Auto sales could be economic 'time bomb'
10-30-2002, 03:40 PM
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Auto sales could be economic 'time bomb'
This is an interesting article from USA Today...
Auto Sales Could be Economic "Time Bomb"
By James R. Healey, David Kiley and Earle Eldridge USA TODAY
Nothing symbolizes America better than a big car or truck swaggering down the road. That strut has infected the whole industry during almost four years of record and near-record sales, but it is about to become a stumble.
Zero-percent financing signs shout their sales pitch at Jefferson Chevrolet in Detroit.
By Paul Warner, AP
Automakers expect to report only lukewarm October sales on Friday, despite fire-sale discounts and free loans. That'll be the second consecutive month of sales well off the blistering pace that has become considered normal.
It could be a signal that automakers have spent years worth of marketing cash the past 12 months to do no more than pull tomorrow's buyers into showrooms today. If so, deals could get even better, because car companies aren't planning production cuts.
A broader question is whether an auto industry stumble is a big enough misstep to drag the rest of the slowly recovering U.S. economy down with it. Housing and car sales "have been the only pillars of the economic recovery," says economist Sophia Koropeckyj at consultant Economy.com.
The concern became more urgent Tuesday when the Conference Board announced that consumer confidence fell more from September to October than it had after the Sept. 11 terrorist attacks. That big drop left the confidence index lower than any time since 1993.
The auto industry "is a ticking time bomb, but this is not just an auto sector problem," say Amit Srivastava and Jason Rotenberg of Bridgewater Associates in a report this week. An auto industry collapse will affect the entire economy.
Auto sales account for 3.1% of the gross domestic product. Individual consumers spend about one-fourth as much on new cars and trucks as they do on food but about eight times as much as on computer hardware and software, according to government figures. More than 2 million people are employed building and selling cars and trucks.
The fear is that the U.S. auto business faces wrenching reductions in employment and spending if the sales pace slumps month after month.
Automakers don't even like to discuss their future.
"We've been notoriously poor at prognosticating, so as far as next year goes, we may as well flip a coin," says Bill Ford, CEO of Ford Motor. He says there's no way to evaluate how bad a slump might be because of unknowns such as "a war with Iraq or a double-dip recession."
"We don't sit around wringing our hands over what might happen three months from now, but I don't see things falling off a cliff," says General Motors CEO Rick Wagoner. But he's sure that competition for market share, already fierce, will get more brutal as the size of the market shrinks, particularly with Asian automakers going after Detroit's bread-and-butter trucks.
Slumping sales a worry
Predictions for the October sales pace range from 15.5 million to 16.3 million. September's pace was 16.3 million, according to sales tracker Autodata.
The full-year record is 17.4 million set in 2000. The best month was a 21.3 million pace last October, when automakers uncorked 0% financing.
"Car sales are one-quarter of retail sales. It's a very important sector," says Richard DeKaser, senior vice president and chief economist at National City, a big financial holding company headquartered in Cleveland. "If we were to see the auto sector fall abruptly to a rate of 15 million, that would create a great deal of economic damage." Closer to 16.5 million, "It would be a modest drag on growth," he says.
Signs of trouble:
Buyers are getting incentive fatigue.
"Why did people flood showrooms (last October) to buy vehicles at 0% financing? Because they thought it was a one-time offer. If automakers continue offering more and more generous incentives, people will say, 'Why should I buy now?' " Koropeckyj notes.
"Do GM and Ford have the stomach to endure three or four or even five months of depressed sales to let the consumer resume a normal buying pattern?" wonders Van Bussman, senior vice president in charge of global forecasting at J.D. Power and Associates.
Small players are having big troubles.
Daewoo Motor America, a unit of bankrupt South Korean automaker Daewoo, itself filed for bankruptcy protection in May and discontinued retail sales in the USA. That wiped out millions of dollars invested in the franchise by 525 U.S. dealers.
American Isuzu Motors, part-owned by General Motors, plans to downsize. It's struggling to stay vital in the U.S. market even though it sells only sport-utility vehicles, and that's the booming part of the U.S. auto market.
Money problems are closing in.
Rating agencies have downgraded the creditworthiness of Ford and GM to near-junk-bond status, making it more expensive for them to raise money.
Stock prices have slipped as Wall Street sours on the U.S. automakers. The value of all the outstanding shares of GM and Ford — which have about 48% of U.S. new-vehicle sales — is about $35.5 billion. Outstanding shares of DaimlerChrysler, largely on the strength of the Mercedes-Benz unit, are worth $36.3 billion. The value of all three big automakers is less than the $75 billion it would take to buy all the outstanding stock of Dell Computer, operating in a saturated industry.
Bill Ford recently joked that the company could start a stock buyback and own it all.
GM has to pump $16 billion after taxes into its pension funds over the next five years. That has nothing to do with building better or more interesting automobiles, but rather just keeping its fund viable for a big group of retirees and potential retirees who are living longer. That's enough money to develop 16 unique vehicles from the ground up.
A slump can feed on itself.
Dealers will cut back already lean inventories of new cars and trucks if sales continue to sag, says Roger Penske, CEO of United Auto Group, a publicly traded dealership with 126 franchises in the USA and 71 internationally. "Many of us in this business have survived much worse downturns" on earnings from used car sales and service, he says.
But fewer new vehicles on lots mean shoppers are less likely to find what they want, so they might not buy. "We were bumping along at a record year, and then in the first part of October everything slowed down," says Frank Gerenser, president and general manager at Brown Daub Chrysler Jeep in Easton, Pa.
Gerenser trimmed his November orders for new vehicles and is considering a 20% cut in the number for December.
Meantime, "My used car sales are up 70%, and I don't even advertise them," he says. Customers are comparing prices on used 2000 models to new-model prices and choosing the used cars.
Even if dealers aren't ordering new cars and trucks, it's unlikely automakers will build fewer of them. It's cheaper, within limits, to build too many and use big discounts to sell them than it is to lay off workers and slow down factories to build the right number.
Detroit automakers are losing share to import brands.
The foreign-brand car companies seem better at developing cars and trucks that not only sell strongly but do so with small or no incentives. Nissan is offering no buyer or dealer incentives on its redesigned Altima, on sale for a year and competing with Toyota Camry and Honda Accord, both recently redesigned. Meanwhile, Ford offers $1,500 on its redesigned, midsize Explorer SUV and $1,000 on its new-design Expedition full-size SUV.
Incentives can be a drag on image
U.S. automakers have "pulled out all the stops, and they just can't seem to do it," Koropeckyj says, so they're most likely to lose ground in a downturn.
"Layoffs and stock market losses translate to consumers spending less, and zero% can't make up for that," Srivastava says.
As they discount more, they hurt the image of their products and ruin resale values.
"Maintaining resale value is a bedrock of customer trust and satisfaction in your brand in the auto business," says consultant Dan Gorrell at Strategic Vision. "To think that you can destroy resale value of vehicles today and then all will be well when you have better, more emotionally compelling vehicles later is wishful thinking."
Despite all the problems, as a symbol of U.S. economic health, the auto industry has been surprisingly robust, almost a beacon. Koropeckyj figures that automakers have managed inventories well and already have gone through much of the restructuring they had to.
She doesn't think the auto business is about to collapse, nor is the broader economy.
Says Koropeckyj: "People like to spend."
Auto Sales Could be Economic "Time Bomb"
By James R. Healey, David Kiley and Earle Eldridge USA TODAY
Nothing symbolizes America better than a big car or truck swaggering down the road. That strut has infected the whole industry during almost four years of record and near-record sales, but it is about to become a stumble.
Zero-percent financing signs shout their sales pitch at Jefferson Chevrolet in Detroit.
By Paul Warner, AP
Automakers expect to report only lukewarm October sales on Friday, despite fire-sale discounts and free loans. That'll be the second consecutive month of sales well off the blistering pace that has become considered normal.
It could be a signal that automakers have spent years worth of marketing cash the past 12 months to do no more than pull tomorrow's buyers into showrooms today. If so, deals could get even better, because car companies aren't planning production cuts.
A broader question is whether an auto industry stumble is a big enough misstep to drag the rest of the slowly recovering U.S. economy down with it. Housing and car sales "have been the only pillars of the economic recovery," says economist Sophia Koropeckyj at consultant Economy.com.
The concern became more urgent Tuesday when the Conference Board announced that consumer confidence fell more from September to October than it had after the Sept. 11 terrorist attacks. That big drop left the confidence index lower than any time since 1993.
The auto industry "is a ticking time bomb, but this is not just an auto sector problem," say Amit Srivastava and Jason Rotenberg of Bridgewater Associates in a report this week. An auto industry collapse will affect the entire economy.
Auto sales account for 3.1% of the gross domestic product. Individual consumers spend about one-fourth as much on new cars and trucks as they do on food but about eight times as much as on computer hardware and software, according to government figures. More than 2 million people are employed building and selling cars and trucks.
The fear is that the U.S. auto business faces wrenching reductions in employment and spending if the sales pace slumps month after month.
Automakers don't even like to discuss their future.
"We've been notoriously poor at prognosticating, so as far as next year goes, we may as well flip a coin," says Bill Ford, CEO of Ford Motor. He says there's no way to evaluate how bad a slump might be because of unknowns such as "a war with Iraq or a double-dip recession."
"We don't sit around wringing our hands over what might happen three months from now, but I don't see things falling off a cliff," says General Motors CEO Rick Wagoner. But he's sure that competition for market share, already fierce, will get more brutal as the size of the market shrinks, particularly with Asian automakers going after Detroit's bread-and-butter trucks.
Slumping sales a worry
Predictions for the October sales pace range from 15.5 million to 16.3 million. September's pace was 16.3 million, according to sales tracker Autodata.
The full-year record is 17.4 million set in 2000. The best month was a 21.3 million pace last October, when automakers uncorked 0% financing.
"Car sales are one-quarter of retail sales. It's a very important sector," says Richard DeKaser, senior vice president and chief economist at National City, a big financial holding company headquartered in Cleveland. "If we were to see the auto sector fall abruptly to a rate of 15 million, that would create a great deal of economic damage." Closer to 16.5 million, "It would be a modest drag on growth," he says.
Signs of trouble:
Buyers are getting incentive fatigue.
"Why did people flood showrooms (last October) to buy vehicles at 0% financing? Because they thought it was a one-time offer. If automakers continue offering more and more generous incentives, people will say, 'Why should I buy now?' " Koropeckyj notes.
"Do GM and Ford have the stomach to endure three or four or even five months of depressed sales to let the consumer resume a normal buying pattern?" wonders Van Bussman, senior vice president in charge of global forecasting at J.D. Power and Associates.
Small players are having big troubles.
Daewoo Motor America, a unit of bankrupt South Korean automaker Daewoo, itself filed for bankruptcy protection in May and discontinued retail sales in the USA. That wiped out millions of dollars invested in the franchise by 525 U.S. dealers.
American Isuzu Motors, part-owned by General Motors, plans to downsize. It's struggling to stay vital in the U.S. market even though it sells only sport-utility vehicles, and that's the booming part of the U.S. auto market.
Money problems are closing in.
Rating agencies have downgraded the creditworthiness of Ford and GM to near-junk-bond status, making it more expensive for them to raise money.
Stock prices have slipped as Wall Street sours on the U.S. automakers. The value of all the outstanding shares of GM and Ford — which have about 48% of U.S. new-vehicle sales — is about $35.5 billion. Outstanding shares of DaimlerChrysler, largely on the strength of the Mercedes-Benz unit, are worth $36.3 billion. The value of all three big automakers is less than the $75 billion it would take to buy all the outstanding stock of Dell Computer, operating in a saturated industry.
Bill Ford recently joked that the company could start a stock buyback and own it all.
GM has to pump $16 billion after taxes into its pension funds over the next five years. That has nothing to do with building better or more interesting automobiles, but rather just keeping its fund viable for a big group of retirees and potential retirees who are living longer. That's enough money to develop 16 unique vehicles from the ground up.
A slump can feed on itself.
Dealers will cut back already lean inventories of new cars and trucks if sales continue to sag, says Roger Penske, CEO of United Auto Group, a publicly traded dealership with 126 franchises in the USA and 71 internationally. "Many of us in this business have survived much worse downturns" on earnings from used car sales and service, he says.
But fewer new vehicles on lots mean shoppers are less likely to find what they want, so they might not buy. "We were bumping along at a record year, and then in the first part of October everything slowed down," says Frank Gerenser, president and general manager at Brown Daub Chrysler Jeep in Easton, Pa.
Gerenser trimmed his November orders for new vehicles and is considering a 20% cut in the number for December.
Meantime, "My used car sales are up 70%, and I don't even advertise them," he says. Customers are comparing prices on used 2000 models to new-model prices and choosing the used cars.
Even if dealers aren't ordering new cars and trucks, it's unlikely automakers will build fewer of them. It's cheaper, within limits, to build too many and use big discounts to sell them than it is to lay off workers and slow down factories to build the right number.
Detroit automakers are losing share to import brands.
The foreign-brand car companies seem better at developing cars and trucks that not only sell strongly but do so with small or no incentives. Nissan is offering no buyer or dealer incentives on its redesigned Altima, on sale for a year and competing with Toyota Camry and Honda Accord, both recently redesigned. Meanwhile, Ford offers $1,500 on its redesigned, midsize Explorer SUV and $1,000 on its new-design Expedition full-size SUV.
Incentives can be a drag on image
U.S. automakers have "pulled out all the stops, and they just can't seem to do it," Koropeckyj says, so they're most likely to lose ground in a downturn.
"Layoffs and stock market losses translate to consumers spending less, and zero% can't make up for that," Srivastava says.
As they discount more, they hurt the image of their products and ruin resale values.
"Maintaining resale value is a bedrock of customer trust and satisfaction in your brand in the auto business," says consultant Dan Gorrell at Strategic Vision. "To think that you can destroy resale value of vehicles today and then all will be well when you have better, more emotionally compelling vehicles later is wishful thinking."
Despite all the problems, as a symbol of U.S. economic health, the auto industry has been surprisingly robust, almost a beacon. Koropeckyj figures that automakers have managed inventories well and already have gone through much of the restructuring they had to.
She doesn't think the auto business is about to collapse, nor is the broader economy.
Says Koropeckyj: "People like to spend."
10-30-2002, 03:44 PM
#2
Administrator Alumnus
Agreed...
I've said this all along... Everyone is buying a car NOW. Once the incentives go away, so will the buyers. It's only a matter of time before things get really ugly.
I've said this all along... Everyone is buying a car NOW. Once the incentives go away, so will the buyers. It's only a matter of time before things get really ugly.
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