Big Three Automakers Swerve Into Slow Lane

DETROIT -- Leading into this year, a question hung over Detroit, known as the Motor City: Could the boom-time sales pace of recent years, fueled by the mighty growth of sport utilities, possibly continue? The answer for much of 2002 was a resounding yes, so now analysts are asking the same question about 2003. This time even auto executives are bracing for a slump.

"Consumers are evidently responding to a sluggish economy," said Scott Sprinzen, a credit analyst for Standard & Poor's, in a recent report that suggested that a slump evident in recent months would continue into next year. "After a string of exceptionally good sales years, the market is evidently saturated."

Last year, the terrorist attacks emptied car lots of potential buyers until General Motors refilled them quickly with its "Keep America Rolling" advertising and incentive campaign, which included offers of interest-free financing. The Ford Motor Co. and the Chrysler Group, a unit of DaimlerChrysler, quickly followed suit, and the ensuing price war made October 2001 the best month in industry history. By the end of last year, analysts worried that buoyant sales could not possibly continue in balky economic conditions.

But they did. For much of the year, the Big Three price war kept people buying, providing a spot of hopefulness in a doleful economy -- at least until October, the industry's worst month in more than four years. Though sales recovered somewhat in November, they were still off 13 percent from the robust levels of November 2001.

Is this a hiccup or a harbinger? There is hardly a consensus. On the bullish side is Scott Hill, an analyst at Sanford C. Bernstein & Co., who predicts industry sales of 16.7 million vehicles next year, compared with the 16.5 million to 16.8 million expected for 2002.

Hill cites a combination of factors, from an economy that he believes is stabilizing to consumers' desire to swap cars more often because of a glut of new products and new features, coupled with low prices. Demographic trends are also favorable, he says, because two big generations -- baby boomers and their children, Generation Y -- are entering crucial car-buying years. "Peak buying is around age 47," Hill said. "That's the absolute peak of automotive consumption. The percentage of the population moving into that area continues to rocket."

Other analysts, like Ronald Tadross of Banc of America Securities, are pessimistic. Tadross says sales are likely to be no higher than 16 million and possibly as low as 14 million next year, the latter number being something of a doomsday prediction considering that sales peaked in the United States at 17.4 million in 2000 and were 17.1 million in 2001.

Whatever the level of sales diminishment, most agree it will come largely from the hide of the Big Three, which have been losing market share to foreign brands for years. And these are only the beginning of the Big Three's headaches next year. "Pension expenses will be higher," said John Casesa, an auto analyst at Merrill Lynch, "some raw-materials costs will be higher, like steel, and we'll probably see an increase in wage and benefit costs," because a new contract will be negotiated with the United Auto Workers. "Even before the sales outlook, things will be tough."