No Deja Vu for Detroit : Autos: The Gulf crisis is bad news, but experts say parallels to 1979-81 are overstated. For the Big Three, Honda and Toyota are scarier than Saddam Hussein.
The atmospherics are hard to ignore. Both the symbolic and real effects of the Persian Gulf crisis have helped create a climate that seems eerily similar to the high winds of 1979-1981, when an oil crisis triggered the U.S. auto industry’s incredible shrinking act.
The world’s standoff with Iraq is threatening auto sales by hastening prospects for a recession. Gasoline prices are climbing back toward the oil-shock peaks. There are vague signs that customers might be turning again toward smaller cars.
Inflation and joblessness are rising. Japanese auto firms are stepping up the competitive pressure. Government regulators are rediscovering safety, environmental and--since the Aug. 2 invasion of Kuwait--energy concerns. Wall Street is downgrading automotive debt. Small stains of red ink are starting to appear on the books at Chrysler Corp., most vulnerable of the U.S. auto firms, which is asking for relief from organized labor.
“Sounds familiar, doesn’t it?” Philip E. Benton, president of Ford Motor Co., asked recently. “Everyone is wondering whether history is set to repeat itself.”
But from Benton and others, both in and out of the auto industry, the answer is no, it’s not that simple. The auto landscape has changed so drastically that the parallels between today and 1979 don’t hold up very well.
Detroit is said to be leaner, smarter, and better equipped with small cars and small engines. Moreover, the economic warning signs so far aren’t nearly as riveting as they were a decade ago: Gasoline prices would have to hit $2 a gallon to reach an inflation-adjusted equivalent to 1981. Some investment analysts even think it’s a good time to buy U.S. auto stocks, which, like sales of cars generally, have been depressed for months.
But whatever improvements the domestic auto firms made in the 1980s has been more than offset by the creation of a whole new U.S. automobile industry in the industrial Midwest that is Japanese-owned and is largely having its way with the market.
“There’s a lot of talk about deja vu, with oil and the Japanese. Those are the exact two things that faced the Big Three in 1979,” said Sean McAlinden, economist at the University of Michigan’s Office for the Study of Automotive Transportation. “Clearly, they’re in a better position today on both fuel economy and automotive performance. Yet their (competitive) position against the Japanese is considerably weaker.”
Meanwhile, auto chieftains have dropped their talk of a sales recovery any time soon, conceding that the Middle East crisis has riddled car buyers and other consumers with doubts about the economy.
It makes for a sobering outlook as the 1991 model year begins: a smaller share of a smaller-than-expected pie for Detroit in the short term, and serious doubt about the prospects for the U.S.-based industry in the long term.
“There are no parallels with ’79. It’s different,” declared Daniel Luria, economist at the Industrial Technology Institute, a nonprofit research and development firm in Ann Arbor, Mich. “But that doesn’t mean there isn’t a problem.”
Wall Street’s bond-rating agencies “have a concern about the domestic auto business. Long term, it’s a reasonable concern,” said Robert S. Miller, vice-chairman and chief financial officer of Chrysler.
As symbols of the U.S. industry’s recent turbulent history, Miller and Chrysler serve as well as any. Trouble, he says with unassailable credentials, is relative.
One night in June, 1980, as an assistant treasurer who had just joined Chrysler from Ford, Miller literally rescued the moribund auto firm from a burning building. He and 30 lawyers entered a smoldering New York skyscraper to save thousands of documents that had to be signed by noon the next day if the U.S. government was to snatch Chrysler from bankruptcy.
The rest is an oft-told tale. Chrysler got bailed out, recovered, and paid back the taxpayers. Its crisis marked the leading edge of a restructuring of the U.S. auto industry, which shrank by about one-third, eliminated 410,000 Big Three and supplier jobs, padlocked dozens of plants, modernized the rest, started making better cars, and by the mid-1980s was posting record profits.
But by the time a cyclical sales downturn took hold in late 1988, the Japanese “transplants” had redrawn the whole picture. Moving here rapidly to skirt restraints on imported cars, Honda, Nissan, Mazda, Toyota and others erected eight assembly plants and generated 80,000 to 100,000 jobs in Michigan and the states just south of it.
Their cars last year captured some 8.5% of U.S. sales. And, as production gears up, the transplants will exceed 19% by 1993, predicts the Industrial Technology Institute. Adding conventional imports, autos from foreign firms would then enjoy 41% of U.S. sales.
(When cars imported by Detroit’s firms or built here jointly by U.S. and Japanese firms are counted, that level has already been met. The University of Michigan figures that traditional U.S. cars now account for just 58% of sales in this country.)
The transplant cars are so appealing to motorists that the U.S. firms so far have been reduced to fighting over whatever parts of the market the Japanese-owned companies have ignored, says economist Luria. And he predicts that the domestic share of sales will continue falling as the Japanese outdo Detroit in introducing new cars and trucks in the first half of the 1990s.
Today, as in 1979, Chrysler is the focus of concern, the leading indicator of trouble for Detroit. The company lost $664 million in last year’s fourth quarter and, Miller concedes, will lose money again in this quarter. With one retiree for every worker, it has just recently begun to whittle away at a $3 billion unfunded pension liability. Merger talk has surfaced again.
Chrysler’s credit rating was downgraded this summer to a notch above junk-bond status by the bond-rating agencies, which cited its falling market share. Some key executives have left, and the company has fallen way behind in developing a new mid-sized line of cars. Meanwhile, sales of its Jeeps, largely unchanged since 1984, are being battered this year by new entries from Ford, Toyota, Nissan, General Motors Corp. and others.
But a $2.5-billion cost-cutting program has been launched--without, Miller says, sacrificing new vehicle development--and there’s a well-received replacement this fall for its extraordinarily successful minivans. A new Jeep line debuts next year. Lately, using a technique from its darkest days, Chrysler has offered sneak previews of a line of mid-sized cars due out in two years to prove that it has a future in the car business.
“If you wait long enough, you’re going to be first,” says Thomas C. Gale, Chrysler’s vice-president for design, repeating an old joke about the industry’s design cycles.
Automotive analyst David Healy, of Barclays de Zoete Wedd, the British investment house, doesn’t see much to worry about at Chrysler. He says it is in generally strong financial shape and is fixing its problems. He suggests the bond-rating agencies over-reacted to the competitive pressures on Chrysler and says that a worst-case oil shock would only drop it to a break-even earnings level next year. He recommends Chrysler stock as a “speculative” buy.
Meanwhile, the 6-foot-4 Miller straddles a $4.5 billion pile of cash, the largest hoard in the firm’s history, and wonders what all this deja vu nonsense is about.
“Nineteen-eighty was an energy shock. Nineteen-ninety is an over-capacity shock,” Miller said with some impatience in a recent interview. “The industry has hit a rough patch. Chrysler, being the smallest, gets the most suspicious look.”
He recounts the elements of the 1979-81 auto crash that, by most accounts, don’t apply today: Detroit quality was “hopelessly uncompetitive” versus Japan, interest rates hit 20%, energy costs tripled, the Big Three had few small cars, the Japanese had little else, domestic auto plants were technologically obsolete, the U.S. firms had just signed the costliest labor contract in history, and break-even levels had been bloated by poor productivity growth.
“That was the end of the era of the oligopoly, when we could sit back and enjoy our lack of productivity,” Miller said. “Today, we’ve come through a 10-year competitive free-for-all across the board.”
Though the picture differs from company to company, all have downsized themselves to make money on far fewer sales. Still, the auto firms must compete for now in a market whose direction might be decided partly by Iraqi President Saddam Hussein.
Of greatest concern is the likelihood that the crisis in Kuwait has already nudged the nation’s economy into a recession. By most accounts, that would stall by a year or more a recovery in auto sales that many had expected next year.
“There’s no question, consumer confidence went into the dumper in a way we haven’t seen since 1981,” says Joel Pitcoff, sales analyst at Ford. “But we’ve been in an automotive recession for two years. We’re fairly close to the end of the tunnel. We’re certainly not seeing a headlong plunge into oblivion.”
Analyst Healy said, “We see no financial difficulties for the auto makers in (a) pessimistic scenario.”
Meanwhile, Healy and others argue that a recession wouldn’t change the type of cars people buy, only the number. Accustomed to volatility in gasoline prices, motorists would largely shrug off even a sizable rise at the pumps. Economists say that the improved fuel economy of today’s cars, combined with the fact that the price of gasoline is still cheap compared to 1981, makes this summer’s price run-up almost a non-event.
“I haven’t heard any guru yet say that the lasting effect of this (Persian Gulf crisis) is going to be any more than 20-25 cents a gallon,” Pitcoff said. “At 25 miles per gallon, a 25-cent price hike will cost you $10 a month. That doesn’t get people’s attention.”
Nonetheless, combined sales of mini- and subcompact cars enjoyed a slight spurt in August. Though other factors may have been involved, Ward’s, a trade publication, called this “perhaps a sign that higher gasoline prices are having an effect.”
Some 30% of consumers surveyed by Integrated Automotive Resources of Wayne, Pa., as prices were skyrocketing in the days after Iraq invaded Kuwait, said they would likely trade in their cars for more fuel-efficient ones if the price of gasoline reached $1.60-$1.65 per gallon.
Ford says its “bellwether” dealers report that customers are asking more questions about fuel economy. But that is not affecting what kind of cars they buy, nor is the industry much interested in calling special attention to the fuel-stingy attributes of its cars.
“It’s not our intention to create a hysteria over fuel economy,” Michael Grimaldi, general marketing manager at GM’s Oldsmobile division, said to a reporter. “And I hope it’s not your intention, either.”
But if price doesn’t make customers hysterical, a shortage--such as could result from war in Saudi Arabi--might be another story. It was the supply disruptions and lines at the service stations in 1979 that sent motorists clamoring for little cars.
Who would do the best in a hot new market for subcompact cars? All the car makers have an array of four-cylinder engines, and boast the manufacturing flexibility to switch production quickly--something that Detroit couldn’t do in 1979.
Ironically, the luckiest manufacturer in that case might be GM, the world’s foremost purveyor of big cars, which has never been known for good timing.
Saturn Corp., the new GM subsidiary in Spring Hill, Tenn., that represents GM’s clean-sheet effort to match the Japanese on cost and quality, introduces its long-awaited Saturn compact next month.
“It’s an unbelievably fortuitous circumstance,” says William Pochiluk, a onetime GM analyst who now runs AutoFacts, a consulting firm in Paoli, Pa. He says a sustained high gasoline price “almost guarantees the success of Saturn.”
