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Industry Outlook 1999 -- MANUFACTURING

Autos

No one is expecting the wheels to fall off car sales this year. But auto executives who are usually buoyant are coming to terms with a dim prospect: Their best days are behind them. "I'm worried," confides an anxious Richard B. Colliver, executive vice-president of American Honda Motor Co. "I've seen showroom traffic slow down. People are concerned about the market."

Such pessimism was hard to find in the go-go sales reports of 1998, when car and light-truck sales in the U.S. topped 15.5 million, the best year of the decade. But auto executives acknowledge that global economic malaise and wavering consumer confidence will finally put the brakes to the car business this year. "It will be weaker," admits Ford Chief Executive Jacques A. Nasser. He quickly adds: "But we're still forecasting industry sales that begin with a 1 and a 5."

Indeed, 15 million cars and light trucks is this year's sales consensus among industry analysts. Low interest rates, a robust job market, and rising wages will keep autos rolling out of showrooms.

That lofty sales level is going to cost, though. Detroit may lay out the biggest rebates since the last recession. J.D. Power & Associates Chief Economist Paul Ballew estimates that auto makers spent an average of $1,200 per vehicle on incentives at the end of 1998, up $100 from 1997. And this year, the industry may slap on an additional $100 to $125 per vehicle to prop up sales. The rebates will drive down the average purchase price by 1%, to $22,750, predicts Ballew. "We'll see incentive wars in '99," he says. "We'll have phenomenally high incentives."BEETLEMANIA. Even once rebate-proof light trucks are showing weakness. DaimlerChrysler has $1,000 rebates on its minivans, Ford Motor Co. is offering cut-rate financing on the Ford Explorer, and General Motors Corp. is discounting its sport-utility vehicles by $1,000 to $3,500. And with 900,000 SUVs coming off lease in 1999, good deals on slightly used wheels will abound, putting pressure on new models. The fat SUV profit margins that have been stuffing Detroit's pockets will plunge nearly 20% over the next two years, to an average of $6,500 per vehicle, predicts Merrill Lynch & Co. auto analyst Nicholas Lobaccaro.

Still, the truck juggernaut seems unstoppable this year. Sales of minivans, sport-utilities, and pickup trucks grabbed more than half of the U.S. auto market for the first time ever in November, 1998--and they could hold a slim majority for all of 1999, analysts predict. Good thing, too, because traditional passenger cars remain money losers. With Detroit piling on the rebates to move the metal, the average purchase price of a passenger car will fall 2% this year, to $20,580, predicts Ballew.

U.S. cars are getting hurt by more than just the popularity of trucks. Overseas rivals are simply doing a better job of satisfying customers. "The Europeans are selling every car they can build, but Detroit is struggling," says Wesley R. Brown, auto consultant at Nextrend Inc.

European cars are proving there's a vibrant market right under Detroit's nose for good design and engineering. The Volkswagen Beetle's wild success in 1998 helped boost VW's U.S. sales more than 60%. Analysts expect VW will do even better this year with the launch of a redesigned Jetta sedan and Golf small car. Mercedes-Benz will also grow briskly--and even threaten Detroit's lead in luxury car sales--with a new S-class sedan starting at $69,000. That's a price cut of 10%. Overall, European auto makers will boost their share of the U.S. market to 5.8% in 1999, from 5.1% last year, Brown predicts.

Asian carmakers are also expected to gain ground. Their share will rise 1.1 points, to 25.6%, Nextrend projects. Most of the gains will go to Toyota Motor Corp. and Honda Motor Co. These two will be fighting a pitched battle for top-selling car honors, with the Toyota Camry defending its 1998 title against the Honda Accord.

However, Detroit is even more worried about Japanese plans to invade its truck turf. Market watchers expect Toyota and Honda to make inroads with hot new models like the Honda Odyssey minivan and Toyota Tundra pickup truck. But Detroit remains confident it can fend off the Japanese truck threat, as it cruises into its eighth consecutive good year. "I don't expect consumers will roll over and stop spending," says Ford Chief Economist Martin B. Zimmerman. J.D. Power predicts the combined share of GM, Ford, and DaimlerChrysler will rise to 73% from 71.6%, thanks mostly to GM's recovery from its strike last summer. Analysts expect the three auto makers to earn a combined $19.1 billion, up 18.6% from last year's $16.1 billion.

How will Detroit keep the profits flowing even as sales are slowing? By continuing to slash costs. The three companies have pledged a crash diet in 1999, reducing costs by as much as $6.4 billion. That's on top of the billions they have wrung out since the mid-1990s. Ford, for example, has cut $700 per vehicle in just the last two years, says Zimmerman. The auto makers are squeezing suppliers for savings while pruning product development costs and payrolls.MORE TAKEOVERS? That keen eye on costs is critical in an industry glutted with overcapacity. Auto factories around the world can spit out 20 million more cars and trucks than the global market needs. Besides putting pressure on prices and profits, that excess capacity is driving consolidation. Daimler Benz' stunning $35 billion acquisition of Chrysler in 1998 proved that anything can happen in the auto business. Says Ballew: "Nothing would surprise me anymore."

Industry insiders expect the next big buyout to come from Ford, which is sitting on a staggering $23 billion pile of cash. BMW and Volvo have both been rumored as takeover targets, but the Europeans deny it, and Ford remains coy. "We like having all that cash," deadpans Nasser. "That places us in a very strong strategic position." Ford's cash generation will remain peppy this year as its earnings hit $6.8 billion, nearly keeping pace with 1998's expected record profit of $7 billion, predicts Burnham Securities auto analyst David B. Healy.

While its Ford nemesis looks to bulk up, General Motors is slimming down. This year, GM will unload its huge Delphi auto-parts unit. The Delphi spin-off will begin in the first quarter with a $1.5 billion initial public offering--and more than 200,000 workers will move from GM's payroll to the "new" venture. On the heels of the Delphi move will come this summer's national contract talks with the United Auto Workers. So 1999 shapes up as another year of difficult labor relations for GM. But if the No. 1 auto maker can avoid a crippling strike, Healy believes it will nearly double earnings, to $5 billion. That's still shy of the $6 billion in operating earnings GM banked in 1997, but its overseas operations have suffered a 62% decline in profits since then.

For DaimlerChrysler, pulling off the biggest industrial merger in history will be the main challenge this year. While the two companies have mostly complementary product lines, their cultures couldn't be more different. Blending American brashness with buttoned-down German stodginess is going to be really tough, says Healy. But Wall Street is optimistic: A First Call Corp. survey of analysts predicts DaimlerChrysler's earnings will grow 14% this year, to $7.3 billion.

On Main Street, though, car dealers are cutting their profit projections and bracing for dangerous curves ahead. "What goes up must come down," shrugs Frank Ursomarso, a Pontiac and Ford dealer in Wilmington, Del. So 1999 may be a letdown from 1998, but it should be easy to take--even if it does mark the beginning of the end for an extraordinary period of expansion for the auto industry.By Keith Naughton, with Kathleen Kerwin, in DetroitReturn to top


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