Auto Production Going And Going

April 11, 2003
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GRAND RAPIDS — North American automotive production maintained a strong pace during the first quarter.

Even so, a dip in sales has resulted in an uptick in inventories that is leading some automakers to curtail production for the second quarter.

Domestic automakers, seeking to lure more consumers into the showrooms and burn off the inventory, have also launched new incentive programs offering zero-percent financing for up to 60 months on most new vehicles during April.

While 2003 is shaping up as “not a bad year by any means,” Erich Merkle, an analyst with IRN Inc. in Grand Rapids, says the lower production levels from last year may generate greater pain for smaller automotive suppliers.

The Tier 1 suppliers that are well diversified and specialized should weather the decreased production levels relatively well, Merkle said.

But he cautioned that the Tier 2 and Tier 3 suppliers could feel even tighter finances

The smaller firms are subject to pressure from growing pricing pressures on the one hand and, on the other, higher production capacities that were built up to meet higher production demands of the previous year.

Now he says production slumps and loss of higher volumes may leave smaller suppliers unable to generate their margins.

“Those guys have really been beaten down in terms of price and they’re set up to run at a certain capacity,” Merkle said.

“Certainly there are some suppliers who are much better able to withstand a downturn than others,” Merkle added.

Lower tier suppliers also are suffering from automakers’ chronic practice of very slow payment both for services rendered and product tendered.

Among the stronger suppliers he mentioned are Johnson Controls, MagnaDonnelly and Gentex Corp.

These are the kind of Tier 1 suppliers — all of which are either based in or have a large presence in West Michigan — that fabricate products with high consumer appeal.

The big question for now, Merkle said, is how much of a sales boost the new round of incentives that automakers have begun offering will provide during the remainder of this month — and whether it will avert a significant production downturn.

Automakers produced 16.8 million vehicles in North America in 2002, one of the best years ever, though off the still-amazing record pace of 17-plus million units the previous year

While some analysts have lowered their production outlooks for 2003, IRN is maintaining a forecast of 16.1 million to 16.2 million units in North America.

Through the first quarter of the current year, North American light vehicle production totaled 4.20 million units, according to Ward’s Automotive.

That’s a 0.8 percent increase over the 4.16 million units produced during the first three months of 2002.

A 6.1 percent reduction in the production of cars during the quarter was offset by a 6.5 percent increase in pickup truck production.

As production remained strong, auto sales slid during March.

General Motors’ sales fell 3 percent in March and 6.8 percent for the quarter.

Ford Motor Co. was off 7.9 percent during March from year-ago sales figures and down 2 percent for the quarter.

The Chrysler Group of DaimlerChrysler reported a 3 percent sales decline for March and a 6.5 percent quarterly decline.

Foreign automakers Honda and Toyota both reported solid sales gains.

Merkle said the lower sales levels for GM, Ford and DaimlerChrysler were not as bad as some analysts had forecast, especially given the economic uncertainty caused by the war with Iraq.

The uncertainties going forward are the length of the war, the U.S. economy and how interests rates will fare during the year, Merkle said.

“We’re not expecting doom and gloom, although there are things that could happen,” he said. “If everything plays out right, we should be right on target.”

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