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Commentary: Autos: Borrowing From The Future


If only General Motors (GM) and Ford (F) were in the finance business. Their lending arms rake in billions. But profits on autos at GM, Ford Motor, and DaimlerChrysler's (DCX) Chrysler Group have been hammered by the raging incentives war. And in spite of $5,000-plus rebates on some models, the Big Three's share of the U.S. market fell to a record low of 60.1% by late last year.

True, it was incentives like those -- and more modest deals from Japanese and European carmakers -- that kept car sales fairly robust through recession and war during the past three years. But now the tab is coming due. The deals that persuaded consumers to trade in their old models early stole demand from the future, sapping the rebound that typically follows an economic upturn. That's why most industry watchers expect U.S. car and light-truck sales in 2005 to total 16.6 million vehicles, roughly level with 2004's 16.7 million tally. "It appears that the pull-ahead we've worried about is happening," says Chrysler CEO Dieter Zetsche. "There is no pent-up demand."

The economy isn't likely to give carmakers a break, either. "This has been the best year of the cycle," says Comerica Bank (CMA) Chief Economist David Littman. "Without a tax cut, we won't repeat it." Real disposable income has been growing at better than 4%, he says, but it's all downhill from here. And when disposable income growth falls to 2.6% or less, he adds, auto sales nearly always decline.

Steeper interest rates could further deflate auto sales, as the cost of financing a new car rises. And, contends Chrysler Corporate Economist Van E. Jolissaint, "the biggest risk continues to be oil prices." Persistent high fuel prices would take a bite out of sales -- and not just for gas-guzzling sport-utility vehicles. Buyers whose budgets are dinged by high gasoline and heating-fuel prices could delay their car purchases, Jolissaint says.

Meanwhile, rising energy and commodity prices will cut into auto makers' profits. Higher steel prices have added as much as $500 to the cost of a vehicle, says Robert Schnorbus, chief economist at J.D. Power & Associates. But competition is so intense that most carmakers are eating the extra cost. "They fight tooth and nail for pennies in savings, so this is a tremendous burden," Schnorbus says. Detroit's 2005 dilemma will be how to turn off the rebate spigot. Every effort to wean consumers so far has resulted in an immediate plunge in Big Three sales. Cutting output would help, but domestic carmakers fear losing more share.

The only true escape from incentives is to sell better cars. At Chrysler, a new generation of minivans, plus the Dodge Magnum sport wagon and Chrysler 300 sedan, pushed sales up 3.2% in the first 11 months of 2004 -- with few or no incentives.

Ford is hoping that its newly launched passenger cars will provide the kind of sales kick in 2005 that it got from revamped F-series pickups in 2004. But it's too early to tell if the new cars will be hits. The all-new Mustang already looks like a winner. But analysts doubt that any of Ford's trio of new family cars -- the Ford Five Hundred and Mercury Montego sedans and the Ford Freestyle sport wagon -- will match the sizzle of Chrysler's 300.

GM is in the toughest position of all. The result of the auto maker's launch of five new models in 2004 was a half-point decline in market share, to 27.6%, through November. The product pipeline for the year ahead doesn't promise much relief. Says B. Craig Hutson, senior bond analyst at Gimme Credit, an independent bond research firm: "For GM, 2005 will be more of a hang-in-there year." Indeed, Detroit pundits are wondering whether GM's last-gasp December sales push is a "red-tag sale," as advertised, or a white flag of surrender.

Industry execs hope the incentives peak has passed. Yet if demand weakens, they may have little choice but to continue to dole out loans and discounts. Says Diane C. Swonk, an independent Chicago economist: "Unless carmakers want to give cars away, sales will fall." In that case, they'll be leaning on their finance units harder than ever.

By Kathleen Kerwin

With David Welch in Detroit


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