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I Th Ilio e Kiplinger Letter FORECASTS FOR MANAGEMENT DECISIONMAKING I1729 H St. NW, Washington, DC 20006-3938 • KiplingerForecasts.com • Vol. 82, No. 41 IDear Client: Washington, Oct. 14, 2005 Out of the growing mess in Detroit. . . CURRENT FORECASTS I parts giant Delphi's bankruptcy, lousy sales for Ford, General Motors and DaimlerChrysler . " . GDP f Up 3.5%this year,3%in'06 this fall, despite dozens of new models. . . - . IITHE AUTO A necessary crisis is developing Interest rates NEW FORECAST INDUSTRY as the Big Three and their suppliers tPrime rising to 7.25%by end { '05,7.75%-8%by mid-'06 take on the United Auto Workers union (UAW) . Inflation NEW FORECAST IIItwill spark major restructuring. . . ♦ Gaining:4%in'05,3%in'06 painful but unavoidable if domestic automakers • -- hope to end their drift toward financial ruin. Employment t2.1 million new jobs to'05, 1.9 million new jobs in'06 Auto companies will prevail on costs ti Trade deficit as unions realize that the only alternative Rising to$633 billion in'05 to big concessions is yet more bankruptcies, .. , ._leading to an unraveling of the industry. Housing But Ford and GM will remain in danger If Sales rising to 8.3 million in'05,slight easing to 7.8 million in'06 of going under. Even with leaner production, ; Retail sales they need to make cars more people want to buy. ti Growth steady at 4%in'06 P y' pipeline Ford, especially, has little in the i eline 1 Auto sales to argue for a sales pickup in coming years. Falling to 16.8 million tn'06 II Complete economic outlook at The UAW will agree to a number of cuts KiplingerForecasts.com/outlooks in wages and health care and pension benefits. These costs set the Big Three back an average of $65 per hour per worker, I about 60% more than Toyota and other foreign makers spend on U.S. staff. Production line wages are likely to be trimmed by about a third, from a current average of $25 per hour, while health and pension benefits I will be reduced 50%-75%. These benefits are rising more than 10% a year and will cost the Big Three combined roughly $11.5 billion this year. Headed for the chopping block: Generous terms for idled workers, who get 95% of pay and full benefits for as long as they are sidelined. The Big Three will shutter up to 25% of their assembly plants and shed the same percentage of their combined 200,000-strong payroll. I It'll take about two years of struggle to cement these changes, partly because current UAW contracts don't expire until Sept. 2007. Sporadic strikes are possible, causing more pain for automakers. The Big Three's combined market share will probably fall to 45% by 2008 II from 57% now, and many smaller parts suppliers are likely to disappear. Even with lower costs, automakers will outsource more assembly, in large part to make it easier to boost output of hot-selling models. Rigid union rules on work hours and overtime often bog down such moves. The UAW likely won't budge on these rules as it makes other concessions. The Detroit automakers want to spend more time designing cars, something they urgently need to do better if they want to stay afloat. I The Kiphnger Letter(ISSN 1528 7130)is published weekly for$84/one year,5154/two years,$222/three years Subscription inquiries. 800-544-0155 or sub services@klphngercom by The Kiphnger Washington Editors,1729 H St,NW,Washington,DC 20006-3938 Editorial information Tel,202-887-6462,Fax,202-778-8976, Periodicals postage paid at Washington,DC POSTMASTER Send address changes to The Kiplmger Letter,PO Box 3295 Harlan,IA 51593 E-mail,letters@kiplIngercorn,or Web site.Kip6ngerForecasts coin