Wednesday, January 12, 2005

Big Three brace for tough year

Ford, Chrysler and GM must overcome higher interest rates and stiff competition.

By Brett Clanton / The Detroit News

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Detroit automakers will face stiffer economic headwinds this year as they try to defend their turf against foreign rivals.

U.S. auto sales are expected to be flat or slightly down in 2005 as rising interest rates, oil prices and slower economic growth threaten to keep some consumers from buying new cars and trucks, the leading economists at all three Detroit automakers said Tuesday.

Last year the industry generated sales of 16.9 million units. But hitting that mark again will be more difficult in an economic climate that is less favorable than it was in 2004.

"All of the leading indicators are signaling green, they're just less green than they were six months ago," said Van Jolissaint, Chrysler's chief economist.

While there are promising signs that aging baby boomers are starting to splurge on more expensive vehicles, any gains generated from the higher sales could be erased by profit-eating rebates that are likely to remain part of the competitive landscape in 2005.

The average incentive surpassed $4,000 per vehicle last year, and the higher rebates cut into automotive profits at Ford Motor Co. and General Motors Corp. Even though new car and truck discounts dropped in the final months of the year, U.S. consumers still will be swayed by big rebates in 2005, said Michael Bruynesteyn, an analyst with Prudential Equity Group LLC. "Suffice it to say, incentives will remain pretty high and continue to drive sales," he said.

Rising health care and pension costs also will continue to be a drain on Big Three profits. And surging raw material prices will squeeze profits more. Rising interest rates also will dampen the profits automakers reap from their finance arms.

The severe cost pressures on Detroit automakers prompted Morgan Stanley this month to take a cautious view of automotive stocks.

"The years preceding 2005 look eerily like the years preceding the auto industry recession in 1980," Morgan Stanley's chief auto analyst Stephen Girsky said in a new report. During that period, high energy prices, high raw material costs and high incentives made auto stocks poor performers, the report said.

"If history repeats itself, auto stocks may be in for a rough period over the next year or so," he said.

Girsky also is concerned that consumer taste is moving away from large SUVs, one of the domestic industry's most profitable segments.

Even so, the outlook for selling cars in 2005 could be a lot worse.

Big Three economists expect the economy to grow about 3.3 percent this year, down from 4.5 percent in 2004, but still ahead of an expected 2.4 percent rise in inflation. Job growth is rebounding, productivity is near a 30-year high and -- at the beginning of January -- Americans were willing to spend more.

"Consumer confidence seems to be picking up," said Greg Smith, Ford's executive vice president and president of the Americas. "Some of the indications are that the economy is strengthening."

"I feel pretty good about (2005) now," GM Chairman Rick Wagoner said. "I don't feel good about health care costs. I don't feel good about how that impacts our profitability. But are we running the business more like we need to? I really do think we are."

Chrysler CEO Dieter Zetsche expects the automaker to increase sales and U.S. market share this year on the strength of new vehicles such as the 2006 Dodge Charger sedan.

Yet unlike 2004, automakers won't benefit from record-low interest rates that have convinced many Americans to finance new cars and trucks earlier than they might have otherwise. That means fewer Americans may be in the market for new wheels this year.

"We don't think there is any pent-up demand," Jolissaint said. "In fact, we think there's pent-down demand."

Domestic automakers could benefit as the U.S. dollar weakens against foreign currencies, which makes import models more expensive to buy here. But the trend also could hurt their profits from selling vehicles overseas.

High but declining oil prices also may act as a drag on growth this year, particularly for Detroit automakers that generate much of their profits selling gas-thirsty SUVs and pickups. .

"I don't know whether we've been desensitized, or whether it's the $5 point or the $100 fill-up, there's got to be some mark where we'll all of the sudden going to say, 'Wow, that's a lot of money,' " said Charlie Volgelheim, executive editor of Kelley Blue Book, which published surveys last year suggesting higher gas prices were encouraging consumers to consider more fuel-efficient vehicles.

Ford economist Ellen Hughes-Cromwick said there are several encouraging signs that could generate fatter revenues for automakers this year. Demand is increasing for high-end content and features, such as rear-seat DVD players and satellite radio systems, which prop up selling prices

Sales of premium vehicles also hit a record high last year -- 10.8 percent of industry sales -- which "represents a pretty solid opportunity for automakers," she said.

Baby boomers, in particular, will be shopping for higher-end models as they move toward retirement and look for comfy ways to spend, Bruynesteyn said. The 70 million U.S. consumers born just after World War II spend an average of $6,000 more per vehicle than other customer groups and this year will begin moving into their prime buying years. This could be a profitable shift for automakers, he said.

It's unclear whether rising sales to baby boomers will be enough to reverse the decline in U.S. market share held by Detroit automakers, which fell to a low of 58.7 percent last year. That's down from 77 percent in 1980. Prudential sees more erosion as foreign automakers, particularly Asians, make inroads into Big Three strongholds, such as full-size trucks and SUVs.

You can reach Brett Clanton at (313) 222-2612 or bclanton@detnews.com.