The auto industry has gotten used to operating in overdrive. But after an unprecedented five-year boom, carmakers finally are downshifting. Most executives and analysts expect sales to fall by 5.7% in 2001, to 16.5 million vehicles.
Admittedly, they've been fooled before. In 2000, sales were projected to fall 4% but instead finished the year up 3.6%, at a record 17.5 million. It was the third year in a row that forecasters were surprised by better-than-expected sales.
So why do so many analysts believe that the slowdown is real this time around? The cooling economy has a lot to do with it. But there's more. "Customers are burning out on buying new cars," says David B. Healy, a Burnham Securities auto analyst. U.S. auto sales will fall by a million units in 2001, and most analysts expect the majority of the dip to come right out of the showrooms of the Big Three: General Motors (GM), Ford (F), and DaimlerChrysler (DCX). Analysts predict that the domestic auto makers, which have already lost five percentage points of market share since 1997, will lose an additional 1.5 points in 2001. Most believe that Asian auto makers, primarily Toyota Motor Corp. (TM) and Honda Motor Co. (HMC), will grab the sales away.
The Japanese have lately extended their offerings to match the Big Three across nearly every product group. The U.S. makers' sales will be worst hit among value-based brands--mostly because they cater to blue-collar buyers who are the first to suffer during a downturn. Wilmington (Del.) dealer Frank Ursomarso has already seen sales fall and expects his Pontiac/GMC and Ford shops to see the worst sales losses.
The most troubling signs of slowing auto sales are at the factory gates. Layoffs, which simply disappeared over the past three years, returned late in 2000 as Detroit's auto makers began temporarily shuttering or slowing down factories to clear out excess inventories. The Big Three are expected to continue to shed production this year, too.
The slowdown will hurt each of the Big Three, but Chrysler enters 2001 in the worst shape. The unit of Germany's DaimlerChrysler lost $512 million in the third quarter. And fourth-quarter losses are expected to be at least $1.2 billion. DaimlerChrysler CEO Jurgen E. Schrempp admits a turnaround for Chrysler Group is probably a year or more away--and even then, Chrysler has its work cut out for it. The auto maker has to balance its factory production and sales incentives and better coordinate its leasing programs--which together crippled its profit outlook in 2000. A new management team, under German Dieter Zetsche, is expected to have a turnaround plan in place by February. Zetsche and his team have already begun trimming production. And suppliers have been asked to cut prices by 5% this year and a further 10% through 2003.
NEW JEEP. A few developments show promise for Chrysler. Sales of its bread-and-butter minivans should recover a bit, thanks to a redesign. Moreover, the launch later this year of a Jeep Liberty sport-utility vehicle and a redesigned Dodge Ram pickup will bolster an aging product line.
Chrysler's rivals across town, Ford and GM, are in better shape. But both are still looking at some serious belt-tightening. And both say they'll use production adjustments, rather than costly incentives, to cope with slowing demand. Ford market sales analyst George Pipas expects current incentive levels to hold steady.
Ford's biggest market challenge in 2001 may be the launch of a redesigned Explorer. The company hopes the more refined--and safer--version of its popular SUV will help dissipate some of the fallout from the Bridgestone/Firestone tire-related accidents that dogged Explorer sales last year. Ford also will have a full year of production for its new, smaller SUV, the Escape, which got off to a fast start in the fall but was plagued by multiple recalls.
GM is taking more aggressive action. It's cutting production by 14% in the first quarter of 2001 to thin inventories. CEO G. Richard Wagoner Jr. is telling executives to continue the hard-nosed cost-cutting efforts the auto maker started last summer. "When the market drops that quickly, the industry has to adjust," says William J. Lovejoy, vice-president for vehicle sales, service and marketing.
GM's announcement in December that it will phase out its limping Oldsmobile Div. could further erode GM's market share, which has been on a steady slide for more than 30 years. Lovejoy nonetheless expects that GM will have a strong sales year. It's redesigning its family of midsize sport-utility vehicles--the Chevrolet Trailblazer, Oldsmobile Bravada, and GMC Envoy--and will have new entries, including the Chevrolet Avalanche SUV-pickup hybrid and the carlike Buick Rendezvous SUV. "We have new products, and we won't have capacity constraints on hot products like the Chevrolet Suburban and Tahoe," says Lovejoy.
But everywhere GM looks, it will find the Japanese. Toyota is unleashing an array of new trucks and SUVs, driving right into Detroit's home turf. In 2001, Toyota will benefit from a full year of sales for its big new Sequoia pick-up and its rejuvenated RAV4 SUV, both of which debuted in the fall. It will also pick up momentum from a new midsize SUV called Highlander and a fresh, more masculine look in its line of small pickups. "It's hard to see any scenario where Toyota struggles," admits Chrysler's Chief Economist W.Van Bussman.
YOUTH PUSH. Toyota may not be looking forward to the marketwide slowdown, but the company is sanguine about sales growth in 2001. J.Davis Illingworth, senior vice-president for planning and development at Toyota Motor Sales USA Inc., expects sales to improve in 2001. New products such as the Highlander and Sequoia and the Lexus IS 300, an entry-level luxury sedan, will add volume to help offset any soft sales in other lines, he predicts. If Toyota has a weakness, it is the aging of its customer base, Illingworth says. The subcompact Echo was supposed to help attract younger buyers, but so far it has been only marginally successful. Illingworth hints at strong efforts in 2001 to appeal to the under-30 crowd.
Honda will also gain ground in 2001, especially in its Acura luxury division, which has a big hit with its just-introduced MDX sport-utility. Acura is also coming out this year with a redesigned Integra and a souped-up version of its TL coupe. The Honda Div. has new products, too. Its redesigned Civic compact, introduced in the fall, and a new CR-V sport-ute, coming later in 2001, "are going to be good shots in the arm," says Thomas G. Elliott, executive vice-president of American Honda Motor Co. Honda's popular Odyssey minivan is just about sold out, but when a new factory in Alabama comes on line in the fall, sales should skyrocket. So, while Elliott agrees overall industry sales will shrink in 2001, he believes Honda will sell about 50,000 more vehicles than it did last year. "It always comes down to product," says Elliott. "In any down market, there can be winners and losers. We plan on being one of the winners."
With the Japanese accelerating and the U.S. auto makers braking, this year could see some portentous reordering of the market. Toyota is gaining on Chrysler, the No. 3 brand in the U.S. However the year unfolds--even if 2001 meets all the gloomy expectations--it shouldn't be an outright disaster for anyone but perhaps Chrysler. "We're just downshifting," says Diane C. Swonk, chief economist at Bank One Corp. in Chicago. "It will still be a good year," agrees Burnham's Healy. "It just won't be a record one."