Global Sales Spell Prosperity for Ford, GM

Struggling automakers have cars that foreigners want and success overseas is creating profits to counter problems at home.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

June 4, 2008

For ailing auto titans Ford and General Motors (GM), seeds of a rebirth lie in foreign soil. Overseas operations are already quite profitable and will generate real economic payoffs in the U.S.

From a relatively small base, Ford and GM can double sales in China and India by 2015, upping global sales by as much as 10%. GM already outsells Toyota in 16 of the world's 20 hottest markets. Look for GM and Ford to make their biggest overseas sales gains in the fast-growing Asian auto markets, boosting 2007 sales about 75% to 1.4 million vehicles in 2015. U.S.-engineered vehicles, especially sedans, carry cachet among the emerging middle class in China, India, Russia, Brazil and elsewhere. Buicks, Cadillacs and Chevys are very popular.

Cost cutting moves here are helping U.S. automakers boost exports. By 2010, savings written into union contracts that include worker buyouts, lower pay rates for new hires, shifts in health care liabilities to unions and plant closings will trim production costs for Ford by $3000 per car. GM's savings: $5000. Using standardized parts and bodies worldwide will slice up to 50% from development costs.

"Achieving cost reductions of that magnitude can be a game changer, since it would permit GM, for example, to produce a vehicle at lower cost than Toyota, vastly improving GM's profitability," says David Cole, chairman of the Center for Automotive Research, an automotive consulting firm.

Toyota won't stand by idly, but its cost cutting initiatives are limited by growing health care legacy costs -- expenses that GM, Ford and Chrysler will jettison for good in 2010.

Billions saved will help keep U.S. brands competitive in world markets. And as long as the dollar stays weak, American cars are less pricey abroad. The result of cost reductions and a weak buck create financial breathing room for struggling automakers, allowing them to focus on growth strategies, not just domestic survival.

George Magliano, director of automotive research at Global Insight, a consulting firm, says: "Ford's seriously tackling new product development, such as a new Ford Edge, Flex and Lincoln MKS by around year's end and a new F-series pickup and Explorer in a few years."

Between year's end and 2010, GM will roll out the revamped Malibu, Cadillac CTS and a bevy of crossovers, such as the Chevy Traverse and a new GMC Acadia truck.

Of course, the carmakers will need luck, too. They can't afford economic or political turmoil to derail growth in promising markets. Neither can they withstand a worsening of U.S. economic woes.

Detroit is confronting two very challenging years in its biggest market. Sales could fall 15% from a year ago in the U.S. Blame high gas prices and hard-to-get credit. Plus anxious consumers aren't in the mood to buy. The Detroit 3's share of new sales may dip below 50% this year, a first. Chrysler, in the worst shape of the three, may end up on the auction block.

But if things break their way, the overseas gambit is the carmakers' route back to prosperity. Earnings abroad will help automakers create jobs in the U.S., mostly for engineers, marketers, strategists, designers and others of that ilk. And foreign sales will help preserve production jobs in Ford and GM factories and at plants that make some parts for cars assembled abroad.

Even more important, global profits create domestic opportunity. A steady revenue stream will give Ford and GM the flexibility and funds they need to revive sales in the U.S., allowing them to continue improving the design and overall quality of their cars and trucks.

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