The auto industry may be entering one its toughest business quarters in years, with production slowing, car sales dropping and an increasing number of suppliers eager to shore up their financial foundations.
Even if the war in Iraq ends soon, North America's two largest automakers - General Motors Corp. and Ford Motor Co. - have announced production cuts for the next three months. Sales dropped 3-5 percent for most carmakers in the region in March.
Big incentives designed to lure buyers into dealerships through April could keep sales numbers from a free fall, but industry watchers maintain there are few buyers left who have not taken advantage of previous deals.
That means automakers and their largest suppliers may look to their supply chain to boost profit numbers.
``More than one supplier has been going into panic mode,'' said Jon Ball, a consultant with turnaround specialist Conway MacKenzie & Dunleavy of Birmingham, Mich. ``There are a lot of companies that have been propped up by the low interest rates and artificially high volumes.''
An increasing number of businesses are contacting consulting groups like CMD to determine how best to prepare for tougher times.
``We expect a number of companies to face earning pressures,'' said Martin King, auto supplier analyst for credit rating agency Standard & Poor's during an April 2 conference call. ``Pricing pressures are a perpetual challenge and will continue to constrain supplier margins. A slower sales market could lead to even greater pricing pressures.''
King said auto production could drop this year in North America to about 15.5 million vehicles, down from an anticipated 16 million vehicles, if conditions do not improve. Dearborn, Mich.-based Ford has cut planned manufacturing for its second quarter by 17 percent compared with the same period in 2002, and Detroit-based GM by 10.5 percent.
DaimlerChrysler AG's North American arm, Chrysler Corp., does not release quarterly production estimates.
Part of the problem, King said, is that many firms already have cut costs, decreased employee ranks and closed unprofitable plants during other restructuring efforts in the past two years. There is not much fat left to cut.
``Although several [automakers] have endorsed a more cooperative approach to reducing component costs that would protect supplier margins, achieving such cooperation could be difficult as demand declines,'' he said. ``We have not seen any signs that these conciliatory approaches have been put in widespread practice.''
On March 31, GM announced a new series of zero percent interest rates for new car purchases - forcing its North American rivals to come up with similar plans - in a move to keep car sales moving. The problem is, Ball noted, there just are not as many consumers in the market for new vehicles now.
The industry sold to people who wanted cars when the discounts started just after Sept. 11, 2001. It has sold to people considering cars. It even has sold to people who were not even thinking about buying, but decided to take advantage of a deal.
``Ultimately, we'll run out of buyers,'' he said.
The one thing that could keep production running despite any drop-off in sales is the labor talks between automakers and the United Auto Workers this summer. If there is a strike, carmakers want to ensure they have enough vehicles to offset a work stoppage, said Jeff Shuster, director of North American forecasting for J.D. Power & Associates' Troy, Mich.-based auto team.
There still is a chance production will not drop drastically. Analysts have predicted big cuts since the pricing wars started in 2001, and that has yet to happen.
``April is going to be a critical month,'' said Van Bussmann, senior vice president of global forecasting for J.D. Power. ``I think we can reasonably anticipate a decrease [in sales], but the order of magnitude is going to be critical.''