Forbes: Death-Defying Car Sales

By Jerry Flint

What's motivating auto buyers in this strange economy? Not the incentives. It's the growing number of new types of vehicles. New stuff creates markets.

A few months ago I predicted auto sales this year would fall to 15.5 million, a 10% decline from 17.2 million in 2001. I was by no means the most pessimistic forecaster out there. The forecast of a slump made sense for several reasons. A recession was on. Sept. 11 had taken a terrible economic toll. The extra sales generated by General Motors ' 0% financing--400,000 to 500,000 more vehicles--would surely siphon off demand in the new year.

Well, I was wrong. The automobile industry remains stubbornly strong. In the first three months of the year Americans bought nearly 4 million cars and light trucks, only 4.6% behind last year's pace. There's no evidence of any payback for those extra fourth-quarter sales. Production--4.3 million in the U.S., Canada and Mexico--matches the year-ago production. Yet inventories of cars and trucks on showroom lots are lower than a year ago. This is a strange economy.

For the full year, the general industry prediction has moved from 15.5 million cars/trucks to 16 million. Now I think sales will be even higher, toward 16.4 million. This is remarkable when you remember there was not a year close to that from 1990 through 1998. We didn't even reach 15 million in five of those nine years. Then 1999 was a record sales year, with almost 17 million cars and trucks delivered, followed by another record 17.4 million in 2000 and then 17.2 million last year.

What's going on? Here are a few guesses that follow conventional wisdom:

1) There never was a recession. Well, I know that thought is coming into vogue, but I don't buy it Â\302\205 yet.

2) There was a recession, but we recovered. If that's true, then the auto business led that recovery with six months of strong sales and still no sign this year of payback for that fourth-quarter boom.

3) The incentives did it: 0% financing, $2,002 rebates from GM and cheap leases. I don't think so. Even the companies without incentives, such as Honda and BMW , are doing well.

What's motivating buyers is quite simple: the ever-growing number of new types of vehicles. Think of it. More than half the vehicles being sold today are designated trucks, yet are in fact new types of cars--and new variations are popping up all the time. The half-pickup/half sports utility vehicles, like the $38,000 Chevrolet Avalanche, are hot, and the BMW Mini, the new version of the famous little British car, at $20,000 will be hot, too.

And there are more types coming, such as the "crossovers," which are sports utility vehicles built over a car, not a truck, chassis. Examples: the Lexus RX300 and the soon-to-be-released Honda Pilot. More station wagons are coming, such as the Chrysler Pacifica, due next year, and the civilian Hummer H2 arriving this fall from General Motors at $50,000 will be a sellout.

Honda and Toyota are trying something new. I call them CUBs--for "Cheap Ugly Boxes," which is just what they are-- but the Japanese figure that at $16,000 to $21,000 they will lure a new, young generation of buyers.

New stuff creates markets. That famous love affair between Americans and their cars is hot. People want more than one or two. My wife, for example, owns a big GMC pickup, but would like a small sedan like the Mini or a convertible, too.

Women are making a big difference. They've bought cars in the past, but my guess is that they are entering the new-car market earlier than ever because of their income and independence. This represents a huge increase in potential customers.

It is true that more than half the cars and a growing number of trucks carry foreign nameplates. And while most of these are built in the U.S. and Canada now, much of the higher-value work, the design and engineering, is done on the foreign home base. That hurts, but we do get the assembly/manufacturing work, and much of it in poorer states such as Alabama, South Carolina and even Mississippi, where Nissan is building a plant.

The foreigners are not going away, but that doesn't mean the Detroit companies are doomed to profitless years. Not long ago Ford made $7 billion on 25% of the market and Chrysler made $3 billion on 15%. Plenty of money can be made if the product is right. The right product leaves the buyer thrilled, even if the price tag is $6,000 above production cost.

I do not expect American vehicle makers to win back their market shares of a few years ago. But if they get their product right, and I say they will get it right, then they can make more money than ever.

Jerry Flint, a former Forbes Senior Editor, has covered the automobile industry since 1958. Visit his home page at www.forbes.com/flint.