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Let's Make A Deal

News: Analysis & Commentary: AUTOS


Last September, Irvine (Calif.) car dealer John B.T. Campbell III had to beg Detroit to send him more vehicles. Even on overtime, auto makers couldn't keep up with runaway demand. Fast-forward a few months. Interest rates surged, confidence flagged, and in January, the bottom fell out. "All of a sudden, we were buried in cars," Campbell says. "I told Ford: Don't even think of sending us a single car for 90 days."

Now, on the eve of the 1996 model year, dealers say the feast-or-famine market has leveled out. "After a dreadful spring and a muddle-through summer, I would say we're in a recovering fall," says John Casesa, auto analyst at Wertheim Schroder & Co. Consumer demand is reviving a bit, and analysts say U.S. light-vehicle sales should reach 14.7 million units this year, down modestly from 1994's 15.1 million pace. For next year, even once-bearish prognosticator Lincoln Merrihew at DRI/McGraw-Hill is forecasting an increase to a 14.9 million sales rate. The supply side of the picture also is brighter: Detroit, chastened by a midyear glut of unsold cars, has slashed fourth-quarter production plans by 5.7%.

GIVEBACKS. Merrihew figures the situation in autos bodes well for the U.S. economy overall. A more torrid recovery in sales--which would strain supplies of parts and raw materials--might help rekindle inflation. The current prognosis, he says, supports the view of many economists that the Federal Reserve can continue to engineer a soft landing to moderate, sustainable economic growth.

One nagging worry: With the average price of a new car now hovering just below $20,000, up about $3,500 since 1990, many executives fear a looming affordability crisis. Says G. Richard Wagoner Jr., GM's president of North American operations: "We believe affordability is a big issue."

To soften the blow, and reignite demand, auto makers have cushioned price hikes with big cash rebates and tempting lease deals. These days, 32% of all U.S. auto sales are leases, many at bargain rates, up from 27% a year ago, says Art Spinella of CNW Marketing in Bandon, Ore. And Infiniti had to resort to a $7,000 rebate this summer to jump-start sluggish sales of its Q45 luxury sedans. Even Europe's BMW and Mercedes now routinely plug cut-rate leases.

For 1996, it's going to take more enticements, even on new models, to keep sales up. Laments Russell M. Darrow Jr., the West Bend (Wis.) owner of dealerships selling Chrysler and Japanese brands: "The incentives turned it into a buyer's market."

How much are buyers calling the shots? Even Chrysler Corp., the stubborn holdout in leasing, has caved. This summer, it began offering $299-a-month leases on its popular Jeep Grand Cherokee. Now, Chrysler plans to slap attractive leases on its fast-selling new Dodge Caravan and Plymouth Voyager minivans. Concedes Chrysler President Robert A. Lutz: "A year ago, we would not have contemplated introducing the minivan with a lease deal."

Detroit knows all these givebacks spell reduced profits. The steep costs of launching new models--and the lost output and sales during changeovers--will also take a toll. Chrysler's profits are suffering at least temporarily as the company introduces the next generation of its mainstay minivans. Ford Motor Co. faces an even bigger profit bite as it brings out new versions of three of its biggest sellers: the Taurus family, F-series full-size pickup truck, and Escort subcompact, which accounted for 40% of its total U.S. sales last year. As a result, analysts expect Ford's North American auto unit to post a small loss for the third quarter. General Motors Corp., with few new-model launches to drag down profits, "will likely be the only one of the Big Three to earn more than last year," says Casesa.

REARGUARD ACTION. But GM's lack of new offerings will take its toll on market share, now at 32%. Not until the 1997 model year will it be able to tempt buyers with a dozen or so new vehicles, including an all-new Chevrolet minivan. Chrysler's own redesigned minivans could help it add a bit to its 15% share. But Ford's 26% market share is likely to slip at least temporarily during its multiple model changeovers.

To try to keep its share of the market steady, Ford is working to woo diehard import owners to its 1996 lineup. It is mailing owners of rival Honda Accords and Toyota Camrys invitations to lease a 1996 Taurus for two years, or return the car after six months if they don't like it. Plus, it is throwing $250 cash offers at Taurus owners who lease a new model.

Japanese carmakers, meanwhile, are unveiling a new tactic to counteract their largely yen-induced $2,000 to $3,000 per-car price disadvantage: new vehicles engineered to cost significantly less. Honda cut the price tag of the 1996 Civic by an estimated $800 per car. Nissan also has stepped up its efforts to squeeze costs out of models such as Infiniti's I30 entry-level luxury car. And Toyota Motor Corp. is pushing hard to build more vehicles in lower-cost U.S. plants. On Sept. 11, it announced it will begin building its T100 pickup truck, souped up with a V-8 engine, in a new North American plant by early 1999.

Detroit is fighting its own rearguard action to lower base prices. Both Chrysler's new minivan and Ford's new Taurus made antilock brakes optional rather than standard, for instance. Overall, Ford is raising its 1996 prices by an average of 2.5% on comparably equipped vehicles; GM by 2.7%; and Chrysler by 1.4%. The dollar's recent move over 100 yen has given Japanese car companies a slight breather, and AutoPacific Group Inc. analyst Christopher W. Cedergren estimates they will increase prices by only an average of 2% this fall.

So what's hot for 1996? Trucks and sport-utility vehicles still dominate. A slew of new sport-utilities, from Toyota's snappy little RAV4 to Nissan's revamped Pathfinder, will join the red-hot field. But even on these products, lease deals and rebates are likely. Splashy new models alone just don't spark sales as they once did. Shrugs Lutz: "People don't believe anymore that it's vitally important or prestigious to have the latest and the greatest." Car dealers such as John Campbell fervently hope he's wrong.


Demand may be reviving, but lease deals and rebates are taking a bite out of carmakers' bottom lines

-- GENERAL MOTORS A new Saturn subcompact is its only significant new model. Next year is another story: GM has about a dozen new vehicles coming. Until then, market share, which has fallen to 32%, may continue its decline.

-- FORD America's best-selling car and truck--the Taurus and the F-series pickup--get updates. Related costs may leave Ford with a third-quarter loss in U.S. auto operations, and the company's market share, now 26%, may slip as it gears up.

-- CHRYSLER The new Sebring convertible and a new minivan are causing a stir. Chrysler hopes the cars will light a fire under weak demand and boost its market share above the current 15%.

DATA: COMPANY REPORTSBy Kathleen Kerwin, with Bill Vlasic and Keith Naughton in Detroit and Larry Armstrong in Los Angeles

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