Business: Is the United States’ automotive industry in trouble?

By Jeff Lipsey

Chrysler (DCX), Ford (F) and General Motors (GM) recently had an employee discount promotion, giving their low employee price to all consumers. And it was a success – well, if you consider record-breaking sales a success. Unfortunately, even with such high sales volume, both General Motors and Ford lost money.

According to the management consulting firm Harbour Consulting, Ford has lost $139 per vehicle sold this year, while GM has lost nearly ten times that amount, losing $1,227 per vehicle sold.

However, General Motors is not losing money all over the world; in fact, it’s quite the contrary. GM is making money in all of its other markets, including Asia, Latin America, Africa and the Middle East. On top of that, even GMAC, the financial division of General Motors, has made a profit. The problem is the North America division, where the loss of $1.2 billion during the sales promotion more than counterfeited the profits made in its other divisions combined.

So why General Motors is losing money in North America is the million-dollar question. It could be rising gas prices taking a toll on the SUV sales, which are undoubtedly the most profitable portion of GM’s business, but the United States is not the only country affected by this cost. It could be the decrease in market share, but that doesn’t lead to a $1,227 net loss per vehicle sold.

Part of the reason U.S. automotive makers are having financial difficulties is because of their sizeable fixed costs, a large portion of which goes toward pensions. A study by the Motley Fool in 2004 estimated pensions add $1,360 to the cost of every GM vehicle, $734 to every Ford and $631 to every Chrysler, compared to only $180 and $107 per vehicle at Toyota and Honda, respectively.

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    To make things worse, Standards and Poor’s may downgrade General Motors and Ford’s bond rating again. S&P; made headlines last spring when they downgraded both companies’ bond ratings to junk status. A decline in bond ratings leads to higher borrowing costs, and another decline will only add stress to an already defunct business plan.

    Unfortunately, the road ahead for both Ford and General Motors is not very easy. Both companies have to find a way to decrease such high fixed costs, whether that is laying off employees, closing inefficient plants, or selling unprofitable vehicle lines. One thing is for certain: both Ford and General Motors must change. They need to develop lower-cost, higher-quality vehicles that can compete with Toyota and Honda. Secondly, they have to stop discounting their vehicles. Doing so only informs the public of the large markup normally placed on their automotives, while also giving a cheap impression.

    It doesn’t make sense to buy a new vehicle any time after a large promotion such as the employee discount plan, at least not an American one.

    Stock Pick of the Week

    With the struggles of General Motors and Ford, I’m recommending Toyota Motor Corporation (TM). After buying an 8.7 percent stake in Fuji Heavy Industries from General Motors yesterday, I expect Toyota to increase the domination it has in the United States. Although trading at near a 52-week-high, Toyota is selling at a bargain, with a 14.81 price-earnings ratio. I see good things ahead for Toyota. Price: $91.00.

    Jeffrey Lipsey is a senior in Business. His column appears on Thursdays. He can be reached at [email protected].