TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/073189/07318900.012

Text File | 1990-09-17 | 4KB | 67 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."