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How Motown Lost Its Big Mo

4 minute read
S.C. Gwynne/Detroit

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.”




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