CONSUMER SPENDING SLOWDOWN : Big Three Executives Are Shifting Into Lower Gear

By DONALD W. NAUSS

Jan. 5, 1996 12 AM PT

TIMES STAFF WRITER

DETROIT —

A year ago, auto executives here were giddy with optimism. Sales had climbed briskly for four straight years, and most were anticipating more of the same. A few predicted an all-time record.

But something went wrong on the way to the showroom.

Not only did car and truck sales fail to make history in 1995, they took a small step back. According to company reports released Thursday, U.S. sales of light vehicles last year fell a disappointing 2% to 14.8 million. December sales were also lackluster, off by an equal percentage.

Understandably, there is less swagger on display in Detroit this week. Amid the hoopla surrounding the North American International Auto Show, chastened auto executives--while still insisting the current level of sales is good--say 1996’s activity will be about the same as last year’s.

“It will be a good but not spectacular year,” said G. Mustafa Mohatarem, chief economist for General Motors and the most bullish of the forecasters for the Big Three this year.

Auto sales, an important gauge of the nation’s economic strength, moved in fits and starts over the course of last year. Dealers complained that although polls showed consumers to be confident, they were reluctant buyers who demanded rebates.

In this difficult terrain, European auto makers navigated the best. They successfully positioned their luxury products down-market and into the hands of aging baby boomers. In a business that brawls over every percentage point of market share--equal to about 150,000 vehicles--the Europeans gained four-tenths of a point to 3.1%.

The Big Three--Chrysler Corp., Ford Motor Co. and General Motors Corp.--all posted slight sales declines for the year. However, Ford, whose sales were off just 0.4%, rode strong truck sales to grab nearly a point of market share, to 26%. GM, with sales off 3%, dropped a fraction to a 33% market share, and Chrysler held steady at 14.6% despite a 1% decline in sales.

The Japanese manufacturers as a group gave up ground in one of their worst years since they invaded the United States with cheap imports in the 1970s. Their problem: high prices because of a strong yen and a negligible presence in the hot truck market. Their market share plunged to 22.7% from 23.3%. The biggest hits were taken by Mazda, Mitsubishi and Isuzu.

What is most surprising is that the slump in auto sales came in an economy in reasonably good shape. Inflation was in check, consumer confidence was high and interest rates were in a down trend.

So what went wrong? And what does it mean for the future?

Auto executives say last year’s decline in sales reflected the accumulated adverse effects of the Federal Reserve Board’s interest rate increases in 1994 and early ’95. They also said the better quality of today’s autos is allowing consumers to keep vehicles longer.

But other industry analysts say there are other factors causing fundamental shifts in consumers’ car-buying habits--the chief one being an affordability crisis.

Some also believe cars are becoming less important to people. Autos, once seen as an extension of one’s lifestyle, are increasingly regarded as mundane necessities similar to kitchen appliances, surveys have shown. At the same time, personal computers are capturing the public’s imagination and dollars.

“The car no longer conveys the status it once did,” said Maryann Keller, an analyst for Furman Selz in New York.

This trend is only intensified by higher prices. Consumers on average now spend about $20,000 to buy a new vehicle. New-car purchase prices have risen faster than personal income for the last decade.

“During the last year, more consumers complained that vehicle prices were too high than [at any time] in the last 10 years,” said Richard Curtin, director of consumer surveys at the University of Michigan.

Auto executives challenge that view, noting that the percentage of gross domestic product spent on personal transportation has remained constant at about 4% for the last several decades.

But dealers and others say consumers are showing symptoms of sticker shock. This is one reason more buyers are leasing vehicles or opting for late-model used cars.

The industry also argues that structural changes in their business and the nation’s economy are making the auto industry less cyclical than in the past. In this view, the peaks won’t be as high, but there will be plateaus that last longer.

Because 1996 is an election year, most analysts do not expect a recession. Rather, they predict a continuation of slow growth, aided by more Fed interest rate cuts and a federal budget accord.

Still, auto makers may have to resort to increased rebates and other incentives to entice reluctant buyers and reduce already bloated inventories. Those are likely to cut into profits in 1996, as such moves did in ’95.

Collectively, the Big Three should earn about $11 billion for 1995, down about 20% from ‘94, analysts say. The earnings of Chrysler and Ford were pressured by costs for launching flagship vehicles. GM’s profits improved but were held down by poor model launches and a weak product mix--one skewed to low-profit cars.

Again, the light-truck part of the business--minivans, sport-utility vehicles and pickups--showed more vitality than did passenger cars. Light trucks accounted for 41% of sales. A decade ago, trucks captured just 28% of the market.

For the first time in its history, Ford sold more trucks than cars. And with truck sales of 2 million, it outpaced GM in that category for the first time since 1970. Chrysler benefited most from the trend to trucks, as two-thirds of its sales were in minivans, sport-utilities or pickups.

* NEW POWER

GM unveils first mass-market electric car, to be sold this fall. A1

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Gearing Down

Total sales of cars and light trucks decreased 2% in 1995. U.S. sales, in millions of vehicles:

1995

Cars: 8.7

Light Trucks: 6.1

Total: 14.8

TOP SELLERS

Ford continues to have the best-selling car and truck in America.

Cars