By Leow Ju-Len

IN MANY WAYS, the car business stinks. Margins are razor-thin, the competition is cut-throat, developed markets are saturated, and customers have never been more spoilt for choice.

Of the ten carmakers that announced quarterly or half-yearly results last month, only two actually lost money. General Motors and Ford Motor Company, the two largest carmakers in the USA, bled red ink while their counterparts from the rest of the world managed to notch up profits in the hundreds of millions. For some, 2005 could even turn out to be a record year.

JAPAN ON TOP
As usual, Toyota ruled the roost. Thanks to rising global sales, net profits totalled almost $4.4 billion in the July to September period, a 2 percent increase over the same period last year. This means Toyota gets richer by $48 million a day.

Toyota has been spot-on with its product strategy, beefing up its range of hybrid cars just when fuel prices have been scarily high, but it has also watched the bottom line. Cost cuts have saved the company half a billion dollars so far this year, and it’s on track to tally up record profits by the time its fiscal year is over in March 2006.

So is Honda, if results from the first half of the company’s fiscal year are anything to go by. In the six months up to September 30th, Japan’s number three automaker booked more than $3.5 billion in profits, a new record. Strong global sales are behind the solid results, and the company is revising its full-year profit estimate upwards to over $7 billion, which would make it the fifth record-breaking year in a row for the company.

Over at Nissan, quarterly profits were up 8 percent, climbing to just over $1.8 billion, thanks to soaring sales, amazing considering that the company was struggling a decade ago. With the latest quarter’s results, chief executive Carlos Ghosn has declared his ‘Nissan 180’ plan complete, having achieved the goal of increasing sales by 1 million cars within three years of the 2002 plan.

Mazda continued Japan’s winning streak by announcing record half-year profits of around $449 million, a 66 percent jump. The figure might seem small, but then Mazda is number four in Japan by some distance. Hitting its target of $795 million in earnings for 2005 would mean a staggering increase of about 20 percent over fiscal 2004.

STRUGGLING AMERICANS
Compare and contrast the fortunes of the Japanese with those of the Americans. Among US car companies, DaimlerChrysler is alone in making money, with quarterly profits of over $1.5 billion. Then again, the company is arguably more German than American, at least where management is concerned. Top posts are filled by German executives.

Although DaimlerChrysler’s earnings are down 21 over the same period last year, at least the group makes money from cars. Chrysler contributed strong earnings while Mercedes-Benz looks to have turned around. The luxury marque hovered dangerously close to making losses just one quarter ago, but booked very healthy third-quarter operating profits of almost $900 million, a 43 percent surge over 2004.

New models are selling well, and cost-cutting is gathering steam, with 8,500 job cuts on the way. With further contributions from DaimlerChrysler’s truckmaking and financial services divisions, full year profits should hit around $12 billion.

Those are numbers Bill Ford would kill for. The chairman and chief executive of Ford continues to wrestle with dismal results, including losses exceeding $482 million in the third quarter. Ford – the company, not the man – has lurched from one turnaround plan to another as it seeks to find a profitable strategy, and senior managers are said to work poorly together. Things are just as bad, if not worse, over at General Motors.

The world’s biggest carmaker is also the biggest money-loser, bleeding red ink to the tune of over $2.7 billion in the last quarter. That’s a staggering $29 million per day in losses, and comes on top of around $2.4 billion of negative earnings in the first half of the year. The real problem is that GM is being haunted by ghosts from the past. For instance, the company has around 180,000 active employees in North America, but continues to pay health benefits to over 1 million retirees and their dependants.

A 1984 contract with union workers says GM cannot sack them if a plant is closed. Instead, such workers are placed in a ‘jobs bank’ to await redeployment, and continue to be paid in the meantime. This means that today GM spends $750 million a year to pay 5,000 people to sit at home, with full medical benefits. Under circumstances like those, any company would struggle to be competitive.

The group recently netted US$725 million in cash by selling its stake in Fuji Heavy Industries (Subaru’s parent). Trouble is, GM paid nearly twice as much for it in 1999.

LESS IS MORE?
GM is not alone in squandering money. The Volkswagen Group needs to get costs under control in order to improve profitability. Third-quarter earnings of over $565 million look juicy enough on the surface, especially when you consider that it represents a jump of 273 percent over last year’s figure. But VW delivered 1.3 million cars to achieve that, which means that its profit-per-car worked out to be a paltry $435. Where did the efficiencies from all that platform-sharing in the 1990s go?

Some projects have been little more than expensive ego-boosters, like the VW Phaeton. VW has probably never made money because – and management needs to accept this – no one wants a Mercedes S-Class rival with a VW badge on the nose.

Consider that VW makes almost four times as many cars as BMW, but the latter managed $858 million in third-quarter earnings. Net profits are actually slightly down for BMW, though, with rising material costs being one of the factors cited, and the group’s aim for its full year results is to hit the same profit as last year. That leaves the prestige automaker vulnerable to being overtaken by Hyundai in the profit stakes.

Currently on a roll, Hyundai earned just under $875 million in the last quarter, with profits lifted 27 percent by rising sales worldwide (although it should also be pointed out that Hyundai also made money from a profitable credit card business). The Korean carmaker sells about as many cars as Honda (over 3 million a year) if you add in volume from Kia, of which it owns 38.7 percent. The intriguing thing about Hyundai is that it seems to prosper despite an uneasy and costly relationship with workers.

In August, unionised workers went on strike to demand (what else?) salary increases and shorter working hours, and Hyundai says the action cost it $960 million in lost sales. However, almost like clockwork, Hyundai’s union has gone on strike every year except one since 1987, so oddly enough the company must be enjoying enough positive cashflow to indulge this negotiating ‘tradition’.

Better labour relations would propel Hyundai-Kia further up the profit charts, but in any case the Koreans show the Americans that it’s possible for a carmaker to book solid earnings no matter how tough the operating environment seems.

Of course, most of the profitable carmakers on our list enjoyed increased sales during the quarter without resorting to costly discounts, so perhaps success in the car game merely boils down to producing cars that people want to buy. GM and Ford, take note.