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Automotive Industry

On the ropes again

Automotive Industries, Nov, 2001 by Maryann Keller

For nearly 12 months prior to September 11, car companies propped up sales with ever-rising incentives amid fading hopes that expansionary monetary policy would produce a second-half rebound. This time the Federal Reserve Board's arsenal of recession-fighting tools had little impact on an economy that was adjusting to sharpy curtailed business spending. Businesses coped with excess capacity even before there was much evidence that consumers were becoming more cautious. But by the summer, consumer confidence was eroding and it was taking ever more cash to keep car sales close to the 17 million selling rate.

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Even as the Fed repeatedly lowered interest rates, the barometers of future consumer behavior, confidence, unemployment rate and income growth, were pointing to a longer and deeper slowdown that promised to push vehicle demand below 16.5 million units for the year.

The $300 tax cut has already been spent with little permanent positive impact on the economy. Following the terrorist attacks on September 11, no one doubted that the country had fallen into recession. Although vehicle demand was better than we might have expected in September, the outlook for the auto industry is bleak and the downturn could last more than a year. With their cash depleted and credit ratings already downgraded (or will soon be), auto companies will have to cut capacity, let demand fall and retreat from the heavy incentive spending which is contributing to the drop in residual values.

The former U.S. Big 3 always suffer disproportionately in a recession because much of their capacity is sold to economically sensitive fleet customers such as rental car companies, corporations and government agencies.

The outlook for the Big 3 is complicated by the fact that the slowdown comes just as foreign competitors are stepping up their introductions of SUVs, minivans and other truck-like vehicles. A "Buy America" campaign isn't likely to shift consumer behavior in favor of Detroit because many of these models are now built here. Already many foreign brand cars and trucks are selling without the incentives that are now propping up demand for domestic models.

Since the industry cannot afford to continue incentives at the present level of more than $2,100 per unit, it is likely that vehicle demand will fall by more than 10 percent in 2002 to about 15 million units. That would put the sales decrease from the peak last year at about 16 percent, which compares favorably with drops of 20 to 30 percent in the last three recessions. GM, Ford and Chrysler, however, would each suffer sales declines in excess of 20 percent as foreign brands gained share. Even worse, all three are now curtailing product investment, which institutionalizes a lower market share when sales eventually rebound. When the rebounds occurs, Detroit cannot expect the huge profits or margins that it earned in the 1990s to be repeated. Nor will it be able maintain even its present market share.

Once again, Detroit finds itself ill-prepared to cope with a recession that is now complicated by a war on terrorism. The industry should be dosing excess capacity to reduce costs and hope for a better tomorrow, but it is hobbled by a labor contract that it simply cannot afford.

It would be nice to imagine that Detroit might emerge from a round of cost cutting, soul searching and restructuring with fewer but better products, with improved quality and productivity and better relationships with its suppliers and dealers. But that didn't happen during the last three recessions. And it probably won't happen this time.

So the question is how much market share will the Big 3 lose next year that they will never recapture? My guess is that GM, Ford and Chrysler will fall below 60 percent in 2002 and probably fall further in 2003. We aren't too far from the time when we will begin to wonder if Chrysler can survive.

MARYANN KELLER is a veteran auto industry analyst and author of the books "Rude Awakening: The Rise, Fall And Struggle To Recover At General Motors" and "Collision: GM, Toyota and Volkswagen And The Race To Own The 21st Century."

Automotive Industry

On the ropes again

Automotive Industries, Nov, 2001 by Maryann Keller

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