Motown Slowdown

What's behind the slump at the Big Three-and can they pull out of it?

After five years of remarkably steady auto sales, Detroit's Big Three were just getting used to prosperity. Executives even began to talk about the end of the boom-and-bust cycles that had always bedeviled the business. With the U.S. economy purring along, they reasoned, they could count on moving their metal predictably and profitably into the 21st century.

But a chill wind blew through Motown last month. In April, a month when consumers traditionally storm the showrooms, each of the Big Three suffered a sales slump. At General Motors Corp., sales were off 5% from the previous year. Ford Motor Co. was off 4% and Chrysler Corp. down 11% as passenger car sales sputtered.

A PEAK. Chrysler Chairman Robert J. Eaton says the lackluster performance was expected. "We knew it was going to be a tough month," he says, "and it was." But now executives are saying that instead of expanding slightly this year, as they predicted at the start of the year, the U.S. car market will be flat in 1997. Worse, thanks to a surge in imports fueled by weak Japanese and German currencies, the Big Three will almost certainly lose market share.

Suddenly, analysts who had been predicting a stellar year for Detroit are on the lookout for a good old-fashioned slowdown. "I think, from a cyclical standpoint, that we've reached a peak," says Maryann Keller, an analyst with Furman Selz Inc.

That's not just bad news for Detroit. Tepid auto sales have often been a harbinger of slower economic growth. "It's a foreshadowing of a slow period in the second half" of 1997, says David L. Littmann, senior economist at Comerica Inc. Indeed, in a recent survey, leading economists predicted that economic growth will drop to a 2% annual rate by the fourth quarter.

While the auto industry is no longer the sure barometer it once was, troubles in Detroit can still reverberate through the economy. "It's one of the largest swing factors," says economist Diane C. Swonk of First Chicago NBD Corp. She figures, for example, that a crippling 17-day strike at GM plants in 1996 shaved one percentage point off the nation's economic growth rate.

The auto year certainly started on a different note. After sales of 15.1 million light vehicles in 1996, industry economists and Wall Street analysts predicted 1.3% growth, to 15.3 million units, in 1997. With GM introducing a string of new models, and Chrysler and Ford feeding the appetites of truck-hungry consumers, a slowdown seemed unlikely. But the Big Three began to run out of gas early in the year. Altogether, they sold 4% fewer vehicles in the first four months of 1997 than during the same period a year ago.

Yet the economy remains strong, while unemployment and inflation remain low. So what happened to Detroit's momentum? One huge factor has been inroads by foreign carmakers. Toyota Motor Corp.'s sales were 19% higher for the first four months of 1997 than in the same period of 1996, thanks in part to its popular Camry. And German luxury carmakers cleaned up in April. BMW finished the month 33% ahead of April, 1996.

Detroit auto execs do complain about the cheap yen and the pricing advantage that it gives the Japanese imports. But they also say that consumers are holding on to their money because they fear additional rate hikes by the Federal Reserve Board will hit their pocketbooks. Economist Littmann figures that a quarter-point hike in mortgage rates, for example, costs the auto industry 100,000 vehicles. "The only negative is people's concerns about interest rates," says Robert L. Rewey, Ford's group vice-president for marketing and sales. Jack A. Terhar Jr., a Ford dealer in suburban Denver, agrees: "Our business is relatively flat, and I can only think that the consumer is leery of interest rates."

The pause began in January. In that month, Ford and Chrysler had narrow gains over the previous January. But they had poorer year-to-year comparisons in February, March, and April. GM beat last year's sales in March but lagged in the other three months of 1997. Chrysler's Eaton blames weak sales on low lease rates on Japanese models. But that doesn't account for the 3% drop in Chrysler's truck sales. Products such as the Dodge Ram pickup, Town & Country minivan, and Jeep Cherokee are down significantly. "You can't blame the 11% decline in Dodge Ram sales on the yen-dollar situation," says independent auto analyst Scott F. Merlis in Westport, Conn.

To jump-start sales, the Big Three have assembled plenty of incentives for consumers. Ford has given buyers the choice of a $1,000 cash rebate on its Taurus model or a 1.9% financing rate on a 48-month loan. Chrysler has offered cut-rate financing options in lieu of rebates. And GM has offered $1,000 rebates on its Chevrolet Blazers and GMC Jimmys. Furman Selz's Keller predicts "a lot of incentives on the light-truck side," a scenario that would have been unthinkable in 1996. And according to Comerica's Littmann, new-car prices are only 1.3% higher than a year ago--the smallest increase in seven years.

MUDDY PICTURE. Detroit execs certainly aren't pushing the panic button yet. Chrysler still predicts 1997 sales of 15.3 million cars and light trucks. "We had a lousy month," says one Chrysler exec. "What does it mean? Nothing." But what seemed like a sure bet for a 15.3 million-unit year now appears dicey. April's seasonally adjusted selling rate was a disappointing 14.7 million vehicles. "You start to ask whether we are slipping into a lower gear," says Merlis. "It's too early to say it's over, but May sales will tell us a lot."

Labor problems at GM and Chrysler could further muddy the picture. Chrysler and the United Auto Workers reached a tentative agreement to settle an engine-factory strike on May 7. Meanwhile, a month-long walkout in Oklahoma City has slowed GM's launch of new Chevrolet Malibus and Oldsmobile Cutlasses. And sales of full-size GM pickups have been limited by a strike in Pontiac, Mich. Yet another strike looms at a GM assembly plant in Kansas and at several key parts plants. "There's a chance we could have seven or eight different strikes this year," says Merlis. Between strikes, an import onslaught, and leery consumers, Detroit execs may have reason to rethink the idea that boom-and-bust cycles are over.

— With assistance by Keith Naughton

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