Car salespeople are inveterate optimists. Just listen to Gary J. Leh man, general manager at Lupient Buick in Minneapolis. Sure, March sales are off 25% from last year. But Lehman sees a silver lining. More people are taking cars out for a spin, rather than just kicking tires. Better yet, more browsers "are bothering to ask for a price."
With the auto industry suffering its worst slump in a decade, Lehman isn't the only one grasping for signs of a turnaround. Yet despite a few rays of hope, the lingering credit crunch and general economic woes mean a rebound in auto sales isn't likely before the second half--if then. Car sales are ticking up from levels just before the gulf war, but not much. As Chrysler Corp. Vice-Chairman Robert S. Miller Jr. puts it: "It's gone from disastrous to merely awful."
Detroit, in fact, is racking up its biggest quarterly losses ever. "As sure as we are sitting here, we'll all lose $3 billion in the first 90 days" of the year, Chrysler Chairman Lee A. Iacocca told the Detroit Free Press on Mar. 12. That would bring the collective losses of General Motors, Ford, and Chrysler to $5 billion for the six months ending Mar. 31. To be sure, profitable foreign and nonauto operations help stem the red ink. The Big Three will hold their losses to a combined $2.1 billion for the year, predicts PaineWebber Inc. analyst Ann C. Knight. But that's hardly stellar.
And this time, Japan's carmakers are hurting, too. Sales of Japanese cars and light trucks in the U. S. fell 13.5% in January and February--the first sharp drop ever (table). Japanese makers thrived in past downturns, when gasoline prices soared. But this time, gas prices have stayed low, and everyone is getting clobbered. Honda Motor Co., Japan's leader in the U. S., had a 22% drop. That will be enough to hand Honda a down year for 1991, even though it sees sales rising from here on out. To help put zip in sales of its Accord, last year's best-selling model in the U. S., Honda boosted dealer incentives as high as $900, up from $300 in February.
THINKING AMERICAN. Such heavy, unprecedented discounting is slicing into Japanese margins. Yoshikazu Hanawa, an executive managing director with Nissan Motor Co., estimates that Japanese carmakers' collective profits in the U. S. are down about 10% so far this year. And with the car market slumping in Japan, pressure is building on some smaller companies to drop out. Even in a more buoyant market, for instance, Subaru parent Fuji Heavy Industries Ltd. blamed poor U. S. sales for its $187.5 million loss in the fiscal year ended in March, 1990. The rich, meanwhile, get richer. Toyota Motor Corp. predicts it will sell 1 million cars and trucks in the U. S. in 1991--up just 0.6% from 1990 but up nonetheless. Mazda Motor Corp. and Mitsubishi Motors Corp. are doing well, too.
Detroit took heart when consumer confidence turned around rapidly in early March, according to preliminary figures compiled by the University of Michigan's Institute for Social Research. The institute hasn't released its latest reading to the public, but Prudential Securities Inc. reports that the institute's consumer-sentiment index, which tumbled from 88.2 last July to 70.4 in February, spurted to 88 in early March (chart). What's more, car buyers may be more inclined to buy American. In a BUSINESS WEEK/Harris Poll, 64% of those queried say the war left them less likely to buy Japanese products.
That finding wouldn't surprise Glenn S. Ritchey of Daytona Beach, Fla., who owns seven domestic and Japanese dealerships. "Now, I think more people will think about buying domestic," he says. Ritchey is hoping to put his money where his mouth is by adding two new "import killer" Saturn outlets to the one that he now owns.
In the current environment, however, auto makers aren't popping any corks. "Consumer confidence may be up, but consumers don't have any money," says William E. Odom, Ford Motor Credit Co. chairman. Auto repossessions jumped 64% in 1990, to 1.18% of the value of outstanding auto loans, according to a preliminary survey by the Consumer Bankers Assn.
No wonder lenders are gun-shy. In Boston recently for an auto-finance conference, bankers huddled in seminars with such titles as "Collections in a Recessionary Environment: A Strategic Approach." Dealers are turning more to the carmakers' finance companies--but credit is tightening up there, too. One result: An estimated 30% to 35% of all car-loan applicants are being turned down, compared with 10% to 15% in more normal times, says Thomas Webb, chief economist for the National Automobile Dealers Assn.
War and recession aside, some of Detroit's worst woes are self-induced. To pump up volume, the Big Three have heavily subsidized sales to rent-a-car companies. But now the tactic is backfiring: Rental cars are coming up for resale at cut-rate prices after as little as five months, competing with new cars. For instance, John Hynansky, owner of Winner Group Inc., a big Wilmington (Del.) dealer that sells everything from Fords and Lincolns to Mitsubishis and Nissans, figures he can buy a six-month-old Ford Taurus out of a rental fleet for $8,000 or less and resell it for around $9,000. The car would cost $12,000 new.
USED BOOM. To give new cars more breathing room, Ford and GM recently started pressuring rental companies to keep cars in service longer. But that won't keep people from buying other kinds of used cars, which they've been doing in record numbers. And Clifton E. Haley, chairman of Budget Rent a Car Corp., says he may just buy more European models and fewer Fords, even though Ford is a big Budget investor.
The upshot: not much relief in sight for Detroit. Despite the sales slump, Japan's share of the U. S. car and light-truck market notched up more than a point in January and February--to 25.3%, if you count Japanese models that Detroit sells under its own brands. Even the beleaguered Europeans' market share is holding steady, at about 3%. So if new-car sales do rise gradually late this year, there's no guarantee that the Big Three will be big winners. That makes talk of a strong turnaround anytime soon about as believable as that old used-car-lot saw: "This cream puff has only been driven to church and back on Sundays."