Despite optimistic forecasts and big plans to boost sales with dazzling new products, U.S. automakers have gotten off to a slow start in 2004. After a relatively strong fourth quarter, government figures released Thursday showed that car sales fell 3.9 percent in January.
That’s not what was supposed to happen. At last month’s Detroit car show, General Motors, Ford and Chrysler each rolled out dozens of new and re-engineered models design to lure buyers to the showroom as the U.S. economy rebounds. Beyond boosting sales and stopping the ongoing erosion in their market share, the Big Three are hoping that demand for their new models will help wean buyers off the costly cash incentives and no-interest financing that have eroded their profit margins.
“With so many new products coming to your showrooms, the time may have finally come for us to put less emphasis on selling ‘the deal’, and more emphasis on selling the product,” Chrysler Group CEO told Dieter Zetsche at a dealers convention in last Vegas last month. He predicted that the “tidal wave” of new models -- the company will introduce 25 over the next 3 years -- would help push sales higher for the first time in four years.
But so far, the Big Three car makers are having a tough time navigating 2004 with their new profit roadmap. While the latest figures show that the average incentive of $2,751 per vehicle fell slightly in January compared to the month before, the sales slump in January means Detroit will have to continue to come through with sweet deals to move cars that are backing up on the lot, according to Merrill Lynch auto analyst John Casesa.
The incentives numbers for January show that “auto industry price-cutting is not only intense, but appears to be getting worse, despite Detroit’s now often repeated expectation that incentive spending will moderate in 2004,” he wrote in a recent research note. With inventories backing up, Casesa predicts “more incentives are certain for February.”
For now, the Big Three can rightly claim the biggest share of the North American car market, with General Motors (28 percent). Ford (22 percent) and Chrysler (14 percent) still lead the pack. But they've got Japanese car makers Toyota (11 percent) and American Honda (8 percent) in the rear view mirror — and closing that lead.
The real test of will come later this year, when the first of the new models roll out of the factory. After years of focusing their efforts on higher margin light trucks and SUVs. much of the Big Three’s new product push marks a return to the traditional car market.
“They’ve ignored it for so long that their car portfolios are weak,” said Morgan Stanley auto analyst Brian Jacoby. “People still buy a lot of cars; 49 percent of all sales are cars.”
So, after years of ceding the market for mid-sized sedans to popular Japanese models like the Honda Civic or Toyota Corolla, U.S. car makers are hoping to get back in the game. Jacoby says General Motors has a strong contender with its new Cobalt, which replaces the Chevy Cavalier.
“Are those two (Civic and Corolla) still going to be the respective leaders in that space? Yes,” he said. “But GM has a chance to take back some of the product share. The Cavalier was dated. It just wasn’t competitive.”
In addition to GM’s new Cobalt, Ford is also introducing a new Five Hundred mid-sized sedan. But none of these models will be available until next year.
Detroit’s latest offensive against foreign car makers is not without risks – especially if they haven’t worked out all the kinks in their brand new models before they roll off the assembly line.
“Generally the Big Three’s quality is getting better,” said David Healy, auto analyst at Burnham Securities. “But the perception of the Big Three's quality lags the reality, and they still have a lot of convincing to do with customers who went over to a Big Three competitor because of quality concerns in past years.”
No matter how well-received their new models, U.S. car makers can look forward to the kind of tailwind other manufacturers are enjoying from the weak dollar. With much of the competition coming from Japanese, where the yen is also weak, the auto industry can expect little relief from positive exchange rates. That’s especially true as Japanese car makers continue to expand production in the U.S.
And just as U.S. car makers beef up their offerings, Japan is rolling out its own new products in market segments that have been American strongholds.
“The Japanese makers are very formidable competition,” said Healy. “They’re bringing out a lot of new stuff themselves — particularly in the new pickup truck area — but also in the redesigning their minivans and coming up with some new sport utility vehicles as well."
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