Detroit's darkest hour
The collapse of pickup truck sales undermines the industry's chances of survival, says Fortune's Alex Taylor.
NEW YORK (Fortune) -- You don't see any on the streets of Manhattan, but almost everywhere else, the homely pickup truck is America's common carrier. GM, Ford and Chrysler sell more pickups than do they anything else, more than two million a year in good times. In addition to high volume, pickups also produce high profits because they are relatively isolated from foreign competition.
So the sales data reported May 1 that pickup trucks have hit the skids is seriously bad news - much worse even than you might think. Without these reliable profit generators, the business model for domestic auto producers in North American doesn't work. Passenger cars, under ferocious foreign assault, are a breakeven proposition at best and sales of formerly lucrative SUVs are falling faster than Spider-Man without his web.
For General Motors (Charts, Fortune 500), which raced to launch the redesigned Chevy Silverado and GMC Sierra ahead of schedule last year, the drop is a cruel blow to its plans to turn around North American operations - and may force it to scale back its assumptions about the business going forward. Despite incentives of up to $2,000 per unit, Silverado sales fell 7.2 percent in April.
Ford (Charts, Fortune 500) is fighting to protect the F-series with a new advertising campaign touting its durability in crash tests. But the collapse in the showroom digs an even deeper hole for the automaker. F-series sales are down 13.7 percent so far in 2007. At up-for-sale Chrysler, meanwhile, Dodge Ram sales are holding steady but only thanks to incentives that climb as high as $5,000 per vehicle.
There's no mystery about the slump in pickups. Many are used commercially and the collapse of new construction has decimated the market. Trucks are the favored vehicles of everyone on the job site - contractors, carpenters, plumbers and electricians - and a lot of them are out of work. Furthermore, $3-a-gallon gasoline has taken the steam out of personal use of trucks. It's getting expensive to hop into a V-8-powered crew-cab four-by-four for a trip to Starbucks. Finally, foreign competitors in the form of the Nissan (Charts) Titan and Toyota (Charts) Tundra are starting to win comparison tests in car magazines and making inroads in the showroom.
The collapse of pickup truck sales puts GM's seemingly quixotic bid to buy Chrysler in a new light. What at first glance appeared to be a reckless grab for more market share is now seen as a mostly defensive move. GM wants to buy Chrysler to take some of its capacity out of the market and improve GM's chances of survival in North America.
Under one possible scenario, GM would have emptied Chrysler's corporate headquarters in Auburn Hills, laying off thousands of white-collar workers, and shuttered most of its engine and assembly plants. It would have kept the Jeep brand, the minivans and Dodge Truck. By wiping out Dodge's and Chrysler's passenger car lines, GM could have put some nine points of car market share up for grabs at a time when it is struggling to hang on to its 20 percent slice.
From Daimler's (Charts) point of view, GM would have been attractive buyer because it could sweep many of Chrysler's UAW workers under its union contract, which contains givebacks on health care unavailable to Chrysler's deep-pocketed corporate parent. But GM wasn't willing to pay much for the privilege for taking Chrysler off Daimler's hands. GM offered under ten percent of its stock - worth less than $1.8 billion at today's prices - in exchange for Daimler's willingness to foot the annual bill of $800 million to $900 million for retiree health care costs.
All this is a long way removed from business as usual in the auto industry and reflects some unusually creative thinking. It also ratchets up the pressure on both the auto companies and the United Workers to arrive at a new contract in September that is palatable to both sides.
Regrettably, the prospect of cooler heads prevailing seemed far-distant last week. A stalemate at GM's Lordstown plant over union jurisdiction of janitorial and shipping dock jobs caused GM to halt plans for a new small car to be built at the plant.