Sales Up: Auto Firms Sound Sigh of Relief
American motorists warm to idea of buying new cars
DESPITE unseasonably cold weather in much of the country, things seem to be thawing out for the American auto industry.
Frigid temperatures and heavy snowfall may have kept potential customers nestled at home in January, but since then, motorists have been warming to the idea of buying a new car. With current sales outpacing even the most optimistic forecasts, industry planners are wondering whether it's time to crank up production schedules. But automakers are worried that if the new car market cools off again, they could be forced to launch another round of costly incentives.
Dealers had a hard time keeping up with demand last month, as industry sales surged to their highest levels in more than two years. Passenger-car and light-truck volume ran at an annualized rate of 15.9 million units during March. That's all the more surprising considering the two-week strike at General Motors Corp., which created spot shortages of some of the automaker's most popular cars and trucks.
Though unexpected, the upturn was foreshadowed by the Federal Reserve's decision to cut interest rates late last year. On top of that, new figures show stronger-than-anticipated job growth and rising consumer confidence.
Economic conditions "are much better than we expected," said Ross Roberts, general manager of Ford Motor Company's flagship Ford Division, during an appearance at the New York Auto Show last week. "I think it will continue to get better." And with it, said Mr. Roberts, the new-car market should also continue to improve.
It wasn't supposed to happen this way. Ford's initial forecast for 1996 called for US sales of a modest 15.3 million cars and trucks. And that's one of the more bullish estimates. Chrysler Corp. economists began the year predicting an anemic 15.1 million vehicles.
If 1995 was any indication, automotive planners had reason to sound a conservative note. The industry was on a roll during the final months of 1994, and analysts were hoping sales might keep surging to record highs. Chrysler predicted 1995 sales of 16 million, but as interest rates and layoff tallies rose, it became clear the economy was slowing down. Chastened, company economists kept scaling back their figures, barely keeping pace with sliding demand. By the time the year's final numbers were tallied, sales had stuttered to a tepid 15.4 million units.
As 1996 began, most analysts figured the new-car market would completely run out of steam. But after January's false start, the market has taken off like Forrest Gump.
Will the good news last?
The question is whether this is a temporary upturn or a longer-term trend.
Chrysler Corp. chairman Robert Eaton, keynote speaker at the New York Auto Show, said he is "absolutely convinced the market will not continue at the rate we've been running."
Analyst Jack Kirnan, of Salomon Brothers, agrees, stressing that "we think the selling rate [of March], as impressive as it is, is not sustainable."
Even so, most observers are racing to revise their projections. Insiders expect Chrysler's forecast for the year to be upgraded soon, perhaps to as many as 15.4 million vehicles. Ford's will probably creep upward as well.
That's not just an academic exercise, analysts caution. The bullish predictions made during the first weeks of 1995 resulted in plenty of assembly-line overtime. But as sales slumped, manufacturers found themselves with bulging inventories. That led to a round of temporary plant closings and a wave of costly rebates. During the second quarter of 1995, Chrysler was forced to double incentives to an average of $1,090 a car. That was one of the primary reasons why earnings for the quarter were off 86 percent.
This time around, corporate planners are reluctant to increase production even if that costs them some potential sales. What they would like to see most of all is a flat to gradual increase in the US new-car market.
"The car companies would kill for a cycle like that because they can keep up the cadence," explains analyst Joe Phillippi of Lehman Brothers.
Surges in production - whether in the form of increased overtime or temporary shutdowns - play havoc with quality and plant-floor efficiency. So keeping factories running steadily is worth more than a few extra sales, Mr. Phillippi says.
While they may not agree how high is up this year, there's apparent consensus that it's up to the Federal Reserve to keep car buyers warm and cozy. If interest rates are cut 75 basis points (three-fourths of a percentage point) this year, Mr. Eaton said, the new car market likely would stay warm "through 1997."