1998 Automobile Market: Handle with Care - U.S. Manufacturers Facing Tough Decisions According to Polk Analysis
20 October 1997
1998 Automobile Market: Handle with Care - U.S. Manufacturers Facing Tough Decisions According to Polk Analysis
DETROIT, Oct. 20 -- Why are the "Big Three" auto
manufacturers -- Ford, General Motors, Chrysler -- operating as if they are in
the midst of a recession?
According to a recent Polk analysis of the 1997 automobile market, soft
consumer demand and an intensifying price war are making costs and the right
product mix areas of intense focus in the Big Three's efforts to maintain
profitability, painting 1997 as a difficult year with more of the same
possible in 1998.
The financial picture is somewhat misleading at first glance because the
Big Three combined to generate $5.1 billion in second-quarter profits in 1997
after a $4.3-billion first quarter. Continuing at that pace, manufacturers
would break their record of $14.9 billion set in 1994. It is important to
note, however, that those profits are not coming from price, volume or share
increases.
The trend to date has been to cut prices and increase incentives.
AUTOFACTS reports overall incentives are up 30 percent versus this time a year
ago, with Chrysler admitting that its spring rebates ran 56 percent ahead of
spring 1996. In terms of volume, the year-to-date total of nearly 9 million
units is 1.1 percent behind the same period last year. In fact, sales this
year have fallen below 1996 sales in four of the seven comparative months.
And through July 1997, both GM and Chrysler had lost 1.1 points of share,
while Ford remained essentially flat, according to sales numbers reported by
Automotive News. The hefty rebates of 1997 appear to be an effort to prevent
further erosion of the Big Three's market share.
Manufacturers and industry analysts agree the record profits generated so
far are the fortuitous result of long-running, cost-reduction efforts and the
much more profitable product-sales mix.
According to the New York Times, the Big Three manufacturers turned to
cost-cutting to improve sales and profits after a flat auto market for several
years. Chrysler's goal was to cut $1 billion from its 1997 costs, eventually
moving to the $2 billion mark, while Ford achieved $1.8 billion in cost
reductions in the first half of this year.
The product-sales mix shows registrations of passenger cars and light
trucks through the first half of the year were running close to 2.6 percent
behind 1996 figures. (Chart A) According to Polk data, registrations of mid-
sized, entry-level and basic economy cars are down, but every "luxury" or
"prestige" segment has shown gains. The increase in SUV and luxury market
registrations is a critical factor, because profits on luxury cars, pickups,
and hot-selling SUVs are significantly higher than for mass market cars.
(Chart B)
Executives at both GM and Ford have said lagging sales in the
traditionally slow second half of the year would result in continued reliance
on incentives to stimulate the auto market (Detroit Free Press). In fact,
many feel a full-fledged price war is in the offing. At the same time, the
true "consumer" share of registrations had dropped to 69.3 percent through
June of this year -- a substantial 2.9 percentage point decline from 1996.
(Chart C)
Based on Polk's analysis, the following conclusions can be made:
* It appears 1997 has proven to be a far more difficult year than most
had anticipated with the 1998 market potentially producing similar results;
* Manufacturers are facing hard choices in terms of volume versus
profits, leaving them the options of cutting back production on slow-moving
vehicles, shifting production capacity towards the strong-selling products, or
developing products to compete in the segments where higher growth is
apparent;
* Either additional price adjustments -- via incentives for purchase
and/or lease -- or more generous fleet and program terms, or a combination of
both will be needed to achieve targeted sales volumes for 1997.
Polk provides multi-dimensional intelligence information solutions to
companies as a statistician for the motor vehicle industry; a direct marketing
resource; a supplier of demographic and lifestyle data and database marketing
services; a publisher of city directories; and a data enabler for geographic
information systems. Polk is a privately held firm with facilities around the
world including the United States, Canada, England, Germany and Barbados.
For more information, contact Jim Miller, Director of Public Relations, at
303-298-5696.
1998 AUTO MARKET: CHARTS
CHART A
CYDT
Group June July Y-O-Y
1997 1996 Change
Total Cars 4,158,808 4,417,952 -5.9%
Total Light Trucks 3,263,633 3,199,114 2.0%
Total Industry 7,422,441 7,617,066 -2.6%
Source: Polk
CHART B
Top Gainers
CYDT
Group June July Y-O-Y
1997 1996 Change
Prestige Sporty 29,546 15,630 89.0%
Full Size Utility 194,141 120,391 61.3%
Mini Sport Utility 140,341 91,467 53.4%
Prestige Luxury 68,196 54,497 25.1%
Midsize Pickup 81,617 74,659 9.3%
Top Losers
Group CYDT
June July Y-O-Y
1997 1996 Change
Mid Sporty 11,681 18,853 -38.0%
Minivan Cargo 28,006 37,886 -26.1%
Entry Level 107,455 140,692 -23.6%
Basic Sporty 308,111 357,445 -13.8%
Upper Mid Special 188,830 201,878 -10.5%
Source: Polk
CHART C
Registrations Consumer Registration Share
(New Vehicles) 1993 1994 1995 1996 1997 YTD
Personal 64.9% 61.3% 59.1% 56.0% 51.2%
MSL - Personal 6.9% 10.6% 11.5% 12.8% 14.0%
Banks - Personal 0.9% 1.2% 2.1% 2.6% 3.0%
Independent - Personal 0.2% 0.4% 0.5% 0.8% 1.0%
Total 72.9% 73.5% 73.2% 72.2% 69.3%
SOURCE Polk