What will 2002 bring? Decline in sales

Lower energy costs, tax cuts, low interest rates will soften blow

Next year, for sure
Each of these 7 prognosticators underestimated this year's sales totals. Each of them predicts a sharp falloff for 2002. U.S. light-vehicle sales in millions.
  YEAR-AGO ESTIMATE FOR 2001 CURRENT ESTIMATE FOR 2001 2002 ESTIMATE
Industry
Paul Ballew, General Motors 16.2-16.7 16.9 15
Paul Taylor, NADA 16.6 16.9 15.9
Wall Street analysts
John Casesa, Merrill Lynch 16.1 16.9 14.6
Nick Lobaccaro, Lehman Brothers 16-16.5 17 15.3
Scott Merlis, Dresdener Kleinwort Wasserstein 16.3 16.9 15
Other forecasters
George Magliano, DRI-WEFA 16.1 16.9 15.3
Diane Swonk, Bank One Corp. 16.5 17 16
Source: Automotive News research

What folks think

A price to be paid "The risk is the sales payback the industry faces when these attractive incentive programs end. Following GM's 'Big One,' a similar low-rate financing program in 1986, the (seasonally adjusted annual sales rate) fell 32 percent in the month after the program ended." John Casesa, Auto industry analyst, Merrill Lynch & Co. Reasons for optimism "We have never gone into a downturn with interest rates as low as they are. There are something like 3 million people coming off leases in 2002. Those people have got to do something. Meanwhile, prices are more affordable than they have been in the last 10 years." Mike Maroone, President, AutoNation Inc. There's no pent-up demand "The key will be incentive activity. They could easily create more demand than (my 2002 sales forecast of) 15.3 million, if they're willing to lose even more money next year. There is an absolute lack of pent-up demand." Nick Lobaccaro, Auto industry analyst, Lehman Brothers Incentives still have appeal "Incentives are still fairly aggressive; they're still very generous in historical terms. For people driving a 3- or 4-year-old car and paying 9, 10, 11 percent interest, they've got to be very appealing." Ernest Bastien, Corporate manager, vehicle operations group, Toyota Motor Sales U.S.A. Inc. GM did the right thing By introducing 0 percent financing, GM "stepped up and did the right thing for their workers, for the country, and long term, for the GM stockholder. They had to stop the erosion of market share." Paul Taylor, Chief economist, National Automobile Dealers Association Incentives must end "Incentive deals are killing them, so they're going to have to back off. Deals will stay high, but not as onerous as they are now." George Magliano, Auto industry analyst, DRI-WEFA The real story of 2001 If you consider that incentives pulled 500,000 sales from 2002, "this year is not really a 17 million year but kind of a 16.5 million, which is what we were running at before Sept. 11." Scott Merlis, Auto industry analyst, Dresdener Kleinwort Wasserstein This is bizarre "What an unusual downturn we're having - record home sales and record vehicle sales in a recession. Usually, the consumer leads you (the economy) down. This time it has been businesses because they're the ones who fold." Diane Swonk, Chief economist, Bank One Corp. 2002 will start out slow "The seasonally adjusted annual sales rate in the first half will be just below 15 million light vehicles." Paul Ballew, Executive director of market and industry analysis, General Motors

Don't expect a repeat in 2002.

Automakers managed to pull out a home-front victory in 2001 - despite Sept. 11 - with a fourth-quarter comeback that will deliver the second-best U.S. sales year ever.

But analysts say that for 2002, automakers will dial back incentives and allow nature to take its course in a soft economy. As a result, light-vehicle sales will fall by 1 million to 2 million units in 2002 and finish below 16 million for the first time since 1998.

A year ago pundits were predicting a similar decline for this year. And it looked as if it would happen for a while. But thanks to the late-year incentive frenzy, it didn't.

Incentives in 2001 climbed from an industry average for traditional Big 3 brands of $1,374 per vehicle in January to $2,261 in October, according to estimates from Autodata Corp. in Woodcliff Lake, N.J. Ford was highest of the Big 3 at $2,887.

"If the level of marketing (spending) throughout the industry would de-escalate, I would be extremely pleased," said Martin Inglis, CFO of Ford Motor Co.

The bad news

These factors should drive down sales next year - unless incentives keep climbing:

n 2001 incentives. The cost of incentives helped drive Ford and DaimlerChrysler's U.S. unit into the red in the third quarter. (Remember, 0 percent loans did not go into effect until the quarter was almost over.) Analysts expect Ford and DaimlerChrysler to lose money for the full year in 2001. General Motors, meanwhile, is expected to make a profit for the year. But its earnings are expected to drop 63.8 percent from 2000 levels, not counting one-time items, according to estimates compiled by First Call Corp.

  • Pull-ahead. Analysts estimated that the deep 2001 discounts pulled some 500,000 sales out of 2002. "That makes for a very difficult first half" next year, said Scott Merlis, auto industry analyst for Dresdener Kleinwort Wasserstein in New York. At an estimated 17 million light vehicles, 2001 sales will be down only 2.4 percent from last year's record 17.4 million. Merlis forecast 2002 sales at 15.2 million, down about 10.6 percent from this year.

  • The economy. U.S. Department of Commerce statistics show that the economy entered a recession at the end of March. Forecasters expect a recovery around the second half of 2002.

    "By historical standards, it was going to be a fairly mild downturn. But the reality is, Sept. 11 changed that," said Mustafa Mohatarem, General Motors' chief economist.

    "We got hit by a very severe shock that had a significant short-term impact on consumer behavior, and business behavior, and that resulted in a somewhat more severe downturn," he said.

    Rival Ford blew a chilly note for the industry Dec. 5, saying it will lose more money in the fourth quarter than analysts expected. That's largely because Ford Motor Credit Co. predicts that more of its consumer loans will go bad than it expected.

    The good news

    Every year for the last five years, analysts have predicted that to protect their profits, automakers will hold the line on incentives and allow sales to fall. Forecasters made the same call last year, predicting 2001 sales of about 16.2 million.

    Sales did fall in 2001, just not as much as analysts expected.

    Besides incentives, there are fundamental factors that kept auto sales from falling too far in 2001, and those factors should carry over into 2002:

  • Low energy prices. "When you look at the economies around the world, Japan is clearly in a recession. Asia is growing more slowly. Europe is not growing at its potential rate. So oil demand is going to be weak," said GM's Mohatarem. "As much as OPEC (Organization of the Petroleum Exporting Countries) is trying to cut output, that economic weakness is going to exert downward pressure on oil prices."

  • Tax cuts. Taxpayers got a refund in 2001, and more cuts are making their way through Congress. "In October, we saw that people respond to a price stimulus to a much greater extent than we expected," Merlis said. "By the same token, the biggest fiscal and monetary stimulus in history will have the greatest response in history."

  • Low interest rates. The Federal Reserve cut short-term interest rates an unprecedented 11 times in 2001, to the lowest levels in 40 years. Besides making consumer loans more affordable, low rates make it cheaper for automakers to borrow money.

    The low interest-rate environment made 0 percent loans possible, said Diane Swonk, chief economist for Bank One Corp. in Chicago.

    "Anybody who thinks interest rates are not important has to see the 0 percent offers there are today on everything from large-screen TVs to automobiles," she said. "The only way to do that (make those loans) with any confidence isto have a low rate in the first place."

    A safer forecast

    Despite the positive factors, a conservative sales forecast is a safer choice, Mohatarem said.

    "In our industry, the cost of being wrong on the high side is much greater than the cost of being wrong on the low side," he said. "You have to allow for the worst scenario, to take the most cautious forecasts and adjust accordingly. It's much easier to adjust (production) upward. The likelihood that you would miss out on some demand by not having enough cars is just about zero."

    Before Sept. 11, last year's conservative forecasts looked about right.

    "We were right on the numbers at the end of August," said Paul Taylor, chief economist for the National Automobile Dealers Association. A year ago, he predicted 2001 light-vehicle sales of 16.6 million. For 2002, he expects sales of 15.9 million, down 6.5 percent from this year's mark.

    Big 3 stalemate

    Through the end of August, U.S. light-vehicle sales were down 4.9 percent. If sales had stayed on that pace for the rest of the year, 2001 sales would have been about 16.5 million light vehicles.

    Then came Sept. 11 and the economic aftershock.

    On Sept. 14 alone, U.S. sales fell 42 percent below the sales rate of the week before the terrorist attacks, according to J.D. Power and Associates. That prompted the Big 3, led by General Motors, to crank up the incentive thermostat. Thanks to 0 percent loans and other incentives, October sales shot up 29.2 percent. The seasonally adjusted annual sales rate was a record 21.7 million in October, Ballew said.

    Automakers continue to offer some 0 percent deals, but the most generous deals were gone by Thanksgiving.

    Everybody wants to cut incentives, but no one wants to go first, said Ford's Inglis.

    "We're in a business which is a very competitive business," he said. "You can't get so far away from your competition or you'll go into a totally uncontrolled market-share slide.

    "I would suggest - even wearing my financial hat - that that is not a good thing to do."

  • You can reach Jim Henry at autonews@crain.com

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