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Cruise Control?


Industry Outlook -- Basic Industries: AUTOS

CRUISE CONTROL?

Car sales should remain strong, though high sticker prices are worrisome

Peter Dirisamer may not drive home a new car in 1996. Dirisamer, 37, an Elmhurst (Ill.) technical writer, wants to replace his family's 1988 Plymouth Horizon subcompact. But with average new-car prices pushing $20,000, he's not finding much he can afford. "Detroit expects me to pay $20,000 for the average four-door sedan?" he sniffs. "I don't think so." Instead, he may settle for a used car.

Consumers such as Dirisamer are the reason Detroit is cautious about its prospects for the new year. "Price is the issue with customers," says Lehman Brothers Inc. analyst Joseph Phillippi. And with a flood of two- and three-year-old cars and trucks coming back on the market as their leases expire--2.3 million in 1996 alone, according to Art Spinella of CNW Marketing/Research in Bandon, Ore.--consumers are finding plenty of alternatives to pricey new wheels.

So Detroit is prepared to idle along at about the same rate as the overall economy. Auto executives are looking for only a modest improvement of less than 2% over 1995's U.S. sales of 14.8 million cars and light trucks. Says General Motors Corp. Chairman John F. Smith Jr.: "1996 looks like a good year, not spectacular."

Perhaps, too, Detroit is a bit cautious about predicting rosy sales. A year ago, its optimism had reached fever pitch. But by mid-January, consumers began to cool on auto buying as they felt the cumulative effect of interest-rate hikes by the Federal Reserve. Sales revived by fits and starts through 1995, ending about 2.6% behind 1994's pace.

GOOD AS IT GETS? Auto sales should be helped in 1996 by low interest rates, which make auto loans and lease terms more attractive. A continuing appetite for American-made trucks, including minivans and sport utilities, also is in Detroit's favor. And the Big Three are introducing a host of new models, notably Ford's Escort small car and F-series pickup, GM's new midsize cars and minivans, and Chrysler's Dodge Dakota pickup.

Still, other worries loom. PaineWebber Inc. analyst Michael Ward frets about unsold cars and trucks on dealer lots, which reached a 75-day average supply late in 1995, 14% above year-ago levels. Ward predicts little change in sales for 1996: "This is as good as it's going to get for Detroit."

While most on Wall Street predict slightly stronger sales ahead, they don't expect them to flow straight to the bottom line. Customers are demanding cash rebates and sweet lease terms on all but the hottest-selling trucks. Flemington (N.J.) car dealer Steve Kalafer, who owns 23 dealerships, says the only thing selling these days is bargains: "In a world full of wonderful products, the consumer is buying the deal."

That squeezes auto makers' profit margins. "The industry's margins are a disaster for an expansion," says Paul Ballew, chief economist for J.D. Power & Associates Inc. Adding to the uncertainty, Detroit's contracts with the United Auto Workers expire in September. A spirited debate is expected about the auto makers' shifting jobs to outside suppliers (box). And Japanese competitors are hard on Detroit's bumper: introducing snazzy new vehicles while keeping price increases small.

Ford's costs of launching its many new vehicles will continue to drag down profits during the first half of the year, company executives say. Stockholders remain anxious about the company's strategy of loading on features to lure import-loving baby boomers at a time when consumers shun higher sticker prices. Ford also will expand its ambitious global reorganization--dubbed Ford 2000--by folding South America, New Zealand, Australia, and Taiwan into its combined North American and European operations in 1996. J.P. Morgan & Co. analyst David Bradley expects Ford to earn $3.6 billion, unchanged from 1995, on sales of $123 billion.

General Motors Corp., which sat out most of 1995 without new models, launches a series of important vehicles this year. After bungling several car launches in recent years, it has been working on debugging its manufacturing process to prepare for the launches. GM is counting on such entries as the new Chevy Venture minivan, Buick Regal, and Pontiac Grand Prix to help it regain its footing in crucial market segments. The company is hoping its falling market share finally has bottomed. Late in the year, its share edged above 34%, up from lows near 32%. GM will earn $7 billion, up 17%, on $160 billion of sales, Bradley calculates.

"IDEAL SITUATION." Chrysler Corp. management, which just successfully introduced a new generation of its bread-and-butter minivans, is likely to spend plenty of time planning for a spring showdown with billionaire investor Kirk Kerkorian. If Chrysler balks at giving Kerkorian aide Jerome B. York a board seat, a nasty proxy battle will ensue. Back on the plant floor, Chrysler is standardizing manufacturing processes and modernizing older factories. Bradley estimates 1996 Chrysler earnings of $3.1 billion, up 58% from the depressed 1995 level, on sales of $54 billion.

Even as Detroit rolls out spiffy new models, its Japanese rivals will unveil their own new designs. And while a sky-high yen forced them to boost sticker prices, putting them at a $2,000 to $3,000 per-car price disadvantage, they've been slashing costs. The 1997 Toyota Camry midsize sedan is expected to cost as much as $1,000 less than the current car. "The Japanese manufacturers have not gone away," says GM's Smith. "They are tough competitors, and they will continue to be."

Japan also is expanding its lower-cost U.S. production--and even stepping up shipments of American-built cars to Japan. "We are importing, not only to Japan but to 38 countries, from the U.S.," says Nobuhiko Kawamoto, Honda Motor Co. president and chief executive. "We intend to reinforce this plan." Even softening in the yen last fall isn't likely to cause Japan to back off from cost-cutting. Says Ford Chairman Alexander J. Trotman: "I doubt very much that they will take their foot off the pedal just because the yen has slipped back."

There is a silver lining to the slackening of 1994's breakneck pace. Back then, factories were running at maximum overtime, some key parts ran short, and demand for raw materials renewed some inflationary pressures. Says Kenneth L. Way, chairman and CEO of Lear Seating Corp. in Southfield, Mich.: "I think it's an advantage not to have deep troughs and big peaks."

Instead, the industry may be bumping along on a plateau of 14.5 million to 15.5 million unit sales annually. "It's actually an ideal situation," says Chrysler Chairman Robert J. Eaton. "It allows you to get your plants running at maximum efficiency, get your material flowing nice and evenly, and really focus on costs and quality."

And when it comes to expansion opportunities, the Big Three are casting their eyes toward the Asia-Pacific region, where they can still turn out basic cars on a shoestring. "That is where most of our growth focus will be in the next 20 years," says Ford's Trotman. Chrysler, which has lagged its Detroit peers abroad, is likely to make some major international moves this year. The company is talking with a half-dozen potential partners in India, South America, and Southeast Asia. An alliance with a European auto maker could also be in the cards.

Overseas horizons may indeed appear the brightest to Detroit. Especially if American consumers, such as Illinois car shopper Dirisamer, remain convinced that new cars cost too much.By Kathleen Kerwin and Keith Naughton in DetroitReturn to top


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