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Profits for auto companies show signs of beating the 1990s

By Keith Naughton and Craig Trudell
Bloomberg News

The 17 percent surge in U.S. auto sales last month pushed the annual rate to a pre-recession, boom-time level. Even more significant, automakers are reaping profits not seen since 2000.

Sales totaled 1.5 million in August, the most in one month since May 2007. What’s more, the automotive comeback crossed an important milestone as the industry’s annual selling rate reached 16.1 million, the fastest since October 2007 and a volume that signifies a robust car market.

As the fifth anniversary of the collapse of the Wall Street investment firm Lehman Brothers approaches, the auto industry has come from bankruptcy to boom.

General Motors, Ford and Chrysler combined to earn $13.5 billion last year, even as industry sales were 17 percent below the peak of 17.4 million set in 2000. Those profits come from trimmer companies that radically restructured operations, shed debts and overhauled their lineups to better compete.

“Any question that the industry is back should be put to rest,” said Jeff Schuster, auto analyst for researcher LMC Automotive. “In 2007, there was no margin on cars; the Detroit Three were giving them away. Now we’re seeing a much different environment, where they’re much more competitive.”

For the year through Wednesday, Ford shares had soared 31 percent and GM jumped 24 percent, outpacing the 16 percent gain of the Standard & Poor’s 500 index.

In the first half of this year, the Detroit Three made more than $6 billion before the industrywide sales rate breached 16 million from last year’s 14.5 million. They’re making money from models that once were loss leaders, such as small cars like GM’s Chevrolet Cruze and family sedans like Ford’s Fusion, which jumped 14 percent last month.

GM’s total sales rose 15 percent last month, making August its best month since September 2008. Ford was up 12 percent and said it had its best month of retail sales since 2006. Deliveries for Chrysler, majority-owned by Fiat SpA of Italy, climbed 12 percent in August, the automaker’s 41st straight month of gains.

Asian automakers combined for their best U.S. sales month ever. Toyota deliveries surged 23 percent, while Honda and Nissan each had their best August.

“The new 16 is better than the old 17,” said Kevin Tynan, auto analyst for Bloomberg Industries. “It’s different now because the products across the portfolio are so much better. Everything is just better, from the cost structure on down the line.”

Consumers are willing to pay higher prices for these new models, which are stuffed with technology that keeps drivers more connected and going farther on a gallon of gasoline. The average price a consumer paid for a Chrysler model rose 3.9 percent from last year to $32,447, according to researcher Kelley Blue Book. Ford commands an average price of $34,455, up 1.5 percent from last year, and GM gets $34,527, up 0.7 percent.

Now Detroit’s greatest challenge is building enough cars, Schuster said. Ford said it plans to boost North American production in the fourth quarter by 6.8 percent to 785,000 vehicles. Ford just added a shift of 1,400 workers at a Michigan factory to build more Fusions.

GM is running its Cruze factory in Lordstown around the clock on three shifts to keep up with demand for the small car that is up 18 percent this year. Consumer demand for the Cruze “is unprecedented in Chevrolet for decades,” Alan Batey, head of Chevrolet, said on a conference call.

Schuster said projections are that the industry will add 3.4 million vehicles of capacity from 2010 through 2020 in North America, 2 million of which come from new factories in Mexico.

There remain “yellow flags” in the sluggish economy, such as anemic job and income growth, Tynan said.


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