Detroit Updates Its Economic Models Amid Latest Boom
DETROIT
With three months to go, the U.S. auto industry is poised to record its best sales year ever, as consumers are expected to drive about 17 million new passenger cars and light trucks off dealer lots in 1999.
The vibrant performance caps a remarkable, nearly decade-long run of prosperity that harks back to Detroit’s glory days of the 1950s and ‘60s, when tail fins, planned obsolescence and horsepower ruled the roads.
Today’s unexpected boom, however, is different from those of the past and has caught even always-optimistic auto executives by surprise. They are now scurrying to readjust the economic models and assumptions on which they base their production forecasts.
The industry remains vigilant for signs of an inevitable downturn--experienced auto hounds know that a sales drop can be devastating, burning cash fast and crimping future product development. But Detroit is increasingly convinced that the prospects for a continuation of the good times are surprisingly strong for the foreseeable future.
After all, the nation’s economy continues to perk along. Interest rates and inflation are low in historical terms. The wealth created from the still buoyant, albeit nervous, stock market is keeping consumers confident and in a buying mood.
Prosperity has always driven auto sales. But unlike in the post-World War II era, when demand vastly outstripped production, today’s expansion is occurring against a backdrop of global excess capacity and corporate consolidation. The current boom is characterized by several noteworthy trends:
* The increasingly competitive environment is a consumer’s delight. Prices are the most affordable in two decades, even as the Internet puts savvy buyers in control of the buying process.
* Technological advances are yielding new creature comforts and safety features, from night-vision to crash-avoidance systems. Quality has vastly improved, leaving less difference between the best and worst producers.
* Auto design is undergoing a rebirth, as manufacturers are producing new renditions of past hits while attempting to create new vehicle segments with blended car and truck concepts.
* These changes are all made possible by a manufacturing revolution that during the last two decades has reduced production costs, improved quality and quickened the development process.
“We are as close to the return of the glory days as we can get,” said George Peterson, president of AutoPacific Group, an auto consulting firm in Tustin.
Although the auto industry is no longer the economy’s primary engine, it is still a closely watched factor whose performance signals the direction of the nation’s growth.
Its comeback is seen throughout the Midwest, which is finally putting to rest the Rust Belt image caused by the painful industrial retrenchment of the 1980s. Today the region is basking in the glow of a red-hot economy in which labor shortages are a bigger concern than unemployment lines.
Even in hard-pressed Detroit, the signs of a rebound are beginning to take hold. General Motors Corp. moved its headquarters to the city’s riverfront, a new baseball stadium is nearing completion and the first of three downtown casinos recently opened.
Such a scene would hardly have been expected a decade ago. With the intensifying of Japanese competition, the ‘80s were bloody for Detroit’s auto makers. Chrysler Corp., today a unit of DaimlerChrysler, survived only with the help of a government bailout. Soon afterward, Ford Motor Co. was forced to close factories and lay off thousands of workers. GM delayed the inevitable until the early ‘90s, when it too underwent a painful restructuring from which it is just emerging.
New-auto sales, which peaked at 16 million units in 1986, bottomed out at about 12.3 million in 1991 after the recession caused by the Persian Gulf War. Sales then began a gradual climb, settling into the healthy 15-million range for the last five years. Profits rolled in. Detroit’s auto makers have earned more than $30 billion during that time, mostly from U.S. operations.
The recent growth cycle is the longest for the auto industry, whose history is laden with the extremes of booms and busts. In an effort to explain why, experts point to everything from lower prices and imaginative designs to progressive manufacturing and technological innovation.
“The market has changed,” said James Holden, sales and marketing vice president for DaimlerChrysler. “The historic models don’t tell us what they used to tell us.”
One area of significant change has been pricing. Ever since the end of World War II, auto makers raised new-vehicle prices with the regularity of a New England maple turning its leaves in September.
But with a worldwide glut of vehicles--capacity is estimated to outstrip demand by as much as 20 million units--and increased competition, auto makers are being forced to put a brake on prices.
“We have price deflation in the auto industry,” said Diane Swonk, chief economist for Bank One Corp. in Chicago.
New vehicles are more affordable than at any time in the last two decades, said David Ullmann, chief economist for Comerica Bank in Detroit, noting that family incomes continue to rise faster that new-vehicle prices while financing rates remain flat.
Comerica’s analysis of economic data shows that it takes 23.6 weeks of median family income today to buy the average $20,800 new car or truck. That’s about the same as in 1979 (23.0 weeks) but well below 1991 (30.3 weeks).
Evidence of the moderation in pricing abounds. Mercedes-Benz recently announced that it would hold prices on its 2000 models to 1999 levels while adding new standard equipment and features. When adjusted for the new features, prices actually are declining 4%, the company said.
Mercedes’ base C-Class sedan, for example, is priced at $31,750. But now it comes equipped with an electronic stability program to prevent skids, a touch-shift automatic transmission, global positioning satellite emergency system and free maintenance for four years. Accounting for the added features, the 2000 model is 6.2% cheaper than last year’s, Mercedes said.
Auto makers are putting a hold on sticker prices even as they aggressively lure customers with cash rebates, cut-rate loans and discounted leases. The average rebate on new vehicles is about $1,500.
The emergence of leasing in recent years continues to bolster sales, despite a small drop this year in the number of buyers opting for leases. Nearly a third of all new vehicles are leased, most for two or three years, creating an almost guaranteed flow of return customers on a regular basis.
“The explosion of leasing is important,” said David Cole, executive director of the University of Michigan’s Office for the Study of Automotive Transportation. “It is now acceptable to drive a vehicle with no equity in it.”
The price pressure, which shows no signs of easing, is tied to global forces--not just overcapacity but generally weak foreign currencies that make imported vehicles cheaper in this country. The Internet’s rise is also a factor.
Until recently, the sales process was directed by the dealer, which controlled the key information. But today any savvy buyer can learn nearly every detail of a vehicle, including the invoice price, on the World Wide Web before stepping into the showroom. This has taken much of the stress out of the negotiations and forced dealers to become more consumer-friendly.
The auto makers are capturing the power of computers in other areas of their business as well. Using supercomputers and virtual reality, they are developing new concepts and prototypes in half the time and at far less cost than in the past.
At the same time, with profits pouring in, they are dedicating more money to design than ever before. Auto shows this year have been packed with design concepts that give a hint of the stylish new models that will soon hit the marketplace.
“Auto design is undergoing a renaissance,” said Michael Marsden, an expert in auto culture and provost at Eastern Kentucky University. “It is helping restore the romanticism of the auto and rekindling consumer interest.”
Some makers are looking backward and reviving classic designs that baby boomers loved, such as the Ford Thunderbird sports coupe of the ‘50s and Nissan’s Z sports car of the ‘70s. Others are looking forward, trying to create new classes of vehicles. Known as crossovers or hybrids, these vehicles combine elements of minivans with passenger vehicles, or sport-utility vehicles with pickup trucks.
Chrysler’s PT Cruiser, for example, has the nostalgic look of a 1930s British taxicab. Though built off the chassis of a Dodge Neon compact, it is not a small car but has the roominess and versatility of a small minivan.
“It’s too cool to categorize,” said Robert Eaton, co-chairman of DaimlerChrysler.
Likewise, Ford is preparing to introduce a number of hybrid trucks. Both the Explorer Sport-Trac and F-150 Crew Cab offer four-door sport-utility cabins combined with a pickup truck cargo bed. The company has also announced a luxury derivative called the Lincoln Blackwood.
The explosion of new models, particularly in the light-truck market, is being made possible by manufacturing efficiencies. Increasingly, auto makers are developing multiple models off the same platform or chassis by using common parts and processes. The vehicles look different but share many of the same components under the skin.
Such manufacturing innovation is allowing auto makers to cut costs. Ford alone trimmed $6 billion from its operational expenses in the last two years, enabling it to boost profit even as it held vehicle prices steady.
The cost savings are allowing the companies to develop and introduce new technology-based features that are likely to draw more buyers eager to have the latest gizmos in their cars and trucks.
GM, for instance, is introducing night-vision systems into its Cadillac lineup. At the same time, it plans to offer the OnStar communications system, which uses global positioning satellite technology, in 1 million vehicles by the end of next year.
The new consumer focus in Detroit, combined with a robust economy, points to continued strong auto sales going into 2000. After a record year, a modest slowdown is expected, but most signals still appear green.
“The stage is set for a moderation in sales,” said economist Swonk, “but the good times are far from over.”
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Driving Sales
The U.S. auto industry is on track to report its best sales year ever, with manufacturers and analysts predicting the final 1999 figure will top 17 million.
Affordability Index
1998: 24.2 weeks of work
Vehicle Sales
1998: 15.6 million vehicles
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Sources: Comerica Bank, Audodata Corp.
Researched by JENNIFER OLDHAM / Los Angeles Times
