Following a further year on year decline in sales, General Motors and Ford are to cut production for the first quarter of 2005. With the US market increasingly favoring foreign brands, particularly those hailing from Japan, the two US companies can no longer afford to continue risking losses of the magnitude seen in recent times.
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Despite continuing to dominate market share of light vehicle sales in the US, GM and Ford have been struggling now for some time. Trading conditions have been difficult of recent years and the resultant increase in industry competition has favored Japanese firms in particular over their US counterparts.
Toyota and Honda both saw an increase in November sales over the previous year, of 8.1% and 3.1% respectively, with Nissan recording impressive increases also. In contrast, both GM and Ford’s sales plummeted by more than 8% each, prompting 2005 production figures to be cut by 7.1% and 7.7% respectively. Japan’s four biggest carmakers will, by contrast, boost US production in 2005.
Carmakers are reluctant to cut production volumes, and reluctantly so. The high fixed costs associated with the industry means that if a player cuts output, then the costs are spread over a smaller volume, thus reducing margins. To maintain profitability, prices would need to rise, which, in the current market, is quite unrealistic.
Growing prices is unlikely though given the current trend to offer incentives with vehicles to maintain production volumes. Thus, carmakers’ preference to raise advertising and marketing exposure rather than offer more incentives in the hope of a quick fix is understandable. However life is likely to get harder for GM and Ford. Toyota has topped US quality polls for the past five years and the Japanese auto industry as a whole has seen its reputation skyrocket.
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By GlobalDataOf further worry to the US ‘big three’ of Ford, GM and DaimlerChrysler: their recent reliance on finance operations to maintain profitability may have to come to an end. As interest rates start to rise, profits in the financing businesses are likely to come under pressure. As such it is becoming increasingly important that the automakers drag their car businesses out of the red. GM and Ford will now be praying that their current cutbacks will be enough.
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