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Automotive Industry Update 2007

As the Big Three aim for profitability, Toyota and Honda shoot for the stars.

Feb/Mar 07
The compass points appear to be turning again. In recent years, it has seemed like south was the only direction that automakers knew when looking for places to build or grow U.S. assembly plants. More recently, though, the old Rust Belt seems to have taken on a new luster, as the Midwest has again garnered its share of prominent headlines.

Outside of North America, the compass continues to point in a strong easterly direction - toward China, in particular, but also toward Eastern Europe to some extent.

And in many places, the expansion and contraction of automotive manufacturing activities is strongly tied to the fortunes of the automakers traditionally known as the Big Three. Some in the business, however, now refer to General Motors, Ford, and the Chrysler portion of DaimlerChrysler as the "Detroit Three" rather than the "Big Three" - an acknowledgement that their share of automotive sales is not as big as it used to be.

Financial Considerations
"It's going to be a very rocky year," says David Cole, chairperson of the Center for Automotive Research in Michigan, referring to the 2007 prospects for the Big Three. "The most important thing is to get the companies profitable, and they're shrinking to a profitable base from which to grow in the future. It's going to be smaller and leaner, but a profitable industry is better than no industry. They're making good progress."

At General Motors (GM), for example, cost-cutting measures have removed as much as $2,000 from the cost of making each automobile, he says, "which is an amazingly high number for this industry. The big hit has been what they've done with hourly employees, buyouts and restructuring healthcare agreements." Further savings have come from manufacturing productivity enhancements.

Just how much has been cut? By the end of 2006, the company had slashed annual expenses by about $9 billion, according to CEO Rick Wagoner, well ahead of the $6 billion target. The company plans to quickly reinvest some of the savings - as much as a billion dollars - to revitalize its product line.

That's good for GM as a company, but the cuts have been painful for many of its employees and some of its manufacturing communities. But unlike some rough patches in the past, the current changes have had a greater impact outside of Michigan.

"Most of the cutbacks are in the outlying regions," says Cole, farther from the industry's traditional home base. Among the plants to make the company's closing list were assembly operations in Oklahoma City and Doraville, Georgia, and an Ohio plant was slated to lose its third shift. Though Michigan wasn't completely spared, the hit was comparatively smaller. And Michigan has had it share of positive GM news, too, including success in Lansing, where the company a decade ago had planned to cease assembly but has since built two of its most modern plants.

Ford, too, is in the midst of a major restructuring. The company, which lost more than $7 billion in the first three quarters of 2006, is also remaking itself into a smaller but, executives hope, more profitable company. "Ford is in many ways on the same track as GM," says Cole. "It gives rise to the hope that things are coming together very quickly."

Indeed, new Ford CEO Alan Mulally recently told analysts that the "Way Forward" restructuring plan is moving along ahead of schedule. The company is planning to slash its total North American work force by 29 percent and close 16 plants. Last fall, the company announced plans to cut some 14,000 white-collar jobs, above and beyond the 38,000 hourly employees already headed for the doors through buyouts and early retirement packages. Meanwhile, Ford intends to accelerate new product development in hopes of making its offerings more in tune with changing consumer demand.

Like GM, however, Ford is showing ongoing commitment to many of its Michigan operations. The company recently announced plans to invest $866 million upgrading six Michigan plants. Plans include pumping $130 million into a stamping and assembly plant in Wayne that makes the Focus, $320 million to upgrade Ford's transmission plant in Van Dyke, and $208 million at the Dearborn plant where the F-150 pickup truck is made.

Among the challenges that have stung the Big Three are increasing employee healthcare and pension costs. But they also are troubled by declines in the demand for trucks and SUVs, which were practically their bread and butter only a few short years ago. That's a factor in the uncertainty facing operations such as DaimlerChrysler's plant in Newark, Delaware, where the Dodge Durango and Chrysler Aspen are made. At press time, there were indications that the company - dealing with Chrysler losses in the billions - was considering closing the plant or cutting shifts. On the positive side, the company recently invested about $180 million in the plant, but on the other hand it is distant from its major Midwestern suppliers, a factor said to add as much as $500 in costs per vehicle.

Ironically, though the Big Three are focused on making cuts at the moment, Cole foresees a labor shortage not all that far down the road. Baby boomers will be retiring from the manufacturing work force, affecting all sorts of industries, including automotive. "It's a huge issue," he says. "In four to five years, we'll be short 10 million skilled people in our work force. We don't know where these people are going to come from."

Rising Stars
While areas dependent upon Big Three activity are biting their nails and wondering about the future, other parts of the country are basking in the success of such competitors as Toyota and Honda.

Among those rejoicing the loudest are the people of Greensburg, Indiana, whose claim to fame had been the trees that have mysteriously grown for decades from the top of the courthouse tower. Now, the community is known as the new home of Honda.

The company announced last summer that it would build an assembly plant on 1,700 acres near Greensburg. The $550 million facility is to begin production in the fall of 2008 and employ 2,000 people. Capacity will be up to 200,000 vehicles a year. "What was interesting was that they said it was going into the upper Midwest," says Cole, noting that it bucks the trend of recent years that has seen lots of investment in Southern locations by foreign automakers, including Honda. "That would suggest that some of the push for Southern plants is not there right now. It's good news for the Midwest, and what this is tied to heavily is the issue of work force."

Greensburg isn't the only Indiana community celebrating. Toyota is currently gearing up to begin producing its popular Camry in Lafayette, at the Subaru of Indiana Automotive assembly plant there. The plant originally was a joint venture with Isuzu, but the decline in Isuzu production made room for Toyota to move in. Toyota - which already makes pickups, SUVs, minivans and forklifts at two other Indiana locations - last year upgraded part of the Subaru plant and began hiring up to 1,000 employees.

Though the Midwest is faring well, automotive investments continue to bear fruit in the South. Toyota's new San Antonio truck plant officially opened in November on a 2,000-acre site that also hosts nearly two dozen suppliers. The total investment, including that of the suppliers, is about $1.6 billion, and total employment is about 4,000, including those working at the supplier facilities.

Toyota's Texas plant is making the full-size Tundra pickup, supplementing the production from the company's assembly plant in Southwest Indiana. With the added capacity, Toyota has launched a major campaign to take on the Big Three and attempt to strengthen its position in the truck market.

Insiders suggest that Toyota isn't finished with its North American expansion plans. A recent Bloomberg news report suggested that the company could add as many as five more North American plants in the next 10 years, including one in the Southeast and another in Mexico. In fact, a Japanese newspaper in January reported that the company is making plans for a Georgia plant that could produce as many as 200,000 vehicles, perhaps SUVs.

While Georgians wait for word from Toyota, they celebrate news that came from Kia in 2006. The Korean automaker announced plans to invest $1.2 billion to build an assembly plant in West Point, Georgia, creating more than 2,800 jobs. The company broke ground for the project in October, and the operation is to reach full production by 2009. At least five supplier companies also are to locate in Georgia, creating another 2,600 jobs.

These kinds of moves reflect the shift of American car demand away from the traditional Big Three. Last year, Honda and Toyota imported record numbers of vehicles from Japan, as their North American plants failed to keep up with the growing demand. But the domestic brands saw their market share drop from 57 percent in 2005 to 54 percent in 2006.

Overall, it wasn't a bad year for new car and truck sales in the U.S., with 2006 total sales of 16.5 million vehicles. That's down slightly from 2005, but was the eighth-best year ever and the eighth straight year topping 16 million. Analysts with the Big Three are forecasting 2007 sales that are flat or slightly below the levels of 2006.

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