Glut May Worsen : Car Makers Can't Seem to Reverse U.S. Sales Slump

Times Staff Writer

Hyundai's unsold cars are backing up so badly that officials at the port of Portland, Ore., have had to set aside an extra 30 acres to store the imports as they arrive from South Korea.

Ford, which has been running at full blast for years, has temporarily idled small-car assembly plants and laid off workers in New Jersey and Michigan in recent weeks because of lagging subcompact sales--Ford's first significant downtime at any of its car plants since 1983.

Honda, which has often proved resistant to sales slumps in the past, is now burdened by a record level of unsold cars. So it is expanding the incentives it pays dealers to clear out excess inventories before the start of the 1990 model year this fall.

While analysts continue to wonder just when a slowdown will hit the rest of the economy, the guessing is over in the auto industry. The slump is already here.

And so far, nothing the industry has done has reversed the slide. Car sales declined 7.6% in the first half of 1989, despite massive rebates and other incentives designed to lure buyers back into the nation's showrooms. Sales have been down in five out of the first six months of the year, with the industry posting a sharp 11.4% drop in June. Even a 9.3% rise in early July sales wasn't enough to convince analysts that the industry has turned things around.

A Pay-Back Period

In fact, most analysts--who are now generally forecasting that 1989 sales will dip to about 9.9 million units from last year's 10.5 million--believe that the car market is simply exhausted.

"Right now, we are going through a pay-back period--the industry is paying back for the strong car and truck sales we've had for the last four or five years," says Chris Cedergren, an automotive analyst with J. D. Power & Associates, an Agoura Hills automotive market-research firm.

Even light truck sales, which have been buoyant enough to help carry the industry in recent years, are finally starting to sag; Ford just announced that it will temporarily idle truck plants in Minnesota and Kentucky because of the slowdown in compact pickup sales.

The downturn has hit both the importers and Detroit's Big Three; Detroit has been forced to cut domestic production, while the Japanese are finding it impossible to sell all of the cars they are allowed to ship from home under quotas on Japanese car imports.

To be sure, some industry observers, noting that the decline has been relatively modest on a percentage basis, are not yet convinced that car sales are heading for a serious fall. Joel Pitcoff, a sales analyst at Ford, stresses that sales have held up relatively well, given the fact that interest rates are much higher than they were last year. He adds that a recent decline in key rates could even help sales bounce back in the second half of 1989.

"I don't see any signs that we're headed off a cliff," Pitcoff says.

Still, what makes the current dip in sales a bigger headache than normal is the concurrent expansion in production, both in the United States and overseas. That is leading to massive inventories of unsold cars clogging the nation's ports and dealer's lots.

Optimistic Schedules

The Japanese auto makers, for instance, are adding an estimated 600,000 units of production capacity in the United States this year alone, as they open or expand their new American "transplant" assembly plants. By the end of 1989, the Japanese will have the ability to produce more than 1.5 million cars a year in the United States--on top of their imports from Japan.

Meanwhile, the Big Three have tried to adhere to relatively optimistic production schedules throughout the year, despite repeated signs of weakness in the marketplace.

The strong sales of the last few years allowed the market to smoothly absorb some excess production. But as soon as sales softened in early 1989, that extra capacity started to turn into an enormous burden hanging over the entire industry.

"It's only now that you can see the impact the transplants are having, because before they were expanding into a strong market," notes Ted Sullivan, automotive analyst with the WEFA Group, a Bala-Cynwyd, Pa., forecasting firm.

The result: A car glut, which is great for consumers but bad for the industry.

"There are lots of good deals available now for car buyers," observes General Motors President Robert Stempel. "I think it's marvelous that so many (companies) think it's a good investment to build cars in the United States . . . from a customer standpoint, that is great news . . . but from an industry standpoint, it does make our life tougher."

Brutal Marketplace

As a result, the domestic companies, as well as the Japanese and European auto makers, have been forced to broaden their rebates and discount financing packages in order to generate sales. Incentives available on Japanese cars are now the most extensive ever offered, while on the domestic side, Ford and General Motors appear locked in a rebate war to see who can undercut the other.

"The marketplace is getting brutal," warns William Pochiluk, the founder of Autofacts, a Paoli, Pa., research firm. "These companies are knocking the stuffing out of one another."

Without a significant pickup in sales over the next year, many observers expect the market to only get tougher. By the end of 1990, the Japanese will have the capacity to build even more cars in the United States--perhaps as many as 1.8 million annually.

In addition, GM's long-awaited Saturn small car operation will begin operations sometime next year--bringing another 250,000 units of production onto the market.

So the glut could get worse.

"I think everybody is going to be battening down the hatches for the next 18 months," says Pochiluk. "Everybody in the industry will be fighting like hell for three things--market share, market share and market share."

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