Tough year predicted for U.S. automakers

April 29, 2002 BY ED GARSTEN ASSOCIATED PRESS

Two of Detroit's automakers made money in the first quarter and all three beat expectations, but the euphoria derived from those results may not last through the year, according to a study.

PricewaterhouseCoopers predicts a decline in market share and lower profit margins because of increased domestic and foreign competition and globalization.

Automakers and some analysts predict annual auto sales will continue the brisk pace of the last three years, at about 16 million to 17 million units. But Michael Burwell of PricewaterhouseCoopers says that estimate is unattainable.

"It's unrealistic," he said Friday. Annual sales will probably be somewhere around 15.8 million vehicles, he predicted. "It's difficult when the competition is putting out such attractive products." Burwell is leader of Automotive Transaction Services at the professional services firm.

Burwell said he believes automakers have stepped up production to replenish inventories depleted as a result of incentive wars, and not necessarily to meet increased demand.

Economist David Andrea, with the Center for Automotive Research in Ann Arbor, counters that the current sales rate is so brisk, the momentum may provide enough inertia to power the rest of the year.

"Look at the first four months. Look at even the beginning of the second quarter. At a sales rate of 16.5 million, it would really have to fall off in the second half to get down to 15.8," Andrea said.

The Pricewaterhouse study also says weakening of foreign currencies against the dollar will continue to make imports a good value. A declining number of dealerships and other factors also could depress U.S. automakers' earnings for the rest of the year.

A report released Friday from Deutsche Bank AG echoes those sentiments, saying "in the long term we remain concerned over the structural problems facing U.S. manufacturers (pricing, Japanese competition, overcapacity etc.)."

The challenge for the automakers is to increase profits while staying competitive by continuing to offer incentives and maintain pricing, which limits how much money they can make on each vehicle.

"On one side, you see them increasing earnings, but on the flip side you see them staying steady on the incentive side, which means they still have some uncertainty on the sales front or they would have started pulling back," Andrea said.