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Auto Makers Prepare for Worsening Slump

By TERRY KOSDROSKY and MIKE SPECTOR
March 20, 2008; Page A2

http://online.wsj.com/article/SB120593252021148373.html?mod=hpp_us_whats_news


The Big Three U.S. auto makers are preparing cost cuts and other belt-tightening measures in case a slumping U.S. economy hurts sales more than expected.

General Motors Corp. has pushed some capital expenses from the first quarter to later in the year to make sure it has enough cash if the downturn in the U.S. market worsens, the company's chief financial officer said yesterday.

Separately, Ford Motor Co. executives said the auto maker is considering options to cut costs further to reach its goal of becoming profitable by 2009.

Chrysler LLC, meanwhile, said it completed previously planned moves that will lower production at several plants in anticipation of weak sales this year.

Speaking to reporters at the New York auto show, Chrysler Chief Executive Robert Nardelli acknowledged Chrysler isn't yet generating positive cash flow. He also said that the company planned "aggressively conservative" production cuts so it would be able to deal with a down year and that it didn't assume auto sales would rebound in the second half of the year.

Most auto makers have been forecasting industry sales of 15.5 million to 15.7 million cars and light trucks this year, down from nearly 17 million two years ago. But turmoil on Wall Street has raised concerns that vehicle sales could come in even lower. A new forecast by J.D. Power & Associates earlier this week put industry-wide sales of light-duty cars and trucks this year at 14.95 million, the lowest level since 1994.

Speaking at an analyst conference, GM Chief Financial Officer Ray Young said his company is sticking with its forecast that vehicle sales will pick up in the second half of the year. GM expects total U.S. vehicle sales, including heavy trucks, in the low 16 million-unit range, meaning light-vehicle sales of roughly 15.7 million.

Mr. Young said GM has taken about $500 million in "management actions" to mitigate a possible downside scenario. To conserve cash and help its liquidity amid tight credit markets, he said, GM will look to take advantage of government-funding programs in certain capital-spending programs in some countries, including Brazil, that could provide needed capital.

GM ended 2007 with liquidity of $27.3 billion and access to about $7 billion of undrawn U.S. credit facilities. Mr. Young said he is monitoring liquidity on a quarter-by-quarter basis.

GMAC LLC, in which GM owns a 49% stake, is adequately capitalized, and the auto maker doesn't plan on making a cash injection, Mr. Young said. Concerns that GM might have to contribute money to its former lending unit have sent its share price down in recent weeks.

Also in New York, Ford Executive Vice President Mark Fields said the auto maker has to "look at every element of the business" for cost-cutting opportunities, should its effort to trim its hourly work force fall short of its target.

Ford had hoped to shed another 8,000 factory workers with the recent buyout offer, one person familiar with the matter said. But the company is likely to wind up well below that target -- as many as 3,000 workers short -- when executives determine the final tally. The deadline for workers to take a buyout was midnight Tuesday.

Mr. Fields declined to comment on the acceptance rate and said the auto maker won't offer another buyout program.

Speaking to analysts, Ford CEO Alan Mulally said the company remains committed to reaching its target of reducing operating costs between 2006 and the end of this year by $5 billion. To reach the target, executives will consider cutting budgets in the auto maker's core departments: purchasing, manufacturing, product development and marketing, a person familiar with the company's plans said.

Ford will assess where to cut costs and by how much on a case-by-case basis, this person said, in order to ensure it reaches its operating-cost-reduction goal. It remains unclear which departments would receive the bulk of the cuts and by how much.

Ford has reduced about $2 billion in operating costs in the past two years, meaning it needs to cut roughly $3 billion this year to reach its goal. In addition to high energy prices, higher raw-materials costs "clearly make that harder," Mr. Fields said.

Both executives said the annual selling pace in the year's first two months has come in at the low end of the company's projections, about 15.3 million light vehicles. "Clearly, the economy is contracting," Mr. Fields said. "It doesn't take a rocket scientist to see that that's happening."

Mr. Fields said Ford's goal is to "keep ahead of what we see in the marketplace and adjust production accordingly." Mr. Mulally said Ford would continue slashing production amid lower demand instead of resorting to discounts.