For Rivals U.S. Steel and Alcoa The Battle of Detroit Heats Up

As Car Makers Face Squeeze,
New Alloys Let Steelmaker
Regain Edge on Aluminum
Mr. McGuire's Favorite Toys
By PAUL GLADER
Staff Reporter of THE WALL STREET JOURNAL
October 19, 2004; Page A1

DETROIT -- J.P. McGuire is a secret weapon for U.S. Steel Corp. in one of its most important battles: the struggle with the aluminum industry for the hoods, doors and bumpers of American cars.

Mr. McGuire, a 30-year-old engineer who used to work for the aluminum side, sniffs out when Detroit auto makers are designing new cars. He then swoops in to try to hold onto or win back ground in a fight that pits stronger, cheaper steel against lighter, more costly aluminum.

For years, aluminum makers made steady inroads, pitching their product as the fuel-efficient metal of the future. But lately, steelmakers have been battling back with lighter new alloys and a continuing price advantage despite this year's big run-up in steel prices. Mr. McGuire points to a spreadsheet showing that since his arrival in 2001 U.S. Steel has reclaimed 56 parts on eight vehicles that had switched to aluminum. That represents 51,000 tons of steel annually, with a value of about $35 million a year.

Cars are the biggest market for steel and a growing one for aluminum. That means Pittsburgh rivals U.S. Steel and Alcoa Inc. are battling for nearly every wheel, lift gate and drive shaft coming out of Detroit. It's a battle that has broad consequences for the rival metals, the auto industry and the environment.

Facing increasingly intense competition around the world, car makers are pinching pennies as never before, forcing them to seek not just the most fuel-efficient materials but also the cheapest. The tension sets up intense competition between U.S. Steel and Alcoa, which are both counting on the car industry for their long-term profits.


Led by Alcoa, aluminum has gained auto-market share every year in the past decade, going from 140 pounds to nearly 300 pounds per car and generating about $5 billion in sales for North American aluminum makers.

But the auto makers' financial squeeze has helped the steel industry regain momentum. General Motors Corp. recently said it will be using aluminum hoods or lift gates on only six of its 87 vehicles next year, down from nine this year. "It's a cost issue," says Jody Hall, an engineering-group manager at GM. Ford Motor Co. said half of the eight aluminum hoods it had been using have returned to steel in the past three years.

The more than 100% rise in spot steel prices this year has done little to change that. Aluminum, whose more-elaborate processing gobbles up huge amounts of energy, still costs about twice as much as steel. About 1,840 pounds of steel still go into every car, generating about $15 billion in sales for the domestic steel industry. (Other automotive suppliers who use steel have been harder hit by the rising prices. See related article1.)

U.S. Steel and Alcoa have dueling research centers dedicated to auto makers in Detroit. U.S. Steel's five-year-old facility is the size of a football field. Not to be outdone, Alcoa's center, opened this month, is nearly twice as big.

The two rivals snap up each other's engineers and snoop on each other's plans. In presentations to auto makers, they provide tit-for-tat comparisons. Steel offers algebraic formulas showing aluminum is only a third as dense as steel and runs simulated crashes in a computer lab to show how steel's greater density helps bumpers withstand impact.

Alcoa points to similar equations showing the weight advantage of its material -- an aluminum hood weighs 20% to 50% less than one made of steel -- and says its engineers are trying to close the gap on material strength with new designs.

The two companies compete most fiercely in the roughly $5 billion market for so-called closure panels, such as doors, engine hoods, trunks and lift gates. Aluminum makers claim a 10% to 50% weight advantage for those parts; steel claims it is 20% to 50% cheaper.

Those comparisons are hugely important for auto makers. "It's all about reducing weight and lowering costs," says Ron Traficante, senior manager of body materials at DaimlerChrysler AG. The prime equation for each individual part is the ratio of cost savings to weight savings. Most of the time, steel wins the equation. But sometimes a more expensive but lighter aluminum panel is adopted to keep the overall vehicle weight below certain limits.

The stakes are high for both companies. U.S. Steel survived brutal market conditions and a wave of consolidation in its domestic industry, securing its position as the largest U.S. steel company. Rising steel prices -- fueled by surging global demand, especially in fast-growing China -- have returned the company to profitability in recent quarters, but it still faces high pension and other costs. It is streamlining operations to focus on key markets, including sales to Detroit, which represents about 20% to 30% of the company's $9.4 billion in sales last year.

Alcoa, whose headquarters sit on the opposite side of the Allegheny River from U.S. Steel's in downtown Pittsburgh, has solidified its place as the largest aluminum company in the world with a $28 billion market capitalization. Alcoa is focusing on premium markets where it can add engineering value to its basic material. The auto industry accounted for about $2.8 billion of its $21.5 billion in sales last year, a figure it hopes to double by 2010.

Although aluminum was on the body of some early cars such as Henry Ford's Model T, steel replaced aluminum on that model and has dominated most other car bodies since.

Shifting Emphasis

That started to change in the early 1980s, when energy concerns and stronger fuel-economy rules shifted car makers' emphasis from strength to weight. Once-complacent steelmakers blanched when GM rolled out the Pontiac Fiero in 1984, the first mass-produced vehicle with a plastic composite body. Many engineers at Detroit's Big Three auto makers said their future was in plastics.

"We looked at plastic as the antichrist if you will," says Pete Peterson, who retired this month as head of automotive marketing at U.S. Steel and is regarded by many as the "godfather" of the steel industry's efforts to beat back competition from other materials.


Within months of the Fiero's debut, Mr. Peterson, now 67, helped mobilize a task force of 40 steelmakers from around the world. Industry trade groups, the International Iron and Steel Institute and the American Iron and Steel Institute, helped steel companies pool research and development to come up with lighter, more competitive steels and marketing efforts to promote them.

As it turned out, the real threat wasn't plastic but aluminum. "When plastic died and aluminum came on," says Mr. Peterson. "We just swung our guns around and started shooting in a different direction."

He knew what a formidable opponent aluminum could be. As a young executive marketing tin products for U.S. Steel in the 1970s, Mr. Peterson watched the aluminum industry steal the beverage can business away from the steel industry. After that, he says he dedicated his life to not letting that happen in the auto business.

Mr. Peterson recalls a flight from Pittsburgh to Detroit in the mid-'90s. His seatmate was an Alcoa engineer, who was engrossed in a list of parts his company was planning to supply Chrysler for a retro new hot rod.

"He was looking at the Plymouth Prowler papers," says Mr. Peterson, who leaned back in his seat to get a better look. "I sat there reading everything that was on his lap." When he arrived in Detroit, Mr. Peterson told U.S. Steel engineers what he learned.

The engineers were thankful for the tip but concluded that the low-production Prowler wasn't as important as bigger-selling vehicle models, where aluminum was making gains, part by part.

Much Lighter

First came the engine blocks, then transmission-related components and suspension components, all of which can be made much lighter from aluminum than from cast iron on most models coming out of Detroit. Aluminum soon started making pitches on steel's realm -- body panels and parts that formed the body's structure.

High-end vehicles such as Audis, BMWs and Jaguars began using more aluminum components to improve performance. Meanwhile, stylized aluminum wheels on high-priced SUVs caught on with rap stars and soccer moms. Light-weight aluminum also had a starring role in the Clinton administration-backed "super car" project, an effort to design a vehicle that would get 80 miles per gallon.

Steel is an alloy of iron and up to 2% of carbon. The traditional method of making steel involves melting combinations of iron ore, scrap steel, limestone and other materials in a furnace. Aluminum is a silvery metal that is made by melting alumina, a powdery white substance that is made by refining a mined ore called bauxite.

At U.S. Steel, engineers and metallurgists continued to ratchet up research efforts in chemistry and steel-making processes to produce new varieties of "advanced high-strength steels." These include esoteric new products that are up to three times as strong as regular carbon steel. That means less steel is needed for the strength required on an automobile body part, reducing weight and bulk -- and often improving performance in crashes as well.

Auto makers have been impressed with the results. "Competition in the industry is causing us to look at affordable solutions for weight containment and reduction. That is driving us back to steel as an alternative," says Paul Geck, a steel architecture specialist who has been with Ford for 40 years.

Five years ago, U.S. Steel opened an automotive center in a high-tech area of Detroit known as Automation Alley. The new facility in Troy has several labs, including the computer lab that simulates crashes and a metallography lab to study steel types with high-powered microscopes. In a "dent testing" room, a machine resembling a swing set with a robot-like arm slams a rubber mallet onto a vehicle door, simulating golf-ball, hail-storm and shopping-cart assaults on different body panels. On weekends, the team's engineers are working on a pet project to redesign the runners and supply the steel for the U.S. luge team.

The center is partly what persuaded Mr. McGuire, a self-described motorhead who fixes up cars in his spare time, to join the company. With a background in metallurgy and auto engineering, Mr. McGuire had been working in the Detroit office of Montreal-based aluminum giant Alcan Inc.

After Alcan laid off his group in Detroit in 2001, he received offers from U.S. Steel and Alcoa. Although Alcoa's offer was 10% higher, he went with U.S. Steel. The company "had all the toys to play with for someone like me," he says.

When he arrived at U.S. Steel, Mr. McGuire told his new employers about Alcan's intentions to make aluminum for two upcoming Ford models, including the Freestyle, an aluminum-packed design Ford planned to push as a supplement to the aging Taurus model.

Since he hadn't signed a noncompete agreement when he left Alcan, Mr. McGuire's first project at U.S. Steel was to persuade Ford engineers to buy steel designs for the Freestyle instead of the aluminum he had been selling them while at Alcan. Armed with a calculator, engineering studies and color graphics, he showed how steel was more formable, cheaper and not much heavier than aluminum.

Those cars are hitting showroom floors this fall with steel fenders, trunk lids, engine hoods and lift gates.

Meanwhile, in recent years Alcoa has sharpened its focus and broadened its reach. Rather than simply pushing its weight advantage, Alcoa is developing aluminum-based systems in wiring, wheels, closures and "space frames," the supporting skeletal structures of cars. It's also developing partnerships with European car makers and Japanese aluminum producers to make stronger and lighter hoods. They are using engineering solutions such as spider-web designs, metal-shaping technologies and new materials such as aluminum foam to make other parts stronger.

Alcoa has 900 employees at its research lab in New Kensington, Pa., and hundreds more at five other facilities around the world, dwarfing U.S. Steel's research and development resources. U.S. Steel's sprawling research campus in Monroeville, Pa., has about 150 employees, down from about 2,000 workers during its heyday. Alcoa is developing new technologies to join aluminum with lasers, to develop "dura-brite" wheels that are easy to clean, and to create extra-large aluminum castings to make large auto parts more quickly and easily. They are patenting systems such as "thin-door technology," which they claim makes for lighter sliding doors in minivans and give four extra inches to interior space inside the van.

Write to Paul Glader at paul.glader@wsj.com5

Auto Sector Woes Squeeze Suppliers

Prices for Raw Materials
Are Rising, but Car Makers
Won't Pay More for Parts
By PAUL GLADER and NEAL E. BOUDETTE
Staff Reporters of THE WALL STREET JOURNAL
October 19, 2004; Page A2

Just as the economy is supposed to be picking up steam, the auto sector is facing a new round of weak earnings and job cuts in part because of a new twist on an old demon: inflation.

Prices of steel and petroleum-based plastics have soared, squeezing suppliers unable to pass along the cost increases to auto makers, which are in the midst of their own price war. The result is a crisis among the auto suppliers employing tens of thousands of people across the Midwest.

Yesterday, Delphi Corp., once part of General Motors Corp., reported a third-quarter net loss of $114 million. Visteon Corp., which was previously part of Ford Motor Co., is expected to report a substantial loss on Thursday. More bad financial news is due next week from Tower Automotive Inc. and Dura Automotive Systems Inc. Some smaller suppliers are shutting down, moving abroad or seeking bankruptcy protection, a route Citation Corp. and Intermet Corp. took last month.

For the past few years, U.S. auto suppliers have had to contend with fierce competition from low-cost Chinese competitors and constant demands for price cuts from auto makers. This year, suppliers are being whacked by a spike in raw-material costs, with spot-market steel prices for hot-rolled coil, a benchmark product, more than doubling in the past 12 months to about $750 a ton in September, before falling back to about $675 a ton in recent weeks. Commodity prices have declined in the past week on a variety of materials, including copper, nickel and lead, partly because of worries of a slowdown in China. Still, many small and midsize auto-parts makers said the relief isn't significant enough to reverse their fortunes.

"You can't absorb all the raw-material costs and continue to provide the huge price reductions" required by the auto makers, John Barth, chief executive at Johnson Controls Inc., said this month in a conference call. Johnson Controls' automotive unit, which makes seats and interiors, is profitable and faring much better than many suppliers, but nevertheless announced last week that it was cutting 350 jobs at several Michigan locations to keep its costs down.

GM confirmed that some of its suppliers have asked the company to help shoulder the rise in steel prices. It has begun selling scrap metal to some suppliers at below-market prices, but so far hasn't been willing to consider paying more for parts. "We want our suppliers to honor the contracts we have with them," a spokesman said.

For some U.S. parts makers, the rise in material costs is biting particularly hard now because GM and Ford are loaded with unsold cars in their dealer networks and are scaling back production. That means there probably are more lean months ahead.

"Clearly, there's an inventory bubble, and the production cuts won't be complete by the end of the quarter," Delphi Chief Financial Officer Alan Dawes said. "Our plans for next year are going to have to take that into account." Delphi plans to close three plants in the fourth quarter.

The hardest hit of all are companies that make simple metal assemblies, for whom steel can account for half of their costs, said William Gaskin, president of the Precision Metalforming Association, based in Independence, Ohio. "If you are not getting relief from your customers, you get stuck."

At AMI Reichert Stamping Co. in Toledo, Ohio, workers are producing the last runs of auto parts such as window channels, brackets and shift gates for larger auto suppliers like Delphi and Visteon.

Reichert is selling off its stamping presses, giving back its tool-and-die equipment and closing its doors Oct. 29, leaving about 65 workers without jobs and a 225,000-square-foot plant vacant in a town already hard hit by manufacturing layoffs.

During boom times, the plant employed about 250 workers and brought in about $30 million annually.

"We have been working to turn it around and were starting to. But the main difficulty was getting our customers to accept material surcharges," said Dennis "Pete" Peterson, president of the company. "That's the reason we are shutting it down."

Foreign companies accepted the 50% surcharge, he said. But some U.S. customers threatened to sue the small metal-stamping company if it tried to pass along surcharges on parts, as steel prices jumped 100% to 200% on some key products this year.

The plant closing is another blow to the Toledo area. Alcoa Inc.'s nine-year-old plant in Northwood, Ohio, which employed 140 people to make electrical components of automobiles, is closing by the end of the year. Production has shifted to Mexico. And the 73-year-old Gerity-Schultz Inc. plant that makes carburetor bodies closed Thursday, putting 34 people out of work. "We had a good run at it," said President James Murtagh, 80.

Mr. Peterson of AMI's Reichert Stamping said that after 38 years in the auto business, with GM first and later as a manager of auto-manufacturing plants, he wants to find work in a different industry.

"Times have changed now. The trust level between customers and suppliers is just not there anymore," he said. "They preach there is a team concept. There really isn't. There is a lack of trust between customers and suppliers in this country right now."

Write to Paul Glader at paul.glader@wsj.com2 and Neal E. Boudette at neal.boudette@wsj.com3

Ford and GM Get SEC Request On Pension Accounting Practices

By ELLEN E. SCHULTZ
Staff Reporter of THE WALL STREET JOURNAL
October 20, 2004; Page A1

The Securities and Exchange Commission has asked two of the country's biggest companies how they used pension and health-benefits funds to adjust their earnings in recent years, raising the heat on a long-simmering debate over such practices.

Ford Motor Co. and General Motors Corp. said yesterday that the SEC has requested documents and information relating to pension and retiree-benefits accounting.

Ford and GM said that they are cooperating with the SEC and that they adhere to proper accounting. The companies aren't charged with wrongdoing.

The SEC request comes a day after Delphi Corp., the big Troy, Mich., auto-parts and electronic maker, received a similar demand from the agency. The request has major implications, especially in a union-heavy industry such as autos that carries huge pension and retiree-benefits obligations. It could ultimately mean wilder swings in earnings for these manufacturing giants and less reliance on pensions and benefits funds to ease those swings.

"People are starting to wake up now," says Jack Ciesielski, a Baltimore-based expert on pension accounting who provides research to institutional investors. Mr. Ciesielski has warned for a decade that shareholders are unaware of how pensions have enhanced earnings. "There are some big fish to fry," he said.

The impact on companies could be significant. Ford's shares fell 3.4% yesterday, closing at $12.93 in 4 p.m. composite trading on the New York Stock Exchange; GM's shares fell 2.3%, to $38 (see Ford earnings on page A2).

With less flexibility to do accounting tricks with their pensions, these and other companies may find it harder to use the plans to smooth over earnings. Already this year, the Financial Accounting Standards Board has begun to require companies to make clearer disclosures -- and is pushing for others, which companies have been resisting. But this probe by the SEC might lend the FASB renewed clout.

For more than a decade, companies have taken advantage of the flexibility within the arcane accounting provisions to treat benefits plans as corporate-finance tools. Employers make dozens of assumptions that affect their income and IOUs: mortality, marriage rates, salary increases, investment returns on pension plans, health-care inflation, and others.

Thanks to this flexibility, and poor disclosure requirements, companies have been able to come within a few cents of quarterly earnings targets by changing assumptions within its benefits plans, by cutting benefits, or both.

The rules even make it possible for companies to mint income. Raising liabilities (by changing assumptions and by offering enhanced benefits, perhaps in conjunction with an early-retirement offer), then cutting liabilities (by adjusting the assumptions and cutting benefits), generates gains that boost income.

If nothing else, greater disclosure and tougher scrutiny of accounting practices would make it easier for shareholders and analysts to strip out the role the retiree plans have played in a company's results. Companies that cut benefits to boost income in order to meet earnings targets would be less able to hide the fact from employees and retirees, as well.

However, none of the actions that have emerged so far would do much to prevent companies from tapping pension assets, or change the amount companies contribute to pension plans. (Companies use different assumptions under pension law to calculate what they must contribute to pensions.)

When pension plans were pumping hundreds of billions of dollars into income in the 1990s, most analysts were oblivious to the boost to earnings the pensions were providing. But when pension plans lost money, and falling interest rates boosted liabilities, analysts began pumping out reports complaining that companies were masking their obligations, and using overly optimistic assumptions on the returns they could expect from their pension plans.

Retiree and shareholder groups mounted campaigns to require companies to exclude pension income from earnings. They said the desire for pension income tempts companies to cut benefits to boost executive pay, which is typically based on meeting earnings targets.

The SEC says its pension probe is part of a "risk-based" initiative to identify new areas of accounting abuse. The SEC said last week it had asked six companies to produce memos, e-mails and other documents that detail how they select various assumptions for retiree liabilities and costs. The names of the three other companies haven't been made public.

Many companies are complying with guidelines the SEC has issued in recent years about how to select discount rates and expected returns, so that there are fewer using obviously odd assumptions.

Still, the SEC is known to be examining several areas of pension accounting and how different accounting assumptions affected companies.

Analysts have complained that some companies have used unrealistically high hypothetical -- or "expected" -- rates of return for pension investments to enhance earnings. (Under standard accounting practices, to smooth the impact of a pension plan on earnings, companies use expected, rather than actual returns.)

For example, in 2002, GM assumed its pension assets would return 10%, while they actually lost 5.2%. On the other hand, in 2003 GM lowered its expected return to 9% from 10%, which produced expected returns of $6.4 billion, while the actual returns were $13.5 billion. These assumptions helped lower the expense of the pension plan, mitigating its drag on earnings.

Similarly, Ford used an expected return of 8.75% for its U.S. pension plans in 2003, which produced "expected returns" of $3.2 billion. The pensions actually returned more than twice that: $7.7 billion. The prior year, Ford used the same expected return, which generated $3.6 billion in income, even though the pension plan actually lost $3.3 billion.

If the investments exceed their "expected" return, the company can stockpile the gains to use later, which is what happened commonly throughout the 1990s. But if the investments do worse than expected, which was typically the case in 2001 and 2002, the losses can be postponed. Whether a company has abused the assumption is impossible to tell from a glance at its filings.

Another concern is that companies can raise and lower their projected retiree liabilities at will by making small adjustments in their discount rates. Employers generally use rates based on high-grade corporate bonds. According to its filings, Ford's discount rate for its U.S. pension plans fell to 6.25% in 2003 from 6.75% in 2002; GM lowered its discount rate even more, to 6% in 2003 from 6.75% in 2002. The decline in the discount rate boosted the liabilities of the auto makers by billions of dollars.

It's impossible to conclude looking at filings whether a company is using an inappropriate rate. Only the company knows when the expected payments will go out, which depends on tenure and age.

Companies also make assumptions about future salary increases, mortality and marital status -- all of which can affect liabilities.

The SEC is also examining assumptions about health-care inflation that companies use to calculate liabilities in retiree health plans. Employers have enormous latitude to come up with this figure, which, combined with changes in the discount rate, enables them to raise or lower liabilities by hundreds of millions of dollars.

Some analysts have criticized the auto makers for using what they say are unrealistically low inflation assumptions. Ford, for example, lowered its health-care inflation rate to 9% in 2003 from 11% in 2002; according to its filings a one-percentage-point decrease would reduce liabilities by $3.8 billion.

By comparison, GM raised its health-care inflation assumption to 8.5% from 7.2% Still, on a conference call to discuss third-quarter results last week, GM said it will increase its cost assumption for post-retirement health benefits to the "double digits" percentage rate. According to its filings, a one percentage point increase will boost liabilities by $7.6 billion.

Write to Ellen E. Schultz at ellen.schultz@wsj.com4

3Q Profit Outlook for Autos is Grim

Outlook for auto profits in 3Q grim

By Jamie Butters

The auto industry’s upcoming earnings season could be as discouraging as what the Lions used to inflict on Detroit each year.

High prices for steel and oil, so-so vehicle sales despite huge discounts and the remnants of an inventory hangover make for a potentially ugly round of financial results -- and outlooks for coming quarters -- at automakers and parts suppliers alike.

The July-to-September quarter is typically the weakest of the year, as automakers and suppliers shut down for summer vacations, retool for the new model year and unload previous editions of cars and trucks. But this fall looks especially grim: Over the last month, profit expectations have slipped at almost every auto-related company for the rest of this year and all of next, according to Thomson Financial, which collects analysts’ forecasts.

One exception -- sort of -- was Ford Motor Co. Last month, the Dearborn automaker raised its profit expectation for the third quarter by 10 cents a share, or about $180 million. But it excluded expenses, which the company said would eventually cost about $400 million.

General Motors Corp. should have among the best results, despite cuts to North American light-vehicle production. Cost-cutting and strong results in Asia and Latin America should help, said Michael Bruynesteyn, who studies the industry for clients of Prudential Equity Group.

At DaimlerChrysler AG, the Chrysler Group keeps doing better, while Mercedes keeps doing worse. But perhaps the biggest factor is that the company is no longer counting losses at Mitsubishi Motors Corp., which it used to control, in its quarterly results. On the other hand, it does face a hefty setback in the Mitsubishi Fuso heavy-truck business, which is still included.

Car companies book their revenues based on what they manufacture, not what dealers sell, and third-quarter production in North America by Detroit automakers fell 3 percent, Bruynesteyn said.

Production cuts by U.S. automakers have a huge impact on Michigan parts makers, which tend to make the vast majority of their sales to domestic automakers. Two of metro Detroit’s six biggest parts-makers are expected to post lower profits than they did a year ago. Visteon Corp., which sells most of its parts to Ford, is expected to lose money, but less than it did in the same three months last year.

Delphi Corp., the world’s largest auto supplier, identified rising steel prices last week when it warned that it would lose far more than originally feared and could endanger many smaller suppliers. Detroit-based American Axle & Manufacturing Holdings Inc. also buys a lot of steel and suffers when GM cuts production.

Another big steel consumer is Troy-based ArvinMeritor Inc., which makes axles and other parts. But about one-third of its sales go into heavy, commercial trucks -- a business that is considerably healthier than the brutally competitive car and light-truck industry right now.

Among transplants -- the U.S. assembly plants owned by foreign automakers -- production was up 5 percent, according to Prudential’s Bruynesteyn. But he predicts Toyota and Honda will see slightly lower profits in the third quarter, in part because dollar profits earned in the United States translate into 7 percent fewer yen than they did three months ago.

Other analysts, however, predict small profit increases at Toyota, according to Thomson.

Leading interior suppliers Lear Corp. and Johnson Controls Inc. do more business with transplants than most other U.S. parts makers, and both are expected to report modestly higher profits than last year.

Auto-industry stocks have already fallen about 10 percent to 15 percent on average since hitting a peak in early summer, said David Sowerby, chief market analyst at Loomis, Sayles & Co. in Bloomfield Hills. The reason, he said, is that investors simply have many better options than buying stocks in automakers and suppliers.

Investors who want to bet that companies can get more profit out of Americans’ pocketbooks -- what investors call "consumer-discretionary" stocks -- can do better with other purveyors of pleasure, such as Starbucks coffee, he said.

"Retail, media, travel and leisure . . . autos are fighting for investor appetites in a crowded shelf space," Sowerby said.

At the same time, larger trends in the economy -- higher prices for raw materials, such as steel and oil, global competition and expected higher interest rates -- make investors turn away from the auto industry, which seems to be running against the wind.

"While the U.S. economy is fairly strong and vehicle sales have remained relatively robust, there’s still those headwinds that create a significant uncertainty," Sowerby said. "And investors have no appetite for uncertainty."

Rental-car firms add in-city sites

Rental-car firms add in-city sites

By JIM SUHR

The Associated Press

ST. LOUIS — It’s part of an intensifying car rental rumble: As Enterprise Rent-A-Car increases its visibility at airports, longtime airport leader Hertz is muscling into America’s neighborhoods, Enterprise’s closely guarded turf.

Over the past three years, Hertz has christened more than 800 away-from-airport sites — including two in Columbia — to push its total to 1,100. The company hopes to add 200 more before the end of this year.

New car-rental sites are sprouting as Hertz and other Enterprise rivals eye off-airport sites, hoping to reduce their dependence on an air travel industry that has struggled since the September 2001 terrorist attacks. Such woes contributed to the bankruptcies of Alamo, National and Budget car rental companies, which since have regained their footing.

Enterprise, the nation’s largest rental-car company, is responding in kind, seeking more counter space at the airports. It has opened 27 airport outlets in the latest fiscal year, bringing its total in recent years to 170, including at every major U.S. airport. It does not have a site at the Columbia airport.

“It’s open season. It’s capitalism. There’s plenty of business out there,” said Neil Abrams, whose New York-based consulting group has a market research unit that monitors businesses including the rental-car industry.

According to Abrams Travel Data Services, car-rental companies will generate $18 billion in revenue nationwide this year. About 40 percent of that business will be away from airports, explaining the new focus on car rentals in neighborhoods and suburbs.

Enterprise has more than 6,000 locations worldwide — 5,400 of them in the United States — and on average has been opening a new branch every business day. Its response to the mounting challenge: Bring it on.

“Why is everyone running to the nonairport market that we cultivated? What other choice do they have?” said Christy Conrad, spokeswoman for St. Louis-based Enterprise, which became the nation’s biggest rental-car company mostly on the strength of its neighborhood rental shops that provide temporary replacements while cars are being repaired.

“This isn’t the first time we’ve seen the competition in our market. It happens in cycles; competition comes and goes,” she said. “We really do a better job when the competition is there. It keeps us on our toes.”

The privately owned Enterprise, which boasts it has sites within 15 miles of 90 percent of the U.S. population, has been the 800-pound gorilla in the local and replacement market, thanks to its deals with major insurers, large auto dealers and automotive-service companies.

Such neighborhood dominance, observers say, has given Enterprise relative stability and made it more recession-proof than other rental companies more reliant on air travelers. In good times and bad, car wrecks happen, and people need rentals.

“There aren’t too many industries you can think about where there’s such a major domination in one marketplace,” Abrams said of Enterprise.

Hertz hopes to chip away at that, seeking growth beyond its comfort zone of airports, where it enjoys a 30 percent market share. By stepping into suburbia, Hertz, owned by Ford Motor Co., sees the lucrative insurance-replacement market as a “very promising niche,” spokeswoman Paula Stifter said.

“In (that) arena, body shops and insurance companies are welcoming the choice,” she said. Stifter said Hertz has about 7,200 outlets worldwide, though she declined to specify the number in the United States.

Meanwhile, the Cendant Car Rental Group — which bought Budget out of bankruptcy in 2002 and also operates Avis — also has taken to the neighborhoods. In August statements trumpeting its opening of 15 new car-rental sites in the West and Midwest, Avis cast the growth “as part of its commitment to expand into local markets nationwide.”

Nationwide, Avis has about 1,000 outlets and Budget roughly 950, with each having about 700 of those sites away from airports, Cendant Car Rental Group spokesman Ted Deutsch says.

“It’s a sector of the market with the greatest growth potential,” he said for a company that globally has about 1,850 Budget outlets and 1,750 Avis ones. Away from airports, “we’re not just looking to put stores there just to say we’re there. We’re looking for good, solid conditions.”

The Second-Hottest Car Market In The World

Thursday October 14, 8:34 PM
The Second-Hottest Car Market In The World

Jakarta teacher Bachtiar Aming sometimes yearns for the dark days of Indonesia's financial crisis in 1998. Back then his commute to work at a small computer college was just 20 minutes on deserted streets. Now that the traffic jams are back, it takes an hour. Indonesia's economy is growing again, and that has triggered record vehicle sales. "There are just too many cars, trucks, motorcycles everywhere," Aming laments. "But if I don't have a car, I won't have a job."

China and India's double-digit growth in car sales has gotten worldwide attention. But Indonesia, the world's fourth-largest country by population, is also one of its hottest car markets. Driving the sales are cheap financing and plenty of new, low-priced models such as the popular Toyota Kijang sport-utility van, assembled locally by Astra International.

This year auto sales will likely grow 32% from 2003, to 465,000 vehicles, estimates Mandiri Securities in Jakarta. That makes Indonesia the third-largest market in Southeast Asia after Malaysia and Thailand and the second-fastest growing after China. It marks a steep recovery from 1998, when demand plunged to just 58,000 vehicles amid the Asian financial crisis. "The rebound has been spectacular," says Cheong Kwok-Wing, a UBS analyst in Singapore.

Indeed, analysts say that if the economy stays on track, auto sales could triple, to 1.3 million vehicles, by 2010. There's plenty of room for growth. Just 1 in 35 Indonesians owns a car, compared with 1 in 14 Thais and 1 in 7 Malaysians. "After China and India, Indonesia is clearly the biggest [sales] opportunity for car manufacturers anywhere in Asia," says Philip Eng, CEO of Singapore's Jardine Cycle & Carriage Ltd., which owns a 42% stake in Astra.

Behind the recent surge in demand is a pickup in consumer spending after a long spell in the doldrums. That has been driven by a sharp increase in lending by banks. Right now car purchasers can get loans on a new model with as little as 5% cash up front. That compares with the 20% down payments common just a few years ago. Competition and cost reductions have also led to lower sticker prices. Entry-level passenger vans such as Suzuki Motor's four-wheel-drive Karimun cost up to $14,000 before the Asian crisis. Updated versions of the same model now go for under $10,000. "It's the affordability that has fueled the car boom," says John Slack, Astra's chief financial officer.

Unlike in China and India, big global auto makers aren't rushing to build manufacturing capacity in high-risk Indonesia. But as long as the economy holds up and the price is right, the country's showrooms will be packed -- no matter how bad the traffic.

Auto industry faces gloomy third-quarter

Auto industry faces gloomy third-quarter

DETROIT, Mich. - The auto industry's upcoming earnings season could be discouraging.
High prices for steel and oil, so-so vehicle sales despite huge discounts and the remnants of an inventory hang over make for a potentially ugly round of financial results - and outlooks for coming quarters - at automakers and parts suppliers alike.

The July-to-September quarter is typically the weakest of the year, as automakers and suppliers shut down for summer vacations, retool for the new model year and unload previous editions of cars and trucks. But this fall looks especially grim: Over the last month, profit expectations have slipped at almost every auto-related company for the rest of this year and all of next, according to Thomson Financial, which collects analysts' forecasts.

One exception - sort of - was Ford Motor Co. Last month, the Dearborn automaker raised its profit expectation for the third quarter by 10 cents a share, or about $180 million. But it excluded expenses, which the company said would eventually cost about $400 million.

General Motors Corp. should have among the best results, despite cuts to North American light-vehicle production. Cost-cutting and strong results in Asia and Latin America should help, said Michael Bruynesteyn, who studies the industry for clients of Prudential Equity Group.

At DaimlerChrysler AG, the Chrysler Group keeps doing better, while Mercedes keeps doing worse. But perhaps the biggest factor is that the company is no longer counting losses at Mitsubishi Motors Corp., which it used to control, in its quarterly results. On the other hand, it does face a hefty setback in the Mitsubishi Fuso heavy-truck business, which is still included.

Car companies book their revenues based on what they manufacture, not what dealers sell, and third-quarter production in North America by Detroit automakers fell 3 percent, Bruynesteyn said.

Production cuts by U.S. automakers have a huge impact on Michigan parts makers, which tend to make the vast majority of their sales to domestic automakers. Two of metro Detroit's six biggest parts-makers are expected to post lower profits than they did a year ago. Visteon Corp., which sells most of its parts to Ford, is expected to lose money, but less than it did in the same three months last year.

Delphi Corp., the world's largest auto supplier, identified rising steel prices last week when it warned that it would lose far more than originally feared and could endanger many smaller suppliers. Detroit-based American Axle & Manufacturing Holdings Inc. also buys a lot of steel and suffers when GM cuts production.

Another big steel consumer is Troy-based ArvinMeritor Inc., which makes axles and other parts. But about one-third of its sales go into heavy, commercial trucks - a business that is considerably healthier than the brutally competitive car and light-truck industry right now.

Among transplants - the U.S. assembly plants owned by foreign automakers - production was up 5 percent, according to Prudential's Bruynesteyn. But he predicts Toyota and Honda will see slightly lower profits in the third quarter, in part because dollar profits earned in the United States translate into 7 percent fewer yen than they did three months ago.

Other analysts, however, predict small profit increases at Toyota, according to Thomson.

Leading interior suppliers Lear Corp. and Johnson Controls Inc. do more business with transplants than most other U.S. parts makers, and both are expected to report modestly higher profits than last year.

Auto-industry stocks have already fallen about 10 percent to 15 percent on average since hitting a peak in early summer, said David Sowerby, chief market analyst at Loomis, Sayles & Co. in Bloomfield Hills. The reason, he said, is that investors simply have many better options than buying stocks in automakers and suppliers.

Investors who want to bet that companies can get more profit out of Americans' pocketbooks - what investors call "consumer-discretionary" stocks - can do better with other purveyors of pleasure, such as Starbucks coffee, he said.

"Retail, media, travel and leisure. . . autos are fighting for investor appetites in a crowded shelf space," Sowerby said.

At the same time, larger trends in the economy - higher prices for raw materials, such as steel and oil, global competition and expected higher interest rates - make investors turn away from the auto industry, which seems to be running against the wind.

"While the U.S. economy is fairly strong and vehicle sales have remained relatively robust, there's still those headwinds that create a significant uncertainty," Sowerby said. "And investors have no appetite for uncertainty."