After eight years of booming sales, Detroit is reluctantly preparing for the party to end. Thanks to a fast start in the first half of this year, the auto industry is expected to sell a record 17.5 million cars and trucks in 2000 and bank huge profits. But Wall Street is fretting that this year’s strong results will soon be a distant memory. Things took a turn for the worse in October as car sales fell to their lowest rate in a year. And next year consumers are expected to buy 1 million fewer new vehicles, a falloff that auto executives optimistically refer to as a “soft landing.” GM CEO Richard Wagoner told NEWSWEEK: “I’m not sitting here worrying a lot about an auto recession.” But the classic signs of a more serious downturn are emerging. For starters, inventories are rising as unsold cars pile up on dealer lots. To move the metal, Detroit is resorting to distressed marketing tactics (Oldsmobile’s come-on: “No money down, no payments for a year!”) that are pushing rebates to profit-corroding levels. At the same time, the Big Three automakers are facing new foreign competition on their most lucrative turf–sport utility vehicles, minivans and pickup trucks. Adding to the turmoil, Chrysler president Jim Holden was fired last week by his German bosses at DaimlerChrysler after the U.S. unit lost a half-billion dollars in the third quarter. Chrysler and GM this week idled five factories to reduce bloated inventories. Even Wagoner admits: “People are definitely more nervous than they were six months ago.”
And that should make the rest of us nervous, too. Even though the auto business is the epitome of the Old Economy, it still has the power to drag the country into a recession. The $425 billion new-car business accounts for about 4 percent of the nation’s gross domestic product and one quarter of all retail sales in America. If car sales fall by as much as they have risen–they are up 16 percent in just the last three years–that would chill the entire country. “The auto industry is still one of the biggest swing factors in the economy,” says Bank One’s chief economist Diane Swonk. Indeed when Saddam Hussein invaded Kuwait in 1990, Detroit sharply cut auto production and set off the last recession. This time the cold winds blowing into Detroit originated, in part, in Silicon Valley. “As the Nasdaq stocks fall, people don’t feel as comfortable,” says GM’s Lovejoy.
And uncomfortable consumers don’t buy new wheels. “Before we commit to a big expense, I’d like to see how the economy holds up,” says Christy Tuohey, a Syracuse, N.Y., mother who is holding on to her 1996 Saturn rather than buying a new minivan. Sitting tight is a choice that’s easier for car buyers to make, since today’s models are built better and last longer–cars on the road are now an average of eight years old. Until now many car-buying decisions were driven by desire rather than necessity. “People were buying new cars just because their old one got dirty,” says veteran auto expert Maryann Keller, who just quit as head of Priceline.com’s struggling car business. Keller believes cautious consumers and more factory closings will trigger a vicious cycle that could send car sales skidding to 15 million next year.
Throughout the automotive food chain, everyone is preparing for the worst. Executives at GM are ordering underlings to send e-mail instead of making long-distance phone calls and to videoconference rather than fly cross-country for meetings. Big parts makers, squeezed by auto companies to cut prices, are canceling plans to show their wares at Detroit’s premier auto-engineering convention in March. Chrysler is considering white-collar layoffs and slashed its annual product-development budget by 25 percent. And dealers nationwide are ordering fewer cars as showroom traffic slows to a crawl. “It feels as if we’re in a mild recession,” says Southfield, Mich., car dealer Martin J. (Hoot) McInerney. Delaware GM dealer Frank Ursomarso cut his ad budget 10 percent, plans a wage freeze and may trim staff. “You look at all these people and what they’re being paid and ask, ‘Do I need them all?’ " says Ursomarso.
How did Detroit end up facing such dim prospects? By playing ‘Let’s Make a Deal’ for years, the automakers conditioned buyers to demand discounts. Until recently, that didn’t hurt profits because Detroit banked billions off the SUV and truck markets it dominated. In the last two years, however, the Japanese and Germans have rolled out hot models like the Toyota Tundra pickup and the BMW X5 SUV. Honda alone picked up eight points of minivan market share with its new Odyssey model, which sells briskly without the need for any rebate. In response Detroit started dealing for the first time on its once hot SUVs and now is taking rebates to record heights–an average of $2,800 per vehicle last month. Analysts say price wars inflated overall auto sales this year by nearly 1 million cars. That has Wall Street cutting profit forecasts for the Big Three, sending their stocks plunging by double digits this year. Ford CEO Jacques Nasser admitted to NEWSWEEK that Detroit’s rebate pains are “self-inflicted,” but he blamed rivals’ optimistic sales goals for creating the profit “crunch.”
Perhaps the biggest wild card is what happens next at Chrysler. DaimlerChrysler chief Juergen Schrempp fired Holden after the American executive didn’t cut costs fast enough and then angered his boss by idling seven factories earlier this month to reduce inventories of cars and trucks. The move blindsided Schrempp, who learned of it from auto analysts just as he was promising that Chrysler would be profitable by the year-end. On Friday DaimlerChrysler officials admitted their forecast was too rosy, and Wall Street is now bracing for more losses as Chrysler boosts rebates on its aging models. But Chrysler officials warn that they won’t be the only automaker with declining fortunes. Says DaimlerChrysler chief economist Van Bussmann, “The cock has come home to crow for us, but I think we’re only the first.”
For now Wall Street predicts Detroit’s combined profits will top a record $16 billion this year. But that could be the last hurrah for some time. Foreign automakers have picked up nearly three points of U.S. market share this year. Perhaps that’s why the industry’s top brass hedge when asked about the prospect of a less than soft downturn. “We don’t see it,” says Nasser, “but on the other hand, you never do.” That’s one blind spot that could cause a real wreck in Detroit
