TIME: Almanac 1993/TIME Almanac 1993.iso/time/073189/07318900.012

Text File | 1992-09-23 | 3.7 KB | 70 lines

                                                                                BUSINESS, Page 34

How Motown Lost Its Big Mo


    While the rest of the U.S. economy is still creaking
forward, the recession monitor is flashing yellow in Detroit.
The reckoning was postponed for months by the Big Three's
inveterate optimism, which kept assembly plants cranking out
cars as though nothing were wrong, and by Detroit's ever
sweetening sales incentives. But by the end of the year's second
quarter, evidence of a reversal was clearly at hand: during the
first six months of 1989, total car sales in the U.S. fell 7.2%
from last year's first half, to 5.1 million.

    Inventories of unsold cars have swollen to 1.8 million
vehicles. At current sales levels, that is a 75-day supply,
well above what is considered healthy, and Detroit is finally
acknowledging the sharp downturn in demand and cutting
production plans for the rest of the year. Output at General
Motors assembly plants in the third quarter will be the lowest
of any July-September period in 19 years, Chrysler's the
smallest in a decade. While none of the automakers are
scheduling long-term shutdowns, many workers are being idled for
the first time since the last recession. Ford, which has run
continuous overtime for the past five years, announced layoffs
at Escort plants in Edison, N.J., and Wayne, Mich., and will
temporarily close Taurus and Sable assembly plants in Chicago
and Atlanta.

    The downturn is at least partly the result of selling so
many cars in the past few years. "The fleet is quite young, the
warranties are longer, and the quality is better. People don't
feel a pressing need for new cars," says Arvid Jouppi, who
follows the industry for Keane Securities in Detroit. The boom
has flooded the market with used cars, which are now selling at
a steep discount, making them a more attractive alternative to
new models. A two-year-old Ford Tempo, for example, sells for
$3,500 less than a new one.

    Then there is the industry's oddball marketing logic, in
which automakers raise prices and offer discounts at the same
time. Prices of U.S.-made autos have doubled within the decade,
to an average of $14,000. "The strength of the deutsche mark and
yen caused importers to raise prices rather quickly. But instead
of taking advantage of that, American makers raised their prices
along with them," says Ron Tonkin, president of the National
Automobile Dealers Association. This year buyers can anticipate
yet another round of increases, ranging from 4% to 7% on 1990
models. To reduce sticker shock, the Big Three renewed incentive
programs earlier this month, offering as much as 10% off basic
prices. But such come-ons are losing their potency.

    Since the downturn began, Japanese manufacturers have made
even greater inroads than in healthy times. Honda, Toyota,
Nissan and Mazda posted higher sales and gains in U.S. market
share in the first half of 1989, largely at the expense of
European imports, Chrysler and GM. Of the Big Three, only Ford
managed to raise its market share, because its sales slump has
been smaller than that of its rivals.

    Since the auto industry accounts for 16% of all durable
goods produced in the U.S., any serious contraction will create
noticeable ripples in the rest of the economy. Detroit's
slowdown has already dragged machine-tool sales to a level 37%
below last year's. So far, however, no one expects the downturn
to match the disaster of 1982, when U.S. auto sales hit a nadir
of 8 million. "We're not going to fall off the roof and break
a leg," predicts analyst Jouppi. "It will be more in the nature
of jumping off the porch and skinning a knee."