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Automakers face “massive headwinds”

Lagging truck sales, rising raw material and health care costs, high fuel prices and overcapacity are bedeviling the efforts of Ford, Chrysler, and General Motors to stay profitable in the North American market

Lagging truck sales, rising raw material and health care costs, high fuel prices and overcapacity are bedeviling the efforts of Ford, Chrysler, and General Motors to stay profitable in the North American market. But each of the “Big Three” say they remain confident they can overcome those challenges.

“I’m sure you’ve been reading the headlines about the struggles of the American auto industry,” said Mark Fields, Ford’s president of the America’s, during a speech to the San Antonio Chamber of Commerce.

To be sure, we face some massive headwinds like the doubling of steel prices and our heavy legacy costs for healthcare and pensions,” he added. “The simple fact is that the business model that served us in North America for decades no longer works. Too often, when it came to customers our philosophy was to move the metal. We built as many vehicles as we had the capacity to produce and then heaped on discounts until they were all sold. Even when we had hits with our trucks and SUVs, we grew so dependent on that success that we didn’t look beyond the horizon.”

Five years ago, Fields noted, gas prices averaged $1.30 a gallon, but prices have not dipped below $2 a gallon in nearly two years. “We believe that sustained high prices combined with the record prices we saw after Hurricanes Rita and Katrina have permanently changed customers’ mindsets,” he said. “Going forward, they expect higher fuel prices will be a fact of life and so do we.”

“The global auto industry is certainly not for the faint of heart,” noted Troy Clarke president, GM North America, in a recent speech in Las Vegas. “And, as we all know, the U.S. market is particularly tough. We still face volatile crude oil prices, a softened housing market, and escalating health care costs. [We also face] intense competitive pressures that are also in the marketplace, including a lot of great products and very aggressive pricing.”

One critical key in the revival of the U.S. automaking industry is public policy, he said: not only the need to level the playing field for American manufacturers, but also making sure open and free trade means all countries play by the same set of rules.

“International exchange rate policy and currency manipulation is still an issue facing American manufacturers,” said Clarke “We also need our policy makers to take a closer look at the U.S. health care system, which impacts all of our businesses. The U.S. spends 16% of GDP on health care– more per capita than any other industrialized nation. Yet we still rank among the lowest in terms of quality of care when compared to these other countries.”

Yet changes in product design and manufacturing strategy are going to remain the main paths to success, contended Chrysler Group president & CEO Tom LaSorda in a talk with analysts outlining his company’s plan to refocus its operations in the U.S.

“Currently, North America represents some 90% of the Chrysler Group’s business, and its product line-up has historically been heavily weighted toward minivans, trucks and sport utility vehicles,” he said. “Now, high fuel prices and other dramatic shifts in the market have driven a shift in consumer preferences to smaller, more fuel-efficient vehicles. We must make some strategic adjustments to build off our historic strengths, but not rely on them so much so that we are put at a competitive disadvantage.”

That plan includes rolling out more than 20 all-new vehicles and 13 refreshed vehicles through 2009, while reducing product platforms from the current 12 to seven by the year 2012, he explained.

While trucks remain a key piece of strategy, change is in the works, LaSorda said. “We’re going to build on existing product strengths through new entries in the minivan, pick-up truck and select rear-drive full-size vehicles. At the same time, we are expanding into new commercial vehicle segments, including entering the Class 4 & 5 truck segments for the first time,” he noted. “However, we still plan to continue shifting to a car/truck mix that is less reliant on trucks.”

To comment on this story, write to Sean Kilcarr at [email protected]

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