Toyota, Honda Gaining on U.S. Automakers

Nov. 22, 2005 — -- General Motors intends to contract. Its foreign competitors are expanding. It's as simple as that, and it's not a good sign for U.S. automakers.

Monday's announcement that GM plans cut 30,000 jobs came as little surprise to analysts who follow the auto industry and have watched sales slump for the auto giant. Hearing that GM will slash 9 percent of its workforce, the only question from some analysts was, "OK, and what else?"

"Today's announcement was not unexpected," said Rebecca Lindland, auto sales analyst with the economic forecasting firm Global Insight. "It does a good job of addressing part of the problem. But they still need cooperation from the unions and they need to make some positive moves with their products."

Market Dominance Shrinking

American automakers have seen a steady erosion of their market share of U.S. auto sales the past several years as foreign companies, specifically Japanese manufacturers, gained a toehold with American car-buyers. General Motors, the world's largest automaker, sold 4.66 million cars in the United States in 2004, for a 27.6 percent market share. That number is expected to fall sharply this year to 4.4 million and only 26 percent of the market, according to Global Insight.

"Every single percentage point they lose is worth about 160,000 to 170,000 units," said Lindland.

Ford is expected to see a similar drop, from 3.28 million cars sold in 2004 to 3.09 this year. The Ford market share is expected to slip to 18.3 percent from 19.4 percent last year.

At the same time, the prominent Japanese automakers are gaining ground. Toyota's market share is expected to jump from 12.2 to 13.5 percent in 2005, and Honda is forecast to jump from 8.3 to 8.6 percent. Toyota's Camry has been the top-selling car in the U.S. for several years, and Honda's Accord has also been a big seller.

"If the speed the Japanese automakers are gaining repeats itself for the next decade, Japanese cars will outsell American cars in 10 years," said Jesse Toprak, executive director of industry analysis with the automotive Web site

Among the U.S. automakers, only DaimlerChrysler is expected to see a slight increase in sales in 2005, from 2.2 million to 2.26 million in 2006. DaimlerChrysler has been more adept than either Ford or GM at gauging the market and rolling out new products that consumers have bought.

GM also intends to cut its production capacity by about 1 million cars by 2008. Meanwhile, Toyota and Honda have experienced huge global expansions in the last decade, opening plants across the globe and producing more cars than ever before. Toyota could pass GM as early as next year as the world's largest car-maker.

Pension and Healthcare Problems

The problems facing GM and Ford have been twofold. First, because of longstanding labor union contracts with their workers, American manufacturers pay out hefty healthcare and pension benefits. Industry analysts estimate that for every car sold by a U.S. carmaker, $1,500 is paid out in health benefits to workers and retired workers. That number climbs above $2,000 per car when pensions are factored in.

That's a drain that Japanese manufacturers Toyota, Nissan and Honda are not paying out, as most use non-union workers, even for U.S.-based manufacturing plants.

"The legacy costs -- the healthcare and pensions, put them at a disadvantage," Toprak said.

A large percentage of that money goes to retirees, meaning much of the healthcare and pension expense has no corresponding effect on production. Lindland noted that for every three people in General Motors' pension program, there is only one active worker.

"They're supporting a lot of people who aren't even in their workforce," she said. "They're going to need some huge concessions from the union, but so far UAW [United Auto Workers] is not yet fully on board with the changes GM is looking for."

The labor problem is a difficult one with no immediate fix, the analysts said.

Are Foreign Cars Really Better?

Of even larger concern is a growing negative perception of U.S-made cars. The auto lines released by both GM and Ford over the past several years have not been well-received by consumers. And heavy discounting throughout the summer and fall did not bring buyers back.

An Edmunds survey estimated that U.S. manufacturers offered nearly $2,800 worth of incentives for each car sold in October. During the same month, Japanese automakers offered about $950 in incentives. The result? Japanese-made cars captured a 36 percent market share in October, an all-time record for the month. The market share for U.S. car sales fell to 52.3 percent, an all-time low.

"What that tells you is that people didn't care how much they're paying, they're not going to buy it. And that's not a good situation," Toprak said.

Lindland said that many long-time buyers of American cars have now aged out of the new car market, leaving carmakers with the task of appealing to baby boomers aged 40 to 60 and all of the buyers younger than 40. Establishing brand loyalty, or even loyalty to American-made products, has been difficult.

"Buyers just don't feel a responsibility to buy domestically anymore. There's going to be a tremendous shift over the next 10 years that will make it even harder," she said.

Make Better Cars, Sell More Cars

Things could get better. Long-time staples like the Ford Mustang and the Chevrolet Corvette continue to sell well, and analysts believe both Ford and GM have some promising new cars coming out in future years. Ford's Escape hybrid SUV has sold well, and Lindland said GM's new line of SUVs is a big upgrade over the current fleet.

The key will be to anticipate consumer demands and stay ahead of the technology curve. Add-ons such as MP3 capabilities were a non-factor five years ago, but now two out of three U.S. drivers say they'd like an MP3 option in a new car, according to Edmonds.

"They need to sense those future trends and integrate them," Toprak said.

But first, the U.S. manufacturers must reverse public opinion. Young, trend-setting markets on the East and West Coasts are buying more Japanese cars than ever before. More U.S. buyers believe foreign carmakers produce superior products. Regardless of whether it's true, the U.S. automakers must convince buyers that their cars are equal to or better than their foreign counterparts.

With the announced cutback, GM's plan is to achieve $7 billion in cost reductions by the end of 2006. Ford is expected to announce cutbacks early next year. Analysts agreed that it's a good first step, but it won't help if they don't start making more sales.

"If' you're not selling enough cars, you're not going to make enough money," Toprak said. "Cuts aren't going to maintain long-term, sustainable growth -- only sales does that. It's all about the product."

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