A year ago Americans were still having to come to terms with terrorism at home and the daunting prospect of stepping up their country’s role as a world policeman. With the stock market – traditionally the bellwether for automobile sales – languishing at a fraction of its 2000 level (and still further to fall?), war drums beating in the Pentagon, corporate corruption exposed in the highest ranks of America’s financial aristocracy, and unemployment on the rise, all the signs were of a sustained and deep recession. Bert Wyatt reports.
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For much of the economy this prognosis was correct, but certainly not for the automobile industry, which turned in a performance that surprised everyone. New vehicle sales last year in the United States were the fourth highest ever at over 16.8 million units, an outstanding achievement judged against the sombre background of political and economic turmoil.
2002 began with the assumption that the frenetic post-9/11 activity in 2001’s latter months had mopped up much of the potential market, and that this would be a ‘down’ year. That theory was blown out of the water in a matter of weeks. From then on, sales just rolled along at a healthy clip, any sign of a slowing down being immediately knocked on the head by ever bigger and better incentives, led by venerable old General Motors, continuing its ‘zero/zero’ financing.
This renaissance of GM dates from Bob Lutz coming on board a couple of years ago. Already one sees flair in the styling of both concept and production cars, but more than that, a sense of adventure and chutzpah. Emboldened by Bob Lutz’s aggressive and creative presence, momentum was maintained throughout a year which ended with its rallying cry that ‘heavy incentives’ would continue throughout 2003 in the battle for market share. Critics of ‘zero/zero’ were not hard to find: deploring the effect on used car values, Nissan’s Carlos Ghosn called it ‘Crazy’.
The annual National Automobile Dealers’ Association convention (held the first few days in February this year, in San Francisco) presented a useful opportunity for sounding out dealers. Obviously, the prospect of war with Iraq dominated all conversations, but although there were some very nervous faces around, the time-honoured optimism prevailed. There were a few pessimists forecasting a flat year, but the mainstream opinion was for a quiet start to the year and a strong finish. On Iraq, the consensus was that, if war comes, it would be very brief, that the market will slow down only temporarily, and the total net effect will be marginal. This view seems to have the support of J D Power and Associates with its forecast of 16.4 million units, only 400,000 below 2002.
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By GlobalDataI have to say that I feel that this is a simplistic view of 2003. Even given a brief operational campaign against Iraq, the aftermath is likely to be prolonged. In an interesting postscript to present-day life in America, Ken Gillman, CEO of the publicly-quoted Asbury Automotive Group, draws attention to what he calls ‘the CNN factor’ (the black joke here is that the President cannot begin the invasion of Iraq until Rupert Murdoch has a vacant prime time TV slot available on his Fox channel). Any conflict is bound to have Americans glued to their TVs, with car buying relegated to the back burner. As Gillman says, the problem will be finding customers with enough confidence to turn off the TV and go to the showrooms.
Shrugging off the ‘zero/zero’ criticism, GM’s own rallying cry is unequivocal: “The strategy is working. So guess what? This year [2003] we’re going to keep pushing. Stop whining and get used to it.” These words, emblazoned from the house tops by CEO Rick Wagoner, show a remarkable U-turn in a company just completing 40 years of steady retreat. Bob Lutz’s own confident glimpse into the future struck a more extravagant tone with: “The automobile industry is on the verge of a new Golden Age.” And as if to give substance to those grandiose words, GM’s fourth quarter profit came out at $1 billion, boosting the whole year to $1.7 billion.
We don’t have to look far to see the other side of the coin. The travails of Ford continue, Jac Nasser’s grand strategy (dismissed by one commentator as “a wilderness of experiments”), lies in ruins. Branching out into ancillary activities, it was claimed during Nasser’s reign, was the way forward, with the bonus of evening out the peaks and troughs of this volatile industry.
Now, with the world’s vehicle sales a mere 58% of production capacity, it’s ‘back to basics’ at Ford, a radical change in direction that has left it temporarily barren of new product, its dealers discontented, and Wall Street impatient, all of them even questioning Bill Ford’s ability to come through. This is not the way that his great-grandfather and founder would have enjoyed this year’s celebration of Ford’s 100th anniversary. And it seems only yesterday that we were predicting GM’s relegation to No. 2 behind Ford worldwide.
The home market share of America’s Big 3 continued its slide, at a little over 60%, down from 73% in the past six years alone. This is not going to change any time soon, with Japan’s Big 3 (Toyota, Honda and Nissan) remorselessly building more production capacity stateside.
The imbroglio at Italy’s largest industrial company, Fiat, may well have been irrelevant to us here in the United States were it not for the ill-timed GM investment. To outsiders, the purpose, detail and timing of GM’s investment were mystifying. In exchange for 5% of its own shares with an estimated value of $2.2 billion at the time, GM acquired 20% of Fiat, committing itself to buying the rest if so required by Fiat, an unusual obligation by any standard.
In the past year GM has stood by helplessly, seeing Fiat reel from one crisis to the next, and the value of its investment plummet. With admirable speed and resolution, GM wrote off the whole investment (effectively valuing Fiat at under $1 billion, a 91% drop since the original deal was consummated), and is currently negotiating to extricate itself from the commitment to buy more shares. At the same time the value of Fiat’s 5% of GM shares has itself fallen by around one-half to $1.2 billion
Meanwhile, interesting trends continue within this prosperous market. Criticism of SUVs is beginning to take on the appearance of a quasi-official campaign. With the big question mark, oil, weighing heavily on everyone’s mind, it has become the fashion to criticise the use of vehicles like the enormous Ford Excursion. Significantly, for the first time in a couple of years, January showed cars outselling small trucks, and comfortably so. Another tangible indication that SUVs are under pressure is GM’s announcement of a 19% drop in January sales against the previous month, coupled with the offer of up to $1,000 per vehicle incentive on all SUVs through to the end of February
More ominous still is the news that following a blunt warning from the head of the National Highway Traffic Safety Administration on SUV safety, a non-profit auto safety group, the Insurance Institute for Highway Safety, is sponsoring a two-day meeting on the same topic. Illustrating growing unease in official circles, NHTSA points out that many deaths are caused not necessarily by the severity of the accident but to some degree by the incompatibility of large SUVs and pick-up trucks colliding with smaller vehicles.
Yet, paradoxically, statistics show that SUVs provide less protection to their own drivers than, for example, a mid-size saloon. Whereas when cars go out of control they tend to slide sideways, an SUV, because of its higher centre of gravity, is more likely to flip over. Rollovers are usually the most lethal of all types of accidents, only 3% of the accidents causing 30% of the deaths.
By the law of diminishing returns alone, it is doubtful if zero finance deals will continue to buttress the market to the extent of the last 18 months – there is no longer any great reservoir of pent-up demand to be satisfied. It would be judicious therefore to foresee a market rather less than 2002, but still respectable enough to keep manufacturer and dealer happy. Unfortunately, the external factors (namely Iraq) are more momentous than usual. We may see, therefore, market forecasts that are shrouded by more equivocal language than usual.
