite of a sharp 17 percent increase in its incentives from year-earlier levels, according to Autodata Corp.

Nissan Motor Co. posted a 6 percent sales gain, according to unadjusted sales figures from Autodata, while Honda sales dropped 14.7 percent. Honda car sales are down ahead of the launch of the new Civic compact later this year, and its new Ridgeline pickup has been slow to gain traction.

"It's a very nice truck but they have to market it a little bit better than they do right now," said Charlie Pernik, owner of the Metro Honda dealership in Detroit.

GM reported the best May for its Cadillac brand since 1993, and strong sales of its new Cobalt compact. It also reported gains in large pickups, but sales of some of its large SUVs, such as the Chevrolet Tahoe and GMC Yukon, fell more than 20 percent in May.

"We still believe the truck side, notably crossovers, is the primary area of growth in the industry," said Paul Ballew, executive director of market and industry analysis at GM.

The automaker, which lost $1.1 billion in the first quarter, is counting on the rollout next year of new large SUVs to bolster its results.

Ford views the prospects for SUVs with greater caution. Sales of its aging midsize Explorer tumbled 35 percent in May and have fallen 25 percent this year.

"The declines this year have been greater than what we'd have expected," Pipas said.

"Our feeling is, with regard to SUVs, there is a secular decline in this segment," he said. He cited Ward's Automotive data showing that truck-based SUV sales fell 14 percent in the first four months of the year, while sales of crossovers rose 17 percent.

Although Ford expects customers to respond to the next-generation Explorer coming out later this year, "we don't have any illusions that we'll be returning to the days when we were selling 400,000 Explorers," Pipas said.

In contrast, Ford can't keep up with demand for its Mustang coupes and convertibles. Sales were up 47 percent last month.

"We have fewer than 10,000 Mustangs in stock at dealers," said Pipas. He said the shortage was especially acute for Mustangs fitted with V8 engines.

The Chrysler Group benefited from solid demand for the Chrysler 300C sedan, but its monthly performance was hurt by a 41 percent plunge in sales of the Dodge Durango SUV.

"We had a tough comparison against several things going on in the marketplace last year -- some very aggressive incentives both in the open market and the fleet market," said Gary Dilts, Chrysler senior vice president for sales.

European brands fared poorly in May, posting an overall 14 percent decline. Jaguar sales were down 39 percent and Volkswagen sales plunged 42 percent.

Detroit News Staff Writer Eric Mayne contributed to this report. You can reach Christine Tierney at (313) 222-1463 or ctierney@detnews.com.