How 1998 looks will all depend on whether you're selling wheels or kicking tires. For car buyers, the year promises lower sticker prices and bigger rebates. For auto makers, especially Detroit's Big Three, those bargains will make it harder to make a buck. "It is a tremendous buyers' market," says Ford Motor Co. President Jacques A. Nasser. "Customers are getting more and more value."

The final months of 1997 paint the picture: Every time sales flag, manufacturers slap on new marketing incentives--rebates, a sweet lease deal, or low interest rate financing--and business perks up again. But when the deals expire, customers stay home. "It becomes a test of wills between the factory and the customer to see who can hold out longer," says Garden City (Mich.) Chevrolet dealer Gordon Stewart. "And the customer always wins."

For all that, the forecast is hardly bleak. With interest rates and unemployment low, consumer confidence is at its highest since 1965, increasing the likelihood of large purchases. Still, finicky customers are a telltale sign that pent-up demand for cars has been largely exhausted. In 1998, U.S. sales of cars and light trucks will likely drop 2%, to about 14.7 million units, from just above 15 million in 1997, according to some industry analysts and consultants. Says G. Richard Wagoner Jr., president of General Motors Corp.'s North American operations: "I think it's going to be a dogfight out there."

MAKING THE NUT. To lure consumers, auto makers have been forced to forgo the once-annual ritual of the new-model-year price increase--and, increasingly, are cutting the prices of vehicles when they're launched. With inflation low and personal income strong, car buyers are seeing their first signs in years of real price cuts. Buying a new car requires about 25.6 weeks of a typical family's net income, down from a peak of 26.4 weeks in 1996. J.D. Power & Associates Inc. forecasts that auto prices will fall by an average of 2% this year.

Even with lower sticker prices, marketing incentives are climbing. Merrill Lynch & Co. analyst Nicholas Lobaccaro figures that incentives surged 57% in the past year, to a current average of $1,200 per vehicle. "Car incentives are already at recessionary levels," he says, predicting that the average will climb an additional $150 to $200 in 1998. Auto makers hope fresh designs will help them avoid incentives. "New models are the best remedy," says John G. Middlebrook, general manager of GM's Chevrolet Div. But older models need more help, and when rivals start dangling rebates, it's hard not to join them. "At some point, you just get sucked in," says Middlebrook.

Auto makers have been squeezing costs to hold down sticker prices, but piling on incentives carves into profits. "If they want to keep sales high, they may have to sacrifice some profits," says J.D. Power analyst Lincoln Merrihew. "It's going to hit margins for companies that haven't been aggressively cost-cutting." In 1997, all of the Big Three made large cost reductions, but maintaining that pace will be tough.

Even Detroit's longtime profit haven in trucks is being challenged as more foreign rivals enter an increasingly saturated market. Some auto industry analysts believe trucks are beginning to lose their luster--even the mighty sport-utility vehicle is destined to falter. "SUVs have been the `in' vehicle, but once that trendiness wears off, people will come to recognize the deficiencies of those vehicles," predicts auto consultant Christopher W. Cedergren, of NexTrend in Thousand Oaks, Calif. "That shift is now starting to happen."

Another ominous sign: Used-car prices, a harbinger for the new-car market, started declining in 1997. It won't help that the leasing boom that took off mid-decade should continue to provide a plentiful supply of used cars as 3.8 million cars come off lease during 1998, up 12% from 1997, says Cedergren.

The ailing yen spells more bad news for Detroit. Ford Chairman Alexander J. Trotman bemoans the benefit to cars and components that Japan exports. "It will increase the trade deficit and increase trade tensions," he says. "I expect it to become more of an issue over the next few months."

The yen effect is already showing up in the prices of Nissans, Hondas, and Toyotas. Japanese cars designed a few years ago to make money when the yen was close to 90 to the dollar are immensely more profitable with the yen at 130. This has allowed Japanese auto makers to introduce models with more features at lower prices than the cars they replace. For instance, Honda Motor Co. cut $950 from the price of the new V-6 Accord, which starts at $21,945. "They can cut prices and still repatriate very good earnings back to Japan," says Kurt Brown, an analyst with Standard & Poor's DRI.

The Japanese are likely to increase their share of the U.S. light-vehicle market from 1997's 23.5% due to the weak yen, cost-cutting, and popular new models. The race for the best-selling car in America this year, a crown held by Ford's Taurus from 1992 through 1996, is expected to pit Toyota's Camry against Honda's Accord. "Toyota and Honda should both set sales records," says NexTrend's Cedergren. He also predicts that European auto makers will extend their 1997 gains, racking up in 1998 their best sales since the early '70s and adding to their 3.6% market share at Detroit's expense.

"LITTLE MURKY." Look beyond U.S. shores, and the picture is even less certain. For most of the world, "the present is shining, but the future looks a little murky," says Mustafa Mohatarem, GM's chief economist. However, the go-go markets of Southeast Asia and Brazil where carmakers are setting up shop have nose-dived in recent months. Many of the Asian economies could take several years to recover, at best.

Even so, the Asian slowdown isn't likely to put a major crimp in the Big Three's 1998 earnings. Ford, which recently dropped the slow-selling Aspire and Probe and put the Thunderbird and Cougar on hiatus, will sacrifice some market share from lost sales of those models. And 1997's record earnings, spurred by $3 billion in cost reductions, will be hard to match. Ford's net will slip 5% in 1998, to $6.45 billion, on automotive sales of $128.4 billion, estimates Lehman Brothers analyst Joseph Phillippi.

General Motors, which launched nearly a dozen models in 1997, will continue to fight its battle to hold on to customers. GM finally saw its market share perk up to about 31% this fall after decades of decline, but will be hard put to maintain that level as it launches new versions of several high-volume pickup trucks and compact cars, including the Chevy Silverado and Pontiac Grand Am. The new year will also test the popularity of a half-dozen GM midsize cars introduced in the past year, and analysts will be watching to see if the company is forced to offer rebates or financing deals. Phillippi expects GM's automotive earnings to rise 4.8% in 1998, to $5.85 billion, on revenues of $163 billion.

Chrysler Corp. is expected to perform better in 1998 after slumping in 1997 when its new Dodge Intrepid and Chrysler Concorde sedans and Dodge Durango sport-utility vehicle sapped profits. Chrysler's new president, former supply chief Thomas T. Stallkamp, is ratcheting up the pressure to cut vehicle development costs and improve quality, after overseeing a $1.5 billion reduction of supplier costs in 1997. "[Of] the final cost from start to finish of delivering a vehicle and selling it, probably a third of that is waste right now," Stallkamp says. Phillippi forecasts the No.3 auto maker will earn $3.15 billion in 1998, up 13.6% from 1997's disappointing levels, on automotive sales of $63.4 billion.

The bottom line: The scramble to squeeze costs and shrink sticker prices is good news for consumers, but it will make a challenging year for Detroit.

Before it's here, it's on the Bloomberg Terminal.