Car Shopping in a Recession

Auto sales continue to slump along with the overall economy. The cars that are showing any strength? Smaller, more fuel-efficient models

The current U.S. economic slowdown is kicking the Big Three right where it hurts—and when they were already down.

High gas prices, low consumer confidence, a shaky economy, and the housing and credit crisis have car buyers holding on to their wallets, entering the third year in a row of weaker auto sales. First-quarter sales this year were the worst since 2002, and 8% behind the year-ago quarter. Unless the automakers revert to their old form and dramatically cut prices—which they swear they won't do—2008 sales look to be the worst in at least a decade (, 4/1/08).

Worst of all, big pickup trucks and big SUVs are off the most, hurting General Motors (GM), Ford Motor (F), and Chrysler in both profit and volume. For every big truck that doesn't sell, the domestic brands are forced to try and make up for it. They are doing so by cutting costs on one hand, and on the other trying to sell more small cars and crossovers—categories that have been dominated in recent years by imports such as Toyota Motor (TM) and Honda Motor (HMC).

Focus on Fuel Efficiency

Despite such grim sales numbers, Americans are still buying cars. More than 1.3 million cars and light trucks in North America were sold in the month of March, which means some people are feeling financially optimistic. Most people, however, are not. And if they are in the market for a new—or used—car, the trend is increasingly toward smaller, more fuel-efficient vehicles.

Which puts Detroit in a difficult spot. In the short to medium term, it is desperately trying to restock its product lineups to reflect how consumer demand has changed since 2004, when gas prices first topped $2, on their way to the current level of close to $3.30.

Jim Farley, Ford's group vice-president for marketing and communications, said on Apr. 1 that cars and crossovers made up 54% of Ford's first-quarter sales in the U.S., up from 30% for the same period in 2004. "That is a wholesale change," he said.

Acting Globally

In the medium to long term, however, Ford and GM are also trying to get their global operations more closely integrated, to build future products on global platforms, much like Toyota builds half a dozen different models for its Toyota and Lexus brands on the Camry platform. Chrysler is the odd man out here, because it is almost totally dependent on the U.S. market.

Ford and GM hope to save development and parts costs by spreading the expenses over multiple global markets. The strategy also includes flexible factories that can switch models to meet demand. That should not only make Ford and GM less dependent on the success of a single model in a single market but also make the cars cheaper to build.

The difficult part is trying to do both at once: survive the short term, while tooling up for the long term, says Michael Robinet, vice-president for global vehicle forecasts at CSM Worldwide, a Northville (Mich.) consultancy. "To be at such razor-thin margins, and also to change the [product] mix makes it doubly difficult to do a turnaround at the same time," he says.


The other big question is, of course, how much of these cost savings will the automakers be able to pass along to consumers. Despite new contracts with the labor unions and an increased emphasis on cost-cutting across the board, it still costs more to build the average American car. Detroit not only needs to be more competitive with Japan, Korea, and Europe in terms of quality, fuel economy, and design, it also needs to offer comparable product at a comparable or even lower price without destroying its margins.

That's why the present U.S. economic downturn is so ill-timed for Detroit. As the saying goes, it's hard to remember your original purpose was to drain the swamp, when you're up to your you-know-what in alligators.

"Fuel economy is foremost on the minds of consumers," Ford's Farley said. He argued Ford is in a better position than it was a couple of years ago, having introduced the Ford Edge crossover a year ago and the redesigned Ford Focus last fall, for the 2008 model year. "We sold 21,000 Focuses last month. That's an incredible transformation for a company that not too many years ago was so focused on trucks and SUVs," Farley said. That represented a more than 31% increase over February.

Fully Loaded

Ford and its domestic rivals can also take what comfort they can from the fact that customers who downsize from a bigger gas-guzzler to a smaller vehicle, and even first-time buyers, are ordering cars with many more extras than they did a couple of product generations ago.

"At the higher-end grade of vehicles like the Focus, the Fusion, and the Edge, the [Mercury] Mariner and the Escape, we are seeing a lot higher demand as people move down into these products, a big preference for higher-end equipment like Sync," Farley said.

Ford's Sync system, developed with Microsoft (MSFT), is a $395 option on entry-level versions of the Focus. It allows customers to link Bluetooth-enabled phones and other devices to the car's controls, including voice control. Farley said transaction prices for the redesigned 2008 Focus are about $2,000 higher than the model it replaced.

Best Budget Picks

So as automakers begin to offer increasingly similar models—smaller, more fuel-efficient cars and crossovers—what should budget-minded buyers be looking for?

We looked at IntelliChoice's list of "best values" for the 2008 model year and factored in those cars IntelliChoice regarded as its "best deals" for March. We then compared that list with data from Vincentric in Bloomfield Hills, Mich. Vincentric analyzes the costs of vehicle ownership for fleet buyers, car dealers, and other auto industry customers.

And because people who fear a recession probably shouldn't be wasting their money on frivolities, we only focused on practical cars and light trucks. Tough times don't exactly call for convertibles or fancy German coupes. But we also looked at resale values and saw that some cars, such as the Edge and the Yaris, failed to score higher than others.

Check out the slide show to find out which cars you should buy in a recession.

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