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BusinessWeek: January 11, 1993 |
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Industry Outlook: AUTOS
IS DETROIT PULLING UP TO PASS? The Big Three won't all prosper equally, it's true. No.2 Ford Motor Co. and No.3 Chrysler Corp. may record higher sales, but their success will probably come more at the expense of beleaguered General Motors Corp. than the Japanese. And GM could have a bad fall if negotiations with the United Auto Workers sour and lead to a Sept. 15 strike. Odds are that the UAW will try to set the industry's wage pattern at No.1 GM, where it struck three plants in 1992, though Ford could be targeted instead. GM's problems aside, Detroit has good reason for optimism. Buffeted by tariffs and tighter trade quotas, the rising yen, higher capital costs, and slumping car sales at home, Japanese companies hiked their U.S. auto prices by an average of 4% last spring, plus 2.7% more last fall. Detroit's increase was just 1.2% for cars that, on balance, are improving in quality and styling. Chrysler and Ford, in particular, "have tremendous product lines," says Timothy Leuliette, president of ITT Corp.'s auto-parts subsidiary. HOLDING THE LINE. The Big Three also should benefit from a more buoyant market. They lost a staggering $7.5 billion during the 1991 sales slump. But this year, U.S. light-vehicle sales are expected to rise 7%, to 13.8 million units, on top of last year's 5% increase. That should put Detroit in the black. Morgan Stanley & Co. analyst Scott Merlis expects Chrysler to earn $1 billion on revenues of $40 billion this year, though new accounting rules for retiree health benefits are sure to drag that down. In December, Ford took a $7.5 billion charge against earnings to cover the new rules and the cost of paring 10,000 jobs in Europe. Merlis says it's now poised to earn $1.1 billion on revenues of $87 billion this year. Even at GM, Chief Executive John F. Smith Jr., who took over in November, vows the company's North American operations will break even, before interest and taxes. That should lift GM out of the red. As the turnaround gains momentum, each one of the Big Three is getting a new chief. There's Smith, of course, a no-nonsense executive who helped turn around GM's European operation in the late 1980s. Robert J. Eaton, who also proved his mettle at GM of Europe, replaced Iacocca as Chrysler chairman on Jan. 1. And later this year, Alexander J. Trotman, head of Ford's worldwide auto operations, is expected to take over as chief when Harold A. Poling retires. Even before the new leaders can have much impact, the Big Three are avoiding the sloppy habits that usually accompany auto sales rebounds. Aside from holding prices down, they're bringing out new products faster. And they're getting creative on marketing, dabbling with no-haggle selling techniques and equipping vehicles with standard packages of popular options at attractive prices. Detroit is also whomping Japan in one of the fastest-growing and most profitable sales segments: light trucks. Trucks grew to a record 41.6% of vehicles produced last year, as consumers replaced sedans with pickups, minivans, and sport-utility vehicles. With nifty entries such as Ford's Explorer and Chrysler's minivans and Jeep Grand Cherokee, Detroit's share, now 91%, was up more than four points last year. The Big Three still have plenty of cause for worry--especially GM. A strike there could be devastating, and several disputes could kindle one. As the company restructures, it is already discussing with the UAW some touchy issues involving layoffs and loss of work to outside suppliers, in hopes that they can be partly resolved before formal contract talks begin. Health-care benefits are another hot button. GM has cut benefits for salaried employees and will seek similar concessions from rank-and-filers. Even without a strike, GM faces a year of struggle. Like Ford and Chrysler, it must continue to curb its habit of pumping up sales by giving money-losing bargains to rental-car companies. And as it streamlines and slashes overcapacity, it will have to speed critical new products to market at a time when cash is scarce. Next year, its aging lineup and a lack of new 1993 models could cost GM a full point of its 34.4% market share, figures Dean Witter analyst Ronald Glantz. GM marketing chief J. Michael Losh disagrees: "We're not going to give up any market share," he declares. He argues that GM's numerous new-in-'92 models are strong enough to hold their own. One imponderable for Detroit is whether the Clinton Administration will be a net plus or minus. Clinton has talked about stiffening fuel-economy standards, which would cost big bucks, and raising taxes on the wealthy, which could further weaken Detroit's profitable luxury-car sales. But Clinton also could endorse some form of protectionism that would hurt Japan. The likeliest example: a change in the definition of what qualifies as a truck under import rules. This would help Detroit by raising tariffs on imported minivans and four-door sport-utility vehicles to 25%, from the current 2.5%. Either way, Detroit isn't writing off Japan. But newly retired Ford President Philip E. Benton Jr. thinks Japan's market share may peak near its current 25%. Even if the Japanese carmakers' troubles are temporary, "'dumb old Detroit' has finally got its act together," contends Chrysler President Robert A. Lutz. This year will be just the first of many tests that will tell if he's right. | |
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