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September 15, 2006, a day that will live in infamy. Well, that may be overstating the case. It was, however, the day both Ford Motor (NYSE: F) and DaimlerChrysler (NYSE: DCX) announced major cutbacks in production and various other cost-cutting moves. Since then, there have been many negative stories about the auto industry.

Before buying into the widespread despair, investors will want to read Sandra Ward's interview (subscription required) with widely respected auto industry analyst Chris Ceraso in the September 25, 2006 issue of Barron's. Yes, Ford announced a Q4 production cut of 21%. Chrysler forecasts a 16% production cut. This will still leave both companies with production in excess of demand through FY 2007. Ceraso, and other auto industry insiders, are particularly disappointed with the vagueness of Ford's third restructuring plan in five years. Ford's plan is much less detailed than GM's plan with few specific rubrics for measuring cost-cutting effectiveness. Ceraso forecasts a $5.5 billion loss through 2007, larger than Ford's estimate. He forecasts cost savings of $5 billion through 2007, smaller than Ford's estimate. Ceraso does not see any indication of Ford profitability until 2009.

There are several macroeconomic factors operating in Ford's favor right now, but negative changes in any one of them could further hamper Ford's turnaround efforts. Oil prices could climb again to uncomfortable levels for any number of reasons. The Fed could hold interest rates at present levels, which is better than any increase. In many real estate markets, housing prices are beginning to moderate, giving people more money to spend on non-mortgage related items.

While Ceraso remains cautiously positive, the fallout from Ford and Chrysler's announcements continues downstream. Virtually every automobile parts supplier's stock has taken a hit. Modine Manufacturing, Lear, and American Axle & Manufacturing Holdings are down. Visteon Corp. has revised its previous forecast downwards and says it will not meet its financial targets for the second half of 2006. Visteon has already began layoffs. Delphi Corporation, a huge auto parts supplier, has 1,400 more workers ready to accept buyout offers. BorgWarner (subscription required) has announced plans to cut staff by 13% or 850 jobs, and lower its per-share profit for 2006 from $4.35- $4.60 per share to $4.10 at the most.

The ripple effect has already spread to the raw materials suppliers. U.S. Steel Corporation, AK Steel Holding Corporation, Algoma Steel and Mid-West Materials may all end up with excess supply. Given China's continued export of steel, there may be a worldwide glut in 2007, forcing prices to unprofitable lows.

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