The recession is over. Now what? - Opinion & Analysis: The Business - Brief Article

Automotive Industries, May, 2002 by Maryann Keller

By historical standards the recession of 2001 was pretty mild. For auto companies it was hardly noticeable in their production schedules, with retail volume registering the second best year on record. At 17.1 million units, 2001 was better than anyone could have hoped given the meltdown in corporate capital spending, rising unemployment and the uncertainty caused by the terrorist attacks. The profit picture, especially at Ford and DaimlerChrysler was more typical of a recession, but General Motors had surprisingly good results as it finally saw the benefit of its multi-year cost cutting efforts. This has set the stage for an unusual recovery this year that will boost GM'S profit performance while Ford and DaimlerChrysler trail behind.

Automakers willingness to pour money into incentives was partly responsible for sustaining sales last year but so were low interest rates and the unprecedented volume in mortgage refinancing. Homeowners used their improved cash flow and borrowing capacity to buy cars and other big-ticket items. And a record number of maturing leases forced households to buy or lease a replacement vehicle, contributing to the surprising results.

So far in 2002 vehicle demand has been better than expected with the selling rate averaging more than 16.5 million. Support for the vehicle market continues to come from incentives, which have reduced the real price of new cars for a third straight year. Lease maturities will set another record this year contributing to the relatively strong market. Much of the year-to-year drop has been recorded in domestic sedans, a mainstay of the rental and corporate fleet markets, which have been slow to resume orders at the 2000 rate.

But this year hasn't felt like a typical recovery and it is unlikely that total retail sales will equal the 2001 level. The industry will not see the classic V-shape sale rate rebound over the next two years. That can only happen when so-called pent up demand has been created due to the deferral of purchases. Without that rebound and with continuing high incentives, profit margins at Ford and DaimlerChrysler will remain under pressure. Vehicle sales will probably be relatively flat even into 2003.

The recession had little impact on consumer preferences for lightweight trucks, which set a new sales record in 2001. The only cloud on the horizon for the truck sector is rising fuel prices. The conflict in the Middle East, along with political instability in Venezuela could focus some attention on fuel economy for a generation that has only known low gasoline prices.

The U.S. vehicle manufacturers have abdicated the traditional sedan segments opting for the higher profit opportunities in large, passenger trucks. Within the car sector, the Japanese, Koreans and Germans continue to gain share with attractive models in every price class.

Meanwhile, the light truck sector is getting very crowded with new models derived from car platforms that escape the tougher CAFE standards imposed on cars. Which of these new models become the next trendsetter is almost impossible to predict Ford is particularly vulnerable because it finds itself in the unenviable position of not having any new models to excite consumers and a high cost structure compared to General Motors and the Asian manufacturers.

It was only 18 months or so ago that everyone was speculating about Ford overtaking GM in market share as GM launched one flop after another. The Pontiac Aztek had been the most recent model to prove that GM had lost its touch. Now their positions are reversed and the brief, shallow recession has crippled Ford while invigorating GM'S ability to win back market share lost during the 1990s. GM is using its superior cost structure to force its rivals to match incentives while it launches new models that are beginning to restore confidence in its brands.

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."