Brisk Auto Sales in 1st Half of ’93 Defy Weak Economy : Profits: Reasons vary but aggressive pricing, creative leasing help drive 7.6% rise. Japanese firms lose ground.
Confounding conventional wisdom, the nation’s auto industry is enjoying a brisk sales revival even as consumer confidence sags and the nation’s economic recovery continues to be weak.
Though the huge California market is slumping, car and truck sales nationwide for the first half of the year are up 7.6%. For the year, sales are likely to top 14 million vehicles--a first since 1990.
That is far from the 16 million vehicles sold in the boom year of 1986, but still a substantial improvement over the dismal performance of the past three years.
“Vehicle sales are running ahead of the basic economic signals,” said George Magliano, an analyst for the WEFA Group, an auto forecasting company.
The reasons are varied, but industry officials and analysts say aggressive pricing and creative leasing deals are helping to drive domestic auto sales.
Other keys: a growing need to replace aging vehicles, the improving quality of U.S-built cars, lower interest rates on car loans, reduced consumer debt levels, rising used car prices and shifting consumer tastes that have made minivans, sport-utility vehicles and pickup trucks increasingly popular.
The sales gains largely have been limited to U.S. car makers. Japanese manufacturers have been hurt by the rise in the yen, which has forced them to raise prices to uncompetitive levels.
“At the moment, the Big Three are eating the Japanese’(s) lunch,” said David Healy, analyst for S.G. Warburg & Co.
As a result, General Motors Corp., Ford Motor Co. and Chrysler Corp. are expected later this month to report combined profits of up to $2 billion for the second quarter--versus a loss of $138 million in the 1992 period.
Sales for the first 10 days of July, reported Wednesday, continued their strong advances, with Americans buying 14.6% more domestically built cars and trucks than during the same period a year ago.
How long the sales upswing can be sustained is uncertain. Most analysts think the trend will continue slowly upward. Anticipating continued strong demand, the Big Three have increased production schedules for the third quarter.
“But there are likely to be some bumps in the road,” said Thad Malesh, a forecaster for J. D. Power & Associates, the auto consulting firm based in Agoura Hills.
Still, 1993 is turning out to be a surprisingly good year for U.S. auto makers.
At City Chevrolet-Geo in Charlotte, N.C., sales are running about 25% above last year’s levels. “I think it’s just pent-up demand,” said general manager Bob Morgan. “Customers are itching to get into a new car.”
As the quality of cars has improved and the recession has lingered, drivers have been delaying purchases of new vehicles. The average age of vehicles now on the road exceeds eight years, according to the American Automobile Manufacturers Assn.--the highest level since the late 1940s.
“Cars are just wearing out,” said Magliano. “It is just not economic to keep them on the road anymore.”
He estimates that 2.5 million to 3 million cars and trucks could be traded in for new vehicles this year. Chrysler is even more optimistic, estimating that more than 6 million old vehicles could be scrapped this year and replaced by new ones.
With 220,000 miles on his 1982 BMW 528e, John McMahon of Mission Viejo decided this spring that the car had become too expensive to maintain.
“That was the prime reason for buying a new car,” the crude oil salesman said.
McMahon looked at a variety of models, both domestic and imports, before settling on a Ford Thunderbird LX. The choice came down to price: just under $14,500, with such standard features as power windows, locks and seats; anti-lock brakes and electronic-controlled air conditioning.
“I thought it had the best value,” McMahon said.
Indeed, Big Three officials attribute much of their recent sales gains to “value pricing.” The marketing strategy involves packaging a group of options as standard equipment on a vehicle while lowering its price. Usually, the “value price” is non-negotiable. Ford has boosted Thunderbird sales 55% so far this year with a value-pricing package.
“It’s just a phenomenal value and takes the hassle out of buying a car,” said Ross Roberts, general manager of the Ford Division.
GM, too, has used value pricing to boost the sales of several models, including the Chevrolet Cavalier and Buick LeSabre. Even though the Cavalier is an 11-year-old design, GM has sold more than 146,000 of the entry-level compacts this year, making it the nation’s third best-selling car behind the Ford Taurus and Toyota Camry.
J. Michael Losh, GM’s vice president of sales, service and marketing, said Tuesday that the company will increase average car prices just 1.5%, or $290, in 1994, with truck prices headed up an average of 2.2%, or $445. GM will extend value-pricing across all its divisions, resulting in lower prices for some models. The No. 1 car maker will be particularly aggressive in California, where it hopes to gain market share.
The car companies also are appealing to car buyers with attractive leasing programs. Leases are considered sales in the industry, even though the car maker is obligated to take back the vehicle at the end of the term. Many leases today come with below-market interest rates and minimal down payments.
The benefits of leasing are what drew Kerry Mangano of Fountain Valley back into the new vehicle market, even though his Ford Explorer GL was only two years old.
Working with his dealer, the stock broker leased a $27,000, top-of-the-line version of the hot-selling Ford sport-utility vehicle. His monthly payment is about the same, but he got back more than 80% of his original investment on the trade-in, which was the equity he needed for a down payment on a new home.
“This has reaffirmed my faith in the American auto industry,” said Mangano, 40.
Not surprisingly, many dealers are aggressively pushing leases. Laird G. Noller, owner of Laird Noller Ford in Topeka, Kan., said his sales are up 15% this year, largely because of leasing. Of all his 1993 sales, 43% involve leases.
“We look forward to seeing these people back in two years,” Noller said.
There’s one problem inherent in the tactic, however. Leased cars get dumped onto the used car market, possibly competing for the attention of new car buyers. Industry analysts, though, say the recent rise in used car prices has made them a less attractive alternative.
In part, used car prices have jumped because the auto makers have cut back program sales to car rental companies. The car makers had been aggressive about such deals during the recent down years, agreeing to take cars back from rental companies after six months or less. Afterward, many new car shoppers ended up buying the low-mileage used cars, rather than more expensive new cars.
With the curbing of the fleet programs, nearly new used cars are harder to find.
“There is a shortage of good used cars,” said Healy of S.G. Warburg. “Used car prices have been rising faster than new car prices.”
Low interest rates are luring some consumers to new car lots, too.
Linda Johnston of Torrance decided to buy a new vehicle last month when she learned that her credit union was offering a 6.9% rate on new-car loans. The credit union offered to finance 80% of the purchase price.
“I thought that if I was going to buy a new car, this was the time to do it,” said Johnston, who works for an optometrist in Redondo Beach.
Equipped with a pre-approved loan, she began looking for a replacement for her 1986 Plymouth sedan. Her only requirement was a bigger vehicle, something large enough to cart around her five grandchildren.
Johnston settled on a $20,000 Plymouth Grand Voyager minivan--a choice that reflects the continuing evolution of the U.S. vehicle market from cars to light trucks--including minivans, sport-utility vehicles and pickups.
Indeed, the recent vehicle sales jump is almost entirely attributable to light trucks. While car sales improved 2% in the January to June period, light truck sales were up 18.2%.
This development has been particularly helpful to the Big Three, which dominate the segment, accounting for more than 90% of all minivan and sport-utility vehicle sales.
The result: U.S. auto makers have regained market share lost to the Japanese. The Big Three’s market share is now 75.2%, up from 73.3% at the end of 1992. Meanwhile, the Japanese share of the U.S. market slipped to 22.5% from 23.8%.
The biggest beneficiaries have been Ford and Chrysler, whose sales have improved markedly on the strength of hot products, such as the Ford Taurus and F-Series pickup and Chrysler’s Dodge Caravan and Jeep Grand Cherokee. GM has continued to lose market share as it downsizes operations in an effort to regain profitability.
The woes of the Japanese are linked largely to the strengthening of the yen, which makes the cost of their vehicles much higher in the United States. The yen has appreciated roughly 15% against the dollar since the beginning of the year, forcing Japanese auto makers to raise prices sharply. Meanwhile, the Big Three have resisted large price increases.
So, more consumers are looking at--and purchasing--American makes. While there is some “Buy American” sentiment, most analysts attribute the shift to growing recognition that the quality of U.S. cars has improved and, more importantly, to lower prices on U.S. models.
“The domestics are coming on strong right now,” said Jerry Rocco, general manager of Joe Myers Toyota in Houston, Tex. “The yen is killing us.” Ford, for instance, is selling its Escort station wagon for $4,600 less than the price he can offer on a comparable Corolla station wagon.
The Japanese have been taking their licks in California--their largest U.S. market--as well, though recent sales data indicate that they may have stemmed the loss of market share.
The state is important because it typically accounts for 11% to 12% of the total new-car market. But California’s prolonged economic slump has hit auto retailers hard. Sales are down 2% from last year’s meager 1.49 million units. In 1990, vehicle sales in the state peaked at 2 million.
“We are not seeing the nationwide uptick,” said Don Kott, who operates Ford and Chyrsler-Plymouth dealerships in Carson that have been hit hard by layoffs in the aerospace industry. “Not even a glimmer of it.”
* RELATED CHART: D2
