Industry Outlook -- Basic Industries: AUTOS
Demand for minivans and sport utilities should help Detroit keep on truckin', but car sales are flat--and the Japanese loom large in the rearview again
Detroit is hoping 1997 will be another year on cruise control, although nervous auto executives are keeping a foot poised over the brake pedal, just in case. The economic growth, low interest rates, and strong consumer confidence that have fueled three years of solid auto sales appear to promise another good year for the industry. Says one institutional investor with large auto-stock holdings: "People actually still have some jingle in their pockets."
Most industry watchers predict that U.S. car and light truck sales will hover close to last year's 15.1 million units. Says Ford Motor Co. Chairman Alexander J. Trotman: "It's more of the same, which I define as great."
PRICE SLICE. But the optimism is tinged with worry. The weakening of the yen sliced Detroit's average price advantage over Japanese models to $1,000, from $1,400, during 1996. The possibility of an economic downturn also concerns the auto industry, now that the economic recovery is six years old. Says First Chicago Corp. economist Diane C. Swonk: "After getting a real breather from the yen for years, the Big Three are seeing everything start to turn on them at once."
One bad omen: Used-car prices--usually a leading indicator for new-car sales--were soft most of the past year and sagged further in the fall. With huge numbers of off-lease autos swelling used-car inventories, that weakness will likely continue this year, says Christopher W. Cedergren, an independent auto consultant in Thousand Oaks, Calif. He estimates that just over 4 million vehicles will be coming off lease this year, vs. some 3.25 million in 1996.
The threat from Tokyo looms largest in Motown's rearview mirror right now. Many Japanese carmakers slashed costs when the yen soared. They're enjoying the fruits of those efforts now, even as the yen tumbles. This allows them to both fatten profit margins and cut prices on some new models. The Japanese should continue to make small gains in market share this year, reaching 23% of U.S. light vehicle sales, vs. 22.8% in 1996, says Cedergren. By the end of the decade, he expects the Japanese to approach their 1991 peak of 25.8%. Says Chrysler Corp. Chairman Robert J. Eaton: "Over time, I view them as our No.1 competitor."
The flat auto market will only intensify carmakers' battle for a piece of the pie. Says Delaware car dealer Frank Ursomarso: "People are going to be stealing from each other, trying to gain inroads against their competitors." The Japanese carmakers' higher profits will allow them to slap on rebates in any segment where sales cool. Detroit would likely follow suit. Already, 15% of all 1997 models carry rebates of $1,000 or more, says DRI/McGraw-Hill analyst Lincoln Merrihew. And that doesn't even include sweetened lease deals, he adds: "It's going to be a buyer's year."
Where the rivalry could get ugly is the stalled-out car market, which continues to lose ground to trucks, even as a raft of new cars hits the market. Nowhere is the glut greater than in family sedans. General Motors Corp. alone is bringing out a new Buick Regal and Century, Chevy Malibu, and Oldsmobile Intrigue and Cutlass, on top of those it introduced in late 1996. And the first of Chrysler Corp.'s next generation of LH sedans will arrive next fall. They're likely to face stiff competition from revamped Japanese entries: the Nissan Altima next summer and the Honda Accord in the fall. Merrihew advises watching for a battle royal for the best-selling car crown, as the Camry introduced by Toyota in fall 1996 challenges the new Accord and longtime titleholder Ford Taurus.
BLOOD SPORT. The other car battleground will be in the exotic realm of the sports car. Plymouth's Prowler hot rod and Chevy's latest Corvette will arrive this spring, along with the Porsche Boxster roadster and the sleek Mercedes-Benz SLK drop-top. They join the fray with the new BMW Z3 two-seater and Jaguar's sexy XK8 coupe and convertible.
Trucks are likely to continue fueling auto sales this year. Sport-
utility vehicles, pickups, and minivans are flying out of dealer Peter Jarvis' suburban New Jersey showrooms. "This is traditionally not thought of as truck country," Jarvis says. Now, though, "it's like Jeep Wonderland around here."
That's partly because the boxy, spartan Jeep has been transmuting itself into everything from cute little sportsters to testosterone-infused Rambo-mobiles. This year brings a macho new Dodge Durango and a civilized, carlike Honda CRV compact sport-utility vehicle. The CRV is just one of a stream of attractive new trucks that give Japanese auto makers their best chance in years of breaking Detroit's stranglehold on the lucrative truck segment. (Detroit still controls 86% of light truck sales, which now account for 43% of all light vehicle sales.) Toyota's new Sienna minivan, to be built in its Georgetown (Ky.) factory and based on the Camry chassis, will debut late this year. Even the Germans are getting into the act: Mercedes' new Vance (Ala.) plant begins cranking out the new M-Class "all-activity vehicle" early this year.
Chrysler will spend 1997 trying to squeeze more output from its plants to keep adding to its 16% market share. Its biggest challenge may be to match 1996's record sales and profits. Wall Street will be watching to see if the No.3 auto maker can keep cutting parts and engineering costs without sacrificing quality. Chrysler will earn $4.1 billion in 1997, up 8%, on sales of $60.7 billion, a 7% increase, according to Lehman Brothers Inc. analyst Joseph Phillippi.
Cost-cutting is key at Ford, which is telling employees it must slash spending by $2.5 billion this year. Trotman and Jacques A. Nasser, the new president of Ford Automotive Operations, are under pressure to keep the global Ford 2000 reorganization rolling. "You name me a cost element and we're pounding away at it," says Trotman. Without deep budget-slashing, Ford won't be able to shake the stigma of having Detroit's least-profitable auto operations. Lehman's Phillippi projects Ford's earnings will climb 31% this year, to $4.9 billion, as sales rise 12%, to $164 billion.
LABOR PAINS. GM's 1997 challenge is stopping its market-share hemorrhage. Sure, the No.1 auto maker has been losing share for nearly two decades, but last year was downright scary. Several lengthy strikes and the changeover of 25% of its product lineup, involving eight factories, disrupted sales in the second half of 1996, when market share dipped below 30%. GM is hoping share will rebound when the last of its new-model launches is wrapped up this summer. GM's earnings will soar 53%, to $6.1 billion, as sales jump 11%, to $160.6 billion, Phillippi says.
For GM to achieve numbers like that, it needs progress on the labor front. The new three-year contract the Big Three signed this fall with the United Auto Workers will allow GM, as well as Ford and Chrysler, some flexibility to shrink their blue-collar ranks in both parts-making and auto-assembly operations. However, GM could face local labor problems if it can't move beyond the adversarial relations that sparked several costly strikes last year.
GM is again counting on overseas markets for continued growth. Europe and South America are likely to remain steady profit engines. Ford, however, has stumbled badly in both markets, although it insists its European operations will get back in the black this year. All of the Big Three are looking, too, to Asia for immediate sales growth, but distant earnings. "In 10 years, India is going to be a larger market than China," predicts Chrysler's Eaton. With the U.S. market still healthy but unlikely to expand much further, such promising international opportunities are Detroit's best bet for long-term prosperity.By Kathleen Kerwin, with Keith Naughton, in DetroitReturn to top