The Big Three: no more 4x4?

This week, Nissan North America ends night shift truck production at a factory in Tennessee. The Tokyo-based company is preparing for the worst; economic downturn and rising fuel prices (now above $4 a gallon) have poisoned the auto industry. In spite of such protective measures Nissan is far better positioned to cope with further economic strife than its US counterparts. Many Americans are switching to smaller, more fuel-efficient cars, which tend to be the speciality of Asian motor manufacturers. US auto sales were down about 10% in the first half of this year, with SUVs and other light trucks posting an 18% drop. Detroit is still making cars and trucks that nobody -- not even Americans -- wants to buy anymore.

Changing ratios

Detroit needs to change its ratios; 70% of its vehicles are gas-guzzling pickups and sport utilities, and those markets, once very profitable, continue to shrink. And even if the price of gasoline drops in the coming years, new US regulations demand that passenger cars average 36 miles per gallon and trucks average 29 by the year 2015. The share of sales of the Big Three (General Motors, Ford and Chrysler) dropped to 45% in May, and will likely drop toward 40% if present trends continue:

• GM bleeds: The biggest US carmaker, General Motors, is cutting costs on the factory floor and in the boardroom as it aims to bolster its cash position by $15 billion to cope with plummeting car sales. GM is haemorrhaging $1 billion per month, a rate that would spell extinction within two years, as soaring gas prices put motorists off buying its pickup trucks and 4x4s.
• Ford focus: Last week, Ford Motor announced plans to retool two US plants to make small, fuel-efficient vehicles instead of trucks and SUVs.
• Chrysler crisis? The problems of GM and Ford seem minor compared with Chrysler, a company that faces serious decline in all of its product lines -- pickups, minivans and sport utilities.

Over the Pacific, the news is better. Toyota is planning to increase production of its Corolla and Yaris passenger cars by 40,000 units by October to help meet consumer demand for those fuel-efficient cars. Honda Motor has bucked the market's trend in recent months, thanks to the popularity of its small cars such as the Civic and the Fit. And Nissan was recently one of the few silver linings in the market, with an 8.5% gain in July US sales. These companies are not flourishing only due to their small-car inventories; they also have more cash to deal with the stagnant US economy.

Getting into gear

The Big Three needs to move fast. GM is contemplating lighter versions of its products, making it possible to run SUVs on smaller motors rather than thirsty V8s. However, it must do more than shed a few pounds from its cars. Forbes’ Jerry Flint points out that in the latest Consumer Reports magazine test of small cars, the Chevrolet Aveo (a small car GM sources from Korea) was the lightest one tested, with the smallest engine, and yet it still had the worst fuel economy.

Ford, meanwhile, already builds plenty of smaller car models in Europe. The plan is to shutter some US truck factories and build those European designs instead. It may have enough cash to deal with this transition, but it is a desperate strategy. It will take time and money to convert those European models to comply with US rules and regulations and retool the plants, and Americans have always been cool on the European versions of Ford's cars, such as the Ford Contour and Mercury Mystique.

Chrysler may have the most problems adapting, as it does not have similar foreign resources. In April, Chrysler and Nissan entered a deal under which Nissan would build a small car for Chrysler using the North American automaker's design. Yet the wait will be agonising; the small car is scheduled to go on sale in 2010.

The Big Three also need their smaller models to compete. Small cars can become profitable if they are sold at premium prices; this means loading them up with extras such as alloy wheels, interior leather, electric sunroofs, and excellent audio systems. At the same time, all three companies will offer huge incentives in August to unload their existing inventories of trucks and SUVs on its dealer lots. Ford is already pursuing its leasing customers with new deals designed to persuade them to buy their next vehicle. Chrysler is extending discounted six-year financing to more products.

Barack Obama, the Democratic presidential candidate, has weighed in on automakers’ woes, saying the Big Three’s restructuring efforts were a “sober reminder” of difficult economic times and evidence for the need of a new direction in Washington. For GM, Ford and Chrysler, that direction should be smaller, quicker.