Production and sales of cars and light trucks are forecast to slip slightly this year. Automakers and their suppliers are more focused on trying to sustain profits in an era of high raw materials costs and rising gasoline prices.

By Myra Pinkham,
Contributing Editor

Sidebars and Tables:

• U.S. Auto Sales
• Auto Suppliers Seek Steel Trade Relief

North American car and light truck production—particularly output among the Big Three automakers—started a bit slow this year. Yet most industry observers expect the year as a whole to mirror 2004, the fourth-best year for production volumes.

Consumer preferences and car designs have begun to move away from large sport utility vehicles (SUVs), however, which eventually could slow consumption of steel, aluminum and other metals by the auto industry.

Despite a string of high-production years, the profitability of automakers and their parts suppliers remains a question in light of escalating raw materials prices and a marketplace that has come to expect generous sales incentives. Service centers can expect to feel continued pressure from automotive customers seeking cost relief in 2005.

“There was some softening in the beginning of this year,” says Shawn Seanor, director of marketing and business development for steel at The Timken Co., Canton, Ohio. “Vehicle inventory levels got too high. But it was temporary. Order rates are back comparable to last year and build rates are expected to be about 16.8 million this year, similar to last year.”

According to Mark Cornelius, president of Morgan & Co., West Olive, Mich., North American production was down 0.75 percent in 2004 and will likely be down 1 percent this year before rebounding between 2006 and 2009. That rebound will be bolstered by additional production capacity being added by such “New Domestic” automakers as Toyota, which has been producing cars in North America for 25 years. Toyota is in the midst of ramping up its new truck plant in San Antonio, and has announced it will probably add two more assembly plants in North America by 2010.

“Other New Domestics are expanding as well,” Cornelius says. Honda America Manufacturing, Marysville, Ohio, has plans to start making the new Acura SUV in Ohio in 2006, and will build a new automatic transmission plant in Tallapoosa, Ga. Hyundai Motor Co. has built its first U.S. automotive assembly and manufacturing plant in Montgomery, Ala., where it plans to produce 300,000 Sonata sedans and Santa Fe SUVs by 2007.

Cornelius adds that Volkswagen is producing the Jetta and the New Beetle, as well as the Bora export car in Puebla, Mexico, while Subaru is boosting production of the B9 Tribeca in Lafeyette, Ind.

George Pipas, U.S. sales analysis manager for Ford Motor Co., does not expect sales or production to vary much from the last two to three years. Market fundamentals are positive, the unemployment rate is down, housing starts are at record highs, and manufacturing and consumer confidence are up. Combined, these factors should have a positive effect on the 2005 auto buying season.

In light of production cutbacks early in the year, however, total vehicle output could slip by a few hundred thousand units vs. 2004, says David Healey, automotive industry analyst for New York-based Burnham Securities.
It is not unusual for automakers to make production cuts in the first quarter to get dealer inventories in line, notes Gary Corrigan, vice president of communications for Dana Corp., Toledo, Ohio.

Kevin L. McCormick, manager of global sales and service communications for DaimlerChrysler Corp., says Chrysler’s inventory—at 79 days on hand—is a little higher than the company would like, but
manageable.

Vehicle inventory levels vary not only by automaker (Toyota has an average of 46 days of inventories on hand for cars and 50 days for trucks, spokesman Greg Thome says), but also by individual vehicle. Deborah Silverman, spokeswoman for General Motors Corp., says GM curtailed production in the first quarter by about 9 percent on selected vehicles.

Pipas questions whether vehicle inventory levels should be expected to meet the standard of 60 days on hand, a norm he says is “as old as the hills” and doesn’t take today’s business environment into account, where inventories need to be built up for the car buying season. “I don’t expect 90 days (Ford’s inventories in February) to be the norm in all products, but the idea of 60 days continuing to be the norm is laughable,” he says.

Gary Dilts, senior sales vice president for the Chrysler Group, agrees. “Consumers are not willing to wait. If we don’t have vehicles in stock, we won’t sell them.”

Gasoline prices
Some experts question whether rising gasoline prices will affect the mix of vehicles sold. Sales of light trucks still seem to be growing at a faster rate than passenger cars, but there has been some shifting of consumer preference within the light truck category, they report.

Steve Rogers, vice president of marketing for Magna International Inc., Aurora, Ontario, says that while sales of cars are down 1.7 percent, sales of trucks are up 3.3 percent. The New Domestics are clearly increasing their presence in the truck market, says Ron Krupitzer, senior director of automotive applications for the Washington-based American Iron and Steel Institute, pointing to Toyota’s new truck plant in Texas, Honda’s launch of a truck line and Nissan’s new Titan full-sized pickup.

According to Fred Standish, director of corporate communications for Nissan NA Inc., Gardena, Calif., 45.6 percent of Nissan’s 2004 sales consisted of trucks. Krupitzer notes that the Big Three automakers have increased their truck offerings as well.

Within the truck market, buyers’ preference seems to be pulling away from the full-sized in favor of smaller, more fuel-efficient crossover SUVs, Rogers says. These vehicles are set on a car frame as opposed to a truck frame, but are still considered light trucks.

“Gasoline prices are up and prices affect buyers’ habits,” says Jay Group, manager of sales and marketing-automotive for Mittal Steel (formerly International Steel Group) in Richfield, Ohio. “The vehicles they are considering now could be different than before gas prices increased. That is one reason why inventories for large SUVs have been up.”

While admitting that smaller SUVs and crossovers are more fuel-efficient than “monsters” like the Cadillac Escalade and Humvee, other experts contend this is not the main reason for the shift in consumer sentiment. Ed Vore, manager of marketing and sales for the mechanical group at Copperweld Corp., Shelby, Ohio, claims the pendulum is simply swinging more toward smaller vehicles again. “Some of that is because of gas prices, but it is more because SUVs have been so popular for a number of years.” Pipas adds that sales of traditional SUVs plateaued in 2001-02, which well precedes the recent gas price hikes.

Crossovers do have many features that consumers seem to want. Neil DeKoker, president of the Original Equipment Suppliers Association, Troy, Mich., explains that these units look like a large station wagon, have the comfort of a passenger car (such as ease of getting in and out), with the utility of an SUV. “They are the best of both worlds.”

They’re also smaller than traditional SUVs, which is a negative for metals suppliers, Seanor says. The overall steel content is much higher in larger trucks, which use more sheet metal, more robust engines, larger transmissions, “bigger everything,” he says. Yet, given the strong economic indicators for automotive and the growing sales volume for crossovers, steel suppliers most likely will remain busy.

New Domestics growing
Domestic metals suppliers are also benefiting from the growing vehicle output of the New Domestics, which have been stealing market share from the Big Three automakers for a long while, according to Tony Kafato, president of Samuel, Son & Co.’s Flat Rolled division in Mississauga, Ontario.

Frank Hampshire, director of research for the Motor & Equipment Manufacturers Association, considers foreign-based carmakers “pretty good customers, but not great” because they still import some steel from their home countries.
The New Domestics source between 65 and 85 percent of their metal in North America, and the domestically produced metal content of their vehicles is increasing all the time, DeKoker says.

“We would like to get more parts and components from the United States,” Nissan’s Standish says. “That saves us transportation cost and gives us better access to our suppliers and reduced currency fluctuation.”

The New Domestics, particularly Japanese brands, will continue to gain market share from the Big Three, agree market experts like Burnham Securities’ Healey. While the Big Three have also introduced “a respectable array” of new products, certain models—especially by Ford and GM—”are not very hot.” Chrysler has actually gained market share, largely due to the introduction of its 300 series sedans, Healey notes.

Cornelius agrees that the New Domestics have done a better job of “freshening” vehicles and appealing to consumer taste. In addition, he says, “The Big Three shot themselves in the foot with incentives. For example, GM recently announced that it was reducing the prices of its mid-sized SUVs. A lot of people think that if GM is throwing $3,000 to $5,000 at them, there must be something wrong with the vehicles.”

Vore at Copperweld says New Domestic cars and trucks are perceived as being more reliable and tend to have a higher resale value. “They have consistently gotten high marks from JD Power on the number of defects, and they depreciate less than many Big Three vehicles,” he says.

The Big Three are working hard to slow the erosion of their market share, however, counting on new models and aggressive sales incentives to attract buyers, despite relentless pricing pressures. “The Big Three have larger issues with all of their legacy costs. The rising steel price makes these problems harder to tackle,” Vore adds.

GM has a “well-thought-out strategy to design and manufacture the best-in-class product while cutting cost,” spokeswoman Silverman says, adding that the company is in the midst of launching 17 new products.

Chrysler is studying its cost controls, including on raw materials. “We look at our vehicles holistically. We have to look at smarter ways to minimize the costs of our vehicles,” such as standardizing components wherever they are not necessarily seen and compared by consumers, McCormick explains. “We are also doing our best to offset economic increases through negotiations with suppliers.”

Silverman is optimistic that 2005 should be another strong year for GM and the auto industry, “but there clearly will be some challenges.”

Krupitzer at AISI agrees. “There will be a lot of fighting for market share and production cuts in certain segments, but on average production this year will be about the same as in 2004.”

Car buyers will benefit from tremendous choice and value, Corrigan says, “but manufacturers and their suppliers will continue to face high raw material costs, which will make it challenging.”