Detroit automakers are (finally!) making profits

@CNNMoney January 5, 2012: 11:23 AM ET

NEW YORK (CNNMoney) -- All three U.S. automakers are on track to be profitable in 2011 when they report results in the coming weeks. That's something that hasn't happened since 2004.

General Motors (GM, Fortune 500) is expected to post a 26% rise in profits to about $6.1 billion.

Ford's (F, Fortune 500) profit is expected to come in at about $7 billion, up from the $6.6 billion it made in 2010, which was the automaker's best performance since 1999.

And after posting a loss last year Chrysler says it will swing to a profit. The company is in the midst of an amazing turnaround, especially considering that during its darkest days the company seemed doomed to disappear. (The comeback of the American car)

And there's hope for the future because even better profits may lay ahead.

Today's best American cars

Good times are here again? Analysts are in widespread agreement in forecasting better industrywide sales in 2012 and beyond. They see sales rising from 12.8 million in 2011 to between 13.5 million to 14 million this year and close to 15 million by 2014 or 2015.

"In terms of profitability and outlook, this is the best conditions we've had for the U.S. auto industry in a long, long time," said Jesse Toprak of TrueCar.

From 1999 to 2007 the industry enjoyed sales of between 16 million to 17 million vehicles. Like the housing bubble, this auto-sales bubble was also fed by cheap credit.

But even with robust sales the automakers began to suffer. A refusal to fix Detroit's inefficient corporate culture and costly labor agreements were bleeding profits.

One such agreement caused U.S. automakers to keep plants running even when there was no demand for the vehicles being produced there. Even if the automaker decided to shut the factory they'd still have to pay workers most of their salary.

So by 2005 GM and Ford were losing money. Chrysler, then owned by German automaker Daimler, would soon follow.

The recession and financial crisis of 2008 almost proved to be the death knell for automakers. The future of the industry was now very much in doubt because demand for new cars and the credit consumers needed to buy them had all but been choked off.

Only federal bailouts and bankruptcies in 2009 kept GM and Chrysler alive, while Ford lived on cash it had borrowed just before the crisis.

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The companies all went through brutally tough reorganizations shedding excess factories, brands and dealerships and slashing their staff. They also won new contracts from the United Auto Workers union giving them the flexibility they long needed.

Making a dollar out of fifteen cents. Detroit is now able to make money even at a sales level that would have been considered catastrophically low only a few years ago.

"Their business models have changed forever," said Rebecca Lindland, director of strategic review for IHS Automotive.

Despite the profits, GM and Ford shares both lost ground in 2011. But there is some good news for investors. Both had their debt upgraded and are close to shedding the junk bond status. And in March Ford is set to start paying a dividend.

There's good news for workers as well. Besides large profit-sharing checks, the companies have all agreed to hire thousands of new workers in the coming year as they move some production to the U.S.

Forecasts are for a net gain of 170,000 auto jobs nationwide by 2014.

And while the sales growth now forecast brings hope, it isn't a guarantee of better profits ahead.

The industry is one of the most competitive in the world. While Toyota Motor (TM) and Honda Motor (HMC) have lost U.S. sales recently, Korean automaker Hyundai Motor, which operates both Hyundai and Kia here, and German automaker Volkswagen (VLKAF), are both poised to take more U.S. market share.

Tough new mileage regulations are due to raise the cost of vehicles and that could either squeeze profits or cut demand.

But the new labor deals gives them a good shot at stronger profitability going forward. New hires, for example, are bought on at a lower pay scale with more affordable benefits than the veteran workers who will be retiring.

"They are really poised with any uptick in volume to do really, really well," said Betsy Meter, audit leader for the U.S. automotive practice of accounting firm KPMG. She said this is the best financial position she's seen the U.S. industry in 25 years she's followed it.

One of the key things going for Detroit is much improved product. The quality is now comparable to that of overseas rivals, as is the productivity in U.S. factories.

"They have very few bad products out there any more," said Jeremy Anwyl is vice chairman of Edmunds.com.

That's one of the reasons the Detroit automakers all reported market share gains in 2011, the first time they were all able to do so since 1988.

And KPMG's survey of 200 top auto executives from around the globe show that a plurality now expect global market share gains at GM, Ford and Chrysler owner Fiat Group over the next five years. Only a few years ago, the expectation was for market share losses at all three.

"It's a remarkable turnaround in quite a short period of time," said Gary Silberg, national automotive industry leader for KPMG. "We're really amazed by it."

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