Daimler AG (NYSE: DAI) joined the continuing parade of ugly automaker earnings with its own disappointing earnings report this week. The company posted a first-quarter loss of US$1.7 billion (1.29 billion euros) on declining sales, which it sees continuing through 2009. The German automaker had posted a profit of 1.33 billion euros for last year's same quarter, and says it is taking cost-cutting measures to remain strong. Daimler joins the U.S. automakers Ford Motor (NYSE: F) and General Motors (NYSE: GM) with earnings woes. DAI comes on the heels of Toyota Motors (NYSE: TM), which recently experienced its first loss in 70 years and the recent Chrysler bankruptcy filing last week. Investors would do well to look beyond the quarter-to-quarter performance of the auto industry.
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More than Just Bad Earnings Reports
With the heavily publicized decline of GM, along with Chrysler's struggle and Ford recently reporting a $1.4 billion loss, it's clear that the automakers are facing much more than a difficult recession. While the U.S. automakers, formerly the Big Three, have been hammered recently, their troubles go back as far as the early 1970s (the oil embargo and gas shortages), and along with labor troubles, modernization struggles and the continuing pressure from foreign competition, it looks as though this is the final act for the U.S. automakers' industry domination. Not even the most starry-eyed optimists are predicting a return to prosperity and strength for the U.S. auto industry - at least not any time soon.
Toyota's losses earlier this year added to investor woes as they were already dealing tith the massive financial losses of domestic automakers. While the Japanese titan nominally replaced GM as the world's largest carmaker, it was sort of like winning a fight on a disqualification. Honda Motor Corp (NYSE: HMC) is also participating in this industry's economic battering. Add the German giant Daimler, which had an awful earnings report despite finalizing its divorce from its questionable marriage to a weakened and ill-fitting Chrysler, and you wonder if any automakers know what they're doing. Some have suggested Volkswagen (OTC:VLKAY.PK) will become one of the dominant automakers, and while it did post positive earnings rather than huge losses, its earnings fell a substantial 74%. At this point, maybe it doesn't make sense to talk about a dominant player in such a sickly industry.
Daimler Sees a Brighter Future
Under its agreement, Daimler will be paying off the last of its obligations into the Chrysler pension fund, so DAI should soon be completely rid of its former partner completely. However, Daimler still faces $1.5 billion or so being written off from loans to the troubled carmaker. That's an expensive and messy divorce.
When Henry Ford began his mass car production and paid his workers $5 a day instead of the going rate of $1, there were two main reasons. The first being that the work was harder than other available work, and the second was that Ford wanted his workers to have enough money to buy cars. Have the automakers made any meaningful unit price adjustments in this recession? When consumers are feeling pinched and industries such as shoes, clothing and housing are dramatically down, what sense does it make having acre upon acre of shiny new SUVs, freshly manufactured and selling for $35,000 a pop?
The Forecast: None
Some are still looking at the automakers as a "normal" industry, and think that the second-quarter output should be poised to increase due to lower inventories and forecasted sales improvements. However, the true painful assessment is waiting just around the corner. GM's flirtation with bankruptcy (and Chrysler's filing) isn't simply about a company or two, it's about a seminal industry that has changed forrever. It's questionable whether any of the major automakers discussed here are good long-term buys. No automaker has convincingly shown that it has understood and met the vast changes that the industry is undergoing and will continue to undergo in the future. (Read Buy When There's Blood In The Streets, to learn how contrarian investors find value in the worst market conditions.)