By Dan McCue
Staff Writer

Could it be that, despite an avalanche of red ink and mounting yards of newsprint devoted to it, things are actually starting to look up for the nation’s Big Three automakers and their local dealers?

After some tough years for the industry, local automobile dealers are pinning their hopes and basing their optimism on commitments by Ford Motor Co., General Motors Corp. and DaimlerChrysler AG’s Chrysler Group to a product-driven turnaround rather than the costly promotions of the past, such as rebates and low-interest financing.

“Personally, I see 2007 as being a little better than last year, and I am particularly optimistic based on the response we’ve received to new models, like the new 2007 Ford Edge sport utility and the Ford Fusion midsize sedan,” said Graham Eubanks, president of Palmetto Ford.

In early February, both vehicles received top scores in frontal and side-impact testing from the Insurance Institute for Highway Safety. This, after Car and Driver magazine deemed the Fusion a strong contender in the mid-size market.

“We have a lot of new models coming in,” Eubanks said. “Ford, as well as GM and (Chrysler) are working at getting their product in line with what was selling.

“In the past, they were producing and producing and producing and simply not getting the throughput,” he said.

Make no mistake, the most recent news coming out of Detroit has been just plain ugly. In January, Ford announced losses of $5.8 billion for the fourth quarter and $12.7 billion for all of 2006.

The fiscal performance was the worst in the 103-year history of the nation’s No. 2 automaker.

Industry analysts expect similarly dismal reports from both Chrysler and GM, the nation’s largest automaker, which is expected to post its results for 2006 on March 1.

The last time all three automakers ended a year in the red was 1991. And, like the last time, the media is rife with stories of mass layoffs, supplier bankruptcies and management shakeups.

Pensions affecting Big Three

Eubanks and other auto dealers in the Lowcountry said a big factor in domestic automakers travails—one not shared by their foreign competitors—is mounting health care and pensions costs stemming from decades of contracts negotiated by the United Auto Workers union. General Motors, for instance, currently has more than 1 million retirees in its benefits program, said Rob Marchant, president of Marchant Chevrolet Inc. and Ravenel Ford.

Those obligations meant plants had to be kept busy. It also led to the creation of more cars and models than the market demanded.

Until recently, the manufacturers adhered to a business model as old as the U.S. auto industry itself. Rather than build cars to order, Ford, GM and Chrysler churned out the models that made the most sense for their assembly lines and then used incentives and rebates to capture buyer’s interest.

The Big Three could do this because for decades they could effectively force vehicles on dealers who borrow to buy their inventory. But as interest rates have risen, making it ever more costly to handle slow-moving models, dealers have been less willing, or able, to shoulder the burden.

“When you finance your inventory, off months get very costly,” Marchant said. “It greatly increases what we call our before-plan charges.”

It was easier, many found, to simply become multi-brand dealerships, adding brands such as Japan’s Toyota and Honda Motor Co. or Korea’s Hyundai to their showrooms, in the process diluting the Big Three’s hold over the market.

And then 2006 became the automakers’ Waterloo.

Though no firm figures are available specifically for the Lowcountry, sales volume of new cars was already down during the winter of 2005-06 when the spike in the cost of fuel oil basically crushed the domestic truck market, which comprises more than 50% of dealer sales in the United States.

After years of pressuring dealers to accept excess inventories and holding “fire sales,” something had to give, and finally, it was the manufacturers.

New models abound

Lydia Cizaruk, a Ford spokeswoman, said the company’s willingness to work in something more akin to a partnership with dealers than in the past manifested itself at the National Automobile Dealers Association Convention held in Las Vegas in early February.

“Our senior management met with dealers to share our vision and to start a dialogue about what’s on dealers’ minds,” she said. “Obviously, product was a big focus.”

Cizaruk said 70% of the Ford/Lincoln/Mercury lineup would be all new or significantly upgraded in North America by the end of 2008, and 100% new by the end of the decade. Ford is also looking to accelerate its product development process to reduce showroom time for individual models.

“Currently the life of a model is about 4.4 years,” Cizaruk said. “We’d like to get it down to 3.2 years.”

GM has also been busy revamping its product line, introducing 10 new models over the past 20 months. These include the Chevy Cobalt, Aveo and HHR small utility vehicle.

“We’re also working with the dealers, looking market-to-market at ways of increasing throughput in terms of both sales and service,” Cizaruk said.

One way they hope to do that is by improving communications both with dealers and with the company’s customers.

“We want to get out a consistent message about our vehicles and include everyone in that dialogue,” Cirazuk said.

Marchant said a similar attitude about the message that’s conveyed to consumers has also strongly taken hold at GM. As a case in point, he pointed to a current promotion for the company’s Silverado pickup that stresses the vehicle’s environmental features.

But changes affecting local auto dealerships aren’t just about products and creating new brand identities. According to John M. McDonald, spokesman for GM’s incentives program, the deals offered on vehicles are also undergoing a transformation.

Employee discount fiasco

“In a phrase, I think you can say we’re going to be much more strategic about the incentives we offer,” he said. “It’s something we began to think long and hard about after the employee discount program we offered in the summer of 2005.”

That program offered any and all customers the same discount on a GM vehicle that the company offered its employees. The incentive program ran for 90 days and, within its first month, was matched by similar offers from Ford and Chrysler.

“That program was extremely successful in terms of moving metal, but we ultimately realized that it flooded the market with highly discounted vehicles, didn’t produce profits and didn’t enhance our brands in the eyes of the public,” McDonald said.

“In fact, because it was pulling people into our showrooms earlier than they might have intended to buy, it actually depressed our sales for three months after,” he said. “Unfortunately, we also reinforced the notion of shopping the deal rather than shopping the vehicle. Those who weren’t pulled into our showrooms by the promotion were waiting for a topper.”

GM will still use cash back and reduced financing deals in the future, McDonald said, “but in the future we’re going to do it much more tactically. We’re going to attach incentives only to specific models, in specific regions, for specific amounts of time, as opposed to blanket programs on all our vehicles.”

That’s not to say GM is forgoing dangling carrots to lure consumers. The automaker is currently touting a 100,000-mile, five-year power train limited warrantee that’s coupled with five years of courtesy transportation should a customer’s Chevy vehicle be in the shop, and five years of roadside assistance.

Partnerships less adversarial

At the same time it has been revamping its marketing strategy, GM has also been reducing the base price of its automobiles, McDonald said.

“Instead of setting a higher price and offering more incentives to encourage the customer to buy, we’ve dialed back incentives and are offering our vehicles at a price closer to the transactional price the vehicle would be,” he said. “We’re also striving to put more content into our vehicles, whether that be offering better power train packages, XM radio or Onstar, which provides a high dollar value to the vehicle.

“So far, the response from dealers has been very positive. Not only are our incentive programs easier to apply and understand, but they are much more able to use them to fit the vehicles they have on their lots.”

Marchant said the question now is whether public perception of domestic vehicles will follow the changes taking place in Detroit.

“I think the negative headlines do impact consumer confidence a little bit, as did GM’s cutting money from product development a few years back,” he said. “This time, however, they’ve chosen to take the hit, and I think that will manifest itself in greater customer interest in new and improved models.

“The relationship between dealers and the domestic automakers is more of a partnership now, a relationship in which we have to agree on what they’re going to send us. It used to be a lot more adversarial, and it used to be a business where supply dictated everything. I think the Big Three have finally gotten oriented to a more demand-oriented situation, where the consumers dictate what vehicles they want to see on our lots and in our showrooms.”

Said Eubanks: “I think it’s a long time coming, of course, but finally Ford and GM and Chrysler have had to make some drastic changes. The product will help us increase our sales volumes.

“If fuel can stay around $2 a gallon, I think we’ll be fine. It seems like things have started rebounding already. We’re already seeing lots of activity.”

Dan McCue is a staff writer for the Business Journal. E-mail him at dmccue@charlestonbusiness.com.

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