The Year in Rearview

With annual sales of new cars and trucks expected to top the 17-million mark by the time 1999 screeches into 2000 Friday night, it was, for most in the automobile industry, the best of years.

The record sales--which caught the entire industry by surprise-- constituted the biggest story of the year by far. But that wasn’t the only one, and not all of the stories were as upbeat.

Industry analysts and executives generally agree that 1999 was a year in which there was little but good news.

But that attitude ignores a few things, such as:

* Domestic auto makers watching their market share shrink even though sales rose.

* AutoNation Inc. shuttering a national chain of money-losing used-car superstores and repudiating the premise that customers would be drawn by variety and be willing to pay a premium for service and surroundings reminiscent of a new-car dealership.

* Auto dealers without Internet sites watching computer shoppers take their business to competitors who send prices and product information electronically and don’t insist on seeing customers before they are ready to show their faces.

* Nissan Motor Co., Japan’s once-proud No. 2 auto maker, forced to shed its independence and take on Renault of France as its controlling equity partner to fend off almost-certain bankruptcy.

* General Motors Corp. watching as sales at its once-vaunted Saturn subsidiary sputtered and slowed despite the launch of a family of new mid-size vehicles. For the first 11 months of the year, Saturn sales were running slightly below last year’s pace.

A Year of Labor Peace,

Bargains and Net Gains

*

Still, “There weren’t a lot of really low spots,” says David Cole, director of the University of Michigan’s Office for the Study of Automotive Transportation. “We’re actually seeing the relative strength of the domestics growing on the worldwide scene.”

The domestic auto makers even avoided labor strife, securing four years of peace with a series of national contracts signed with the United Auto Workers union in late summer and early fall.

“Relationships [with the unions] here and in Canada are better than they’ve been in a long time,” says G. Richard Wagoner Jr., GM’s president and chief operating officer.

Most of the negatives in 1999, analysts say, are the result of normal, and necessary, pressures as the marketplace changes--those who get hurt are those who cannot keep pace.

Perhaps the biggest question mark the industry must deal with just over the horizon was raised this year with the increasing role of the Internet and electronic commerce.

“E-commerce is the industry’s 500-pound gorilla, and there’s going to be carnage in the car-retailing world as it finds its place,” Cole predicts.

But overall, auto makers, dealers and consumers have all been beneficiaries this year of an industry that is making cars and trucks more reliable and feature-packed than at any time in the past, and of an economy that makes new vehicles--even at today’s average selling price of $22,000--more affordable as a percentage of average household income than they have been in almost two decades.

That affordability, coupled with soaring employment, wealth and rising income levels, meant it was a great year for most buyers--especially as the industry pulled out all the stops, the domestic companies piling on incentives as they tried to prop up their market share and the Asian and European auto makers adding incentives of their own to keep pace.

By some estimates, the average new passenger car this year came with about $1,500 worth of incentives in the form of rebates or interest or lease-rate reductions.

Part of that, GM’s Wagoner acknowledges, is because manufacturers initially build steep premiums into the pricing of their most popular models, then back the extra profit out in the form of incentives if the market balks at paying full price.

Thus, he says, when GM’s November sales slipped precariously, the response was to increase December rebates.

Model Behavior: No Bug,

but Plenty of Winners

*

There was no New Beetle to captivate the market in 1999, as was the case when Volkswagen rolled out the restyled Bug in 1998. But the PT Cruiser due out this spring should have them lining up outside Chrysler dealerships until production is in full swing.

There were hot sellers in 1999, to be sure: Honda dealers, taking full advantage of the laws of supply and demand, routinely asked for--and got--$10,000 premiums for hard-to-find Honda S2000 roadsters. And some Nissan dealers were charging premiums of $3,000 to $4,000 for the popular new Xterra sport-utility vehicle as supplies grew short toward the end of the year.

There were other hits with critics and consumers alike, spanning every market segment: trucks (the Xterra, Honda’s Odyssey minivan and Toyota’s Tundra full-size pickup, for example), luxury sedans (Lincoln’s LS and Volvo’s curvy S80), mid-size cars (Buick’s Century and Mitsubishi’s Galant) and compacts (Oldsmobile’s Alero and Ford’s Focus, just out of the gate).

They top a sizable list of trend-setting and even revolutionary cars, trucks and “crossovers” introduced during the year:

* Some, such as Nissan’s Frontier Crew Cab compact pickup, established new segments in the market and engendered a host of competitors. The four-door, five-passenger Frontier is being followed by Dodge’s Dakota Quad Cab, Ford’s Explorer SportTrac and a still-unnamed Chevrolet S-10 variant. All will boast large four-door cabins and shorter-than-usual open cargo beds (the Ford’s is only 50 inches long) and fit into a new category that blends aspects of a passenger car, compact pickup and SUV.

* Some, such as Honda’s S2000 and Mercedes-Benz’s S-Class sedans, showcased new technologies. The Honda offers a highly tuned engine, incredibly stiff chassis and high-performance suspension. The Mercedes piles on such features as a self-adjusting suspension, sonar detectors to warn when curbs--or other vehicles--are too close and a voice-activated “command” system that integrates navigation, cell phone and emergency-alert devices.

* Some, such as Honda’s Insight (which hit dealerships two weeks ago) and Toyota’s Prius (due in the spring), represent major advances in the hunt for fuel-efficient, environmentally friendly vehicles that will go more than 100 miles without being refueled. Both cars use hybrid pairings of gasoline engines and electric motors and are rated at about 70 miles per gallon.

* And some, such as Ford’s Focus or Mitsubishi’s Galant, were hits simply because they provided consumers with a compelling blend of features, performance, safety and affordability.

The Lesson of 1999:

Product Remains Key

*

But in the end, what happened in 1999 really only matters now as it sets up what might occur in 2000.

Product will remain the name of the game, “and the excitement the new products out there will bring to market is going to be big news,” says George Magliano, head of the auto industry unit at WEFA Group economic forecasters in New York.

But even the industry’s Pollyannas acknowledge that with all signs pointing to a continuation of what by February will be the longest unbroken economic boom since World War II, auto sales next year are likely to fall a bit. The consensus is that annual sales in 2000 should hit just above 16 million--making it the second-best year on record. Magliano is a bit less bullish, sticking with an estimate of 15.4 million units.

The big reasons for a slightly slower pace are that gasoline prices and interest rates are rising, and both have an immediate damping effect on auto sales.

And the jury is still out on whether auto makers really tapped a previously undiscovered well of new-car buyers in 1999 or merely lured next year’s buyers into this year’s pot with all the sweeteners they offered.

But the record sales did demonstrate “pretty conclusively that the U.S. alone is probably a 16-million unit market,” says industry consultant George Peterson, president of AutoPacific Inc. in Tustin.

“For most of the last decade, we believed that this market could only absorb about 15 million new cars and trucks each year,” he says. “So we’ve suddenly added an extra million a year to the equation, and that makes a great big difference for all the players in terms of profits.”

Indeed, GM, Ford Motor Co. and DaimlerChrysler all reported record third-quarter earnings recently, and most analysts expect similar results for the fourth quarter.

Even the nation’s new-car dealers, under fire all year both from the growing number of Internet-based automotive information and procurement businesses and from continued efforts by GM and Ford to take a more direct role in the retailing of their vehicles, had a good year.

“An extraordinary year,” says Jim Willingham, owner of Long Beach-based Boulevard Auto Group and outgoing chairman of the National Automobile Dealers Assn.

There are about 200 fewer U.S. dealerships at year’s end than there were last January, says the association’s chief economist, Paul Taylor.

Some went because they were marginal businesses pushed out by stronger competitors; others were lost through consolidation. But those that remain--there are about 22,200 dealerships in the U.S. today, or 47% of the 1941 peak of 47,133--are “better capitalized, better equipped, more technology-adept, and with better personnel and training than ever before,” Willingham says.

Warning Signs and

the Urge to Merge

*

James P. Holden, who as DaimlerChrysler’s Stateside president heads the U.S. product divisions (Chrysler, Dodge, Jeep and the soon-to-be purged Plymouth), joins the chorus in celebrating the record sales year. But he warns that the barrage of incentives doesn’t permit auto makers to base their pricing on real marketplace demand. Worse, he says, it “continues to put big pressures on everybody” at a time when the industry is consumed with the need to cut operating costs.

That drive means there will be more mergers and strategic combinations as more of the smaller vehicle and parts makers are swallowed, or at least embraced in financially advantageous business alliances, by their bigger brethren, says Nobuo Araki, president and chief executive of Nissan North America in Gardena.

Although his parent firm’s “strategic alliance” with Renault dominated headlines this year because of Nissan’s precarious financial position and the still-unusual idea of a Western company taking control of a major Japanese enterprise (Ford did it with Mazda in 1996), it wasn’t the only big deal to go down.

Indeed, Ford started the year by buying the passenger-car operations of Volvo of Sweden for $6.45 billion, and it is ending the year as a bidder--along with GM and Hyundai Motor Co.--to acquire South Korea’s ailing Daewoo Motors.

For its part, GM has been allying itself all over the place this year.

In addition to bidding on Daewoo, it strengthened its equity stakes in Japan’s Isuzu Motors Corp. and Suzuki Motor Co.; acquired a 20% stake in Fuji Heavy Industries Ltd., parent of all-wheel-drive specialist Subaru; signed a five-year deal with Toyota Motor Corp. for joint development of advanced-technology vehicles, including those powered by fuel cells; and this month signed an agreement with Honda Motor Co. under which GM will begin buying Honda V-6 engines for various GM vehicles in return for Honda’s purchase of diesel engines built by GM’s Isuzu subsidiary.

“We are beginning to see consolidations and mergers of this magnitude not only at the manufacturing level, but at the supplier and retailer level as well,” says Araki, the man charged with implementing in North America the Nissan revival plan forged in Japan this summer by the company’s aggressive chief operating officer, former Renault executive Carlos Ghosn.

Among those supplier alliances were two huge ones, as TRW Inc. acquired British parts maker LucasVarity for $7 billion this year and Lear Corp. bought United Technologies Corp.’s auto parts unit for $2.3 billion.

Mergers and alliances, Araki acknowledges, are not unique to the auto industry.

“It’s happening in industry in general and is becoming critical to future success as companies seek long-term growth on a global basis,” he says. “The difference that I see in the auto industry is the greater number of strategic partnerships as opposed to mergers.”

Indeed, sometimes mergers don’t have the expected results.

TRW started selling off some of its automotive properties, including one that came with LucasVarity, just a few months after completing the purchase.

And DaimlerChrysler--the result of last year’s stunning purchase of Chrysler Corp. by Daimler-Benz of Germany--restructured the deal this year by giving each of the partners more independence. It was an acknowledgment by the Germans, some industry watchers say, that the Chrysler half of the company is better run from the United States by U.S. executives.

But business combinations will continue to happen, Araki and others say.

There is no other way for some of the smaller players to continue to compete in a marketplace that no longer respects or even recognizes national boundaries.

One big change that globalization will bring, analyst Peterson says, “is that maybe we’ll have less protectionism and cronyism” in the Asian markets, opening them to domestic and European auto makers desperately seeking new customers.

Over the Horizon:

Technology Looms Large

*

Globalization also means that technology will continue to advance as auto makers and suppliers meld the best of their research-and-development staffs.

The industry has used advances in metallurgy, plastics, computer-aided design and computer-controlled manufacturing processes to make it faster, easier and less expensive to produce new vehicles. Technology has also helped make cars and trucks more reliable, probably safer and certainly more complex to operate as they fill with satellite-based navigation systems, self-adjusting suspension systems, voice-activated cell phones, sonic obstacle detectors and flip-down, liquid-crystal monitor screens for in-cabin movie viewing and game playing by those who aren’t driving.

And the importance of the Internet to the auto industry will continue to grow. Its effects will certainly be felt on the retail side, where more and more franchised car dealers, independent e-commerce auto retailers and even vehicle manufacturers will be experimenting with ways to hook online shoppers. But e-commerce will also be going to work on the wholesale side, where everything from used-car auctions to auto makers’ parts systems will be going online in an effort to shave real costs by creating virtual marketplaces and eliminating inventories and warehousing expenses.

“The explosion of automotive e-commerce is mega-important, to the industry and to the consumer,” says the University of Michigan’s Cole. “And what we’ve seen so far is just the kickoff. Ford and General Motors both have major initiatives underway that are going to bring real substance to the e-world.”

Both manufacturers have announced deals with major software companies to put their entire parts supply systems online, and both are leaders in the industry’s efforts to develop systems that will allow the auto maker to interact directly with the consumer.

“If I were a car dealer, I would be sweating,” Cole says. “The historic model is that the local dealer owned the retail relationship. But now the customer can shop the world, even talk to the factory, and the power has shifted to the consumer. It is going to drive the industry into one-price selling, and the prices are going to be low.”

Auto makers are cheering, Cole says, “because 20% to 30% of the price of a car is embedded in the retail side.” If e-commerce cuts retail prices and spurs sales, the manufacturers will profit. But somebody’s going to pay--and that means dealers, he says.

Jac Nasser, Ford’s president and chief executive, agrees with at least part of Cole’s read on the importance of the Internet and electronic commerce.

Information technology, he says, is one of two forces--the other being the increasingly global economy--that “will revolutionize our industry as profoundly and fundamentally as the engineering and manufacturing innovations of the last century.”

The changes, Nasser says, “mean that the consumer is really now in charge. Not the manufacturer, not the banker, not the retailer, but the consumer.”

Welcome to the year 2000.

Times staff writer John O’Dell can be reached at john.odell@latimes

.com.