Detroit's Gamble to Get Rolling Again
More than any other device made by man, the automobile has shaped U.S. society, sparked its economy and tested its technology. Equally important, from the days of the migrating Okies in the 1930s through the leather-jacketed hot-rodders of the 1950s, the auto -- and its use -- has told much about American habits, values and problems. Today Americans are sharply scaling down their expectations. They are pulling in their purse strings. They are looking for more and more economy, utility and durability in the products that they buy. All of those trends are causing a major upheaval in the nation's most important industry, forcing Detroit's automakers to change sweepingly their sales strategy.
In recent months the auto industry has been jolted by one of the worst sales collapses in its history. Falling production has idled one-fourth of its work force and led to a glut of 1.6 million unsold cars. To get sales rolling again, the industry is now taking two expensive gambles. By the end of this month it will have spent millions in a program of cash rebates -- ranging from $200 to $600 on selected models -- designed to lure reluctant buyers. For the longer term, Detroit is committing billions to an overdue drive aimed at developing and producing whole new families of cars that will be far lighter, smaller and more economical to operate than practically any of the present models. Says Gerald Meyers, product group vice president at American Motors: "Hell, the people have been telling us for years that they wanted smaller, lighter cars. This industry has just not been listening."
The companies are lavishly promoting their rebate programs. Chrysler, which is saddled with the heaviest backlog of unsold cars and was first to begin offering rebates, is spending one-fourth of its $50 million annual ad budget on a series of video spots featuring TV Pitchman Joe Garagiola in a carnival setting urging viewers to hurry, hurry, hurry to their nearest dealer. Lincoln-Mercury commercials have Green Bay Packer Coach Bart Starr sincerely touting Ford's $200 to $500 giveaways. Dealers round the country are jumping in with their own brands of salesmanship and showmanship--some of them bizarre.
Swimming Pool. Atlanta Chevrolet Dealer Doug McCurdy is getting browsers in a buying mood by letting them work off frustrations by taking a sledgehammer to an old Mercury emblazoned with the words INFLATION, RECESSION, GLOOM, DOOM. In Mount Vernon, Ohio, Lincoln-Mercury Dealer Jack Ostrander has started accepting cattle from local farmers as part of a trade-in deal on new cars. Ostrander pays 65-c- per Ib. for steers or heifers, which he ships to his farm for resale later on.
A nearby competitor, Chrysler-Plymouth Dealer John Hatfield, is accepting "anything" as a trade-in on his latest models. Last month his company took in two dune buggies, a garden tractor, four motorcycles, a swimming pool and a public-address system, along with a rifle, a shotgun and a pistol. To stir up publicity, American Motors Dealer Ron Wagner took an electric heater and a tent to the roof of his showroom in Boylston, Mass., and camped out there for eleven icy days and nights. After reaching his goal of selling 23 cars--at a sharply reduced profit--Wagner abandoned his perch and reported: "I think I kept my head above water."
That is an achievement that the four Detroit auto manufacturers would be only too happy to match in 1975. Ford Chairman Henry Ford II says flatly: "This year is going to be terrible." Speaking of the state of the auto industry, Chrysler Chairman Lynn Townsend says: "It's the worst it's been since the 1930s." Sales of American-made cars, which had been wobbling erratically through most of 1974, began a frightening plunge with the introduction of the new models last September and continued falling. In all, Detroit posted sales of only 7.5 million cars last year, way down from the 9.7 million sold in 1973. Sales of imported cars also slid to 1 .4 million, v. 1.8 million the year before.
There are signs that the rapid decline has touched bottom and that sales are gradually turning up, but nobody expects a return to robust buying levels soon. The more optimistic forecasters are predicting sales (including imports) of 8 million or 8.5 million cars this year -- if the Federal Reserve Board sharply pumps up the money supply, which does not now seem likely. But some economists believe that sales may not rise much above 6.5 million -- and for U.S.-made autos not much higher than 5.6 million. If that is the case, it will be the first time since World War II that the U.S. auto industry has suffered two consecutive years of decline.
The huge backlog of unsold cars -- a three months' supply at the slow sales rates of early January -- has forced drastic cuts in production. Though dealers are pulling more customers into their showrooms, the manufacturers are still shutting down assembly lines and turning thousands of workers out onto the streets. General Motors has already put about 93,000 employees-- 15% of its U.S. force--on indefinite furloughs; last week it announced temporary layoffs for 15,500 more workers. In all, 18 auto and truck assembly plants are idle, and 300,000 workers--a fifth of the industry's payroll--are out of jobs.
The agony of the automakers has critical implications for the nation's well being. In one way or another, one out of every six workers depends on the industry for a living, including those employed by thousands of firms that supply myriad auto parts, from wheels to gearshift knobs. In addition, the fortunes of steel, glass, rubber, aluminum, copper and plastics producers are tied to the health of the industry.
Floor Traffic. Thus the sudden skid in car sales hit the already shaky economy with the impact of a runaway truck, toppling it into a much deeper recession than almost anyone had anticipated. Government economists estimate that the car slump accounted for fully half of the 9.1% decline in gross national product in the fourth quarter of 1974 and was the major factor in lifting the nation's jobless rate to more than 7%. Moreover, chances for even a moderate business recovery in the year ahead depend to an enormous degree on a resurgence of car sales.
Against this grim background, the auto industry is fighting back. So far, the results of the rebates have been encouraging. Before they went into effect in mid-January, auto sales were 15% below the miserable levels of a year ago, when the energy crisis clobbered car sales. The rebates were largely responsible for the boost in sales from a dismal 93,235 cars in the first ten days of January to 133,000 cars during the second ten days of the month. Dealers claim that volume has climbed substantially since then. Tom Shanley, an American Motors executive responsible for sales in six Southern states, says that his dealers "have had the greatest increase in floor traffic since the end of the oil embargo last year--up 500%."
The sales upswing has pulled thousands of cars out of the vast Michigan State Fair grounds outside Detroit, which until recently was covered bumper to bumper by part of Chrysler's stock of unsold cars. Chrysler's backlog has dropped from 350,000 to 300,000. Some models have been in especially heavy demand. Orders for Ford's sporty German-built Capri, which lists at a basic $3,566 and carries a $500 factory rebate, have been so great that dealers are scouting round the U.S. to find cars and are warning buyers that they may have to wait weeks for delivery.
The risk Detroit is taking is that the public's car-buying fever will cool rapidly after March 1, when all the rebates will have ended. Moreover, says David Eisenberg, auto analyst at the Wall Street brokerage house of Sanford C. Bernstein & Co.: "If the programs are tremendously successful, it could well mean that Detroit is borrowing sales from future months." Eisenberg believes that if post-rebate results are disappointing, the automakers will probably have to cut prices permanently, even if that means they will have to swallow losses.
How did Detroit lose its grip on the buying public? Last winter's Arab oil embargo "hit us right between the eyes," says GM Chairman Thomas A. Murphy. Consumers are still confused about what the energy crisis might do to gasoline prices and availability in the long term. At the same time, inflation has wiped out more than 5% of the public's purchasing power over the past year, while rising unemployment has also cut deeply into sales. The jobless rate stood at 7.1% in December, and it may turn out to be close to 8% for January, when the latest figures are released this week. Many automen complain that the Ford Administration stuck to an anti-inflation policy too long; they are pleased that the Administration has tilted policy more toward expansion, but wonder whether it has gone far enough.
But Detroit's basic trouble runs deeper and has been building longer than either the energy or the economic crisis; it is simply that the auto companies, rightly vaunted for their marketing skills, have failed in recent years to grasp and react swiftly enough to the changes taking place in their market.
New Controls. The difficulties the automakers are having with Government safety and pollution regulations are a prime consequence of that flaw. For years the auto companies did not take seriously enough the rising clamor for greater car safety and less polluting engines. As a result, Government moved in and imposed stiffer standards than might have been necessary if the companies had acted voluntarily.
Detroit has been fighting a losing battle for a decade against the safety and pollution regulations. According to estimates by GM, Ford and Chrysler, the cost of meeting these standards has already added between $499 and $600 to the price of a car. (The Bureau of Labor Statistics, however, puts the cost at $415.) Company representatives are pressing Congress for a five-year delay in the stiff Government pollution-control standards now scheduled to take effect in 1977. The automakers contend that, instead of being forced to spend money on devices that reduce emissions, they should be allowed to develop engines that will be clean enough to meet federal standards without extra equipment. But they insist that this will take time and money and cannot be done unless the Government puts a freeze on further requirements of its own. In exchange for a delay, all four automakers have pledged to President Ford that they will do their utmost to increase average gas mileage 40% by 1980.
In their push for a moratorium on new controls, the companies have the support of one old adversary: the United Auto Workers. U.A.W. President Leonard Woodcock also argues that a moratorium would give the industry a chance to restore its profits--and get union members back to work.
Bumper Battle. The industry's credibility has not always been high when it comes to complaints about environmental controls. For example, Detroit long opposed use of the emission-reducing catalytic converter, a device fixed to the exhaust pipe underneath the car. These converters are installed in the 1975 models, and GM, for one, praises their virtues. With the converter, engines can be tuned up to give top fuel efficiency instead of being wastefully geared down to reduce emissions, as they had been for several years. The result, according to tests made by the Environmental Protection Agency: the new cars get 13.5% more m.p.g. on the average than the 1974 models. Carmakers agree that the controls now in effect have resulted in significantly cleaner engine exhausts. But they question whether any further federally mandated improvements are necessary for this decade. The cost of installing the first converters this year, they note, added between $110 and $130 to the sticker price.
Henry Ford II estimates that if the tough 1977 rules are not postponed, they will add $750 to the cost of a car and further depress sales. (The EPA estimates the added cost at $250 to $350.) In addition, GM's Murphy contends, "If you set emission standards higher, there's got to be a sacrifice of fuel economy." The EPA disagrees. Astonishingly, a study it released last week argues that there "is no inherent relationship between exhaust-emissions standards and fuel economy." The best guess now is that Congress will push back the 1977 regulations by a year or two on economic grounds but is extremely unlikely to grant the automakers the five-year reprieve that they want.
The industry also believes that it is necessary to ease some of the safety standards if prices are to be held in check and styling and efficiency improved. A main target is the regulation that took effect this year requiring front bumpers that can withstand a 5-m.p.h. impact. Says Murphy: "The extra weight and reduced fuel efficiency caused by those bumpers is costing customers a helluva lot more than it's benefiting them."
The Department of Transportation now agrees that the bumpers, which weigh 100 Ibs. or more, are not worth the cost. The DOT is proposing a rollback to the 1972 requirement--ability to withstand a 2.5-m.p.h. impact. Insurance companies, some Congressmen and several public interest groups, which contend that the stronger bumpers will hold down damage costs, oppose such a move. But they also maintain that the weighty, expensive bumpers U.S. carmakers are using are unnecessary. The bumper on the West German Opel, for instance, is as strong as the steel one on the new Ford Pinto, yet it weighs only a third as much. The outcome of the bumper battle is still in doubt.
Power Seats. Misjudging the power of the auto-safety and environmental advocates in Washington was not the industry's only fumble. It was also remiss in not recognizing and responding fast enough to the public's growing preference for small cars. Between 1965 and 1973, sales of small imported cars jumped 200%, to 1.7 million. This evidence of the change in tastes was later reinforced by the popularity of such subcompacts as the Ford Pinto, the Chevrolet Vega, the American Motors Gremlin and the Dodge Colt. American Motors Chairman Roy Chapin read the signs astutely and steered his faltering company almost exclusively into small cars--a providential move that greatly helped it.
For the most part, however, Detroit doggedly continued its emphasis on size and power; over the past 20 years the standard Chevrolet has grown more than 2 ft. in length, gained more than 1,000 Ibs., and almost doubled its horsepower. One obvious reason for the companies' reluctance to change: except for the expense of materials, producing a high-priced standard-size car costs about the same as making a less profitable small one.
Events soon forced a change in the industry's position. The popularity of small cars hit a peak in January 1974, accounting for about 52% of sales amid the oil embargo and widespread jitters about the price and availability of gasoline. Detroit finally got the message and rushed to switch to the production of more moderate-size vehicles--but not fast enough to satisfy immediate demand. By summer, when production was up, the urgency was out of the energy crisis.
At that point, Detroit made a miscalculation. The auto executives found themselves struggling with soaring material costs for everything from steel to plastics just at a time when sales of big, high-profit cars were lagging. They decided to step up production of small cars and ride on their popularity. But partly to keep the industry's rate of return up, they moved to boost the profit margin on the compacts and subcompacts. Small cars were wrapped in expensive, highly profitable equipment that once was optional--special trim packages, power seats and windows--substantially raising the base price. The auto chiefs reckoned, wrongly as it turned out, that consumers were more interested in fuel economy than sticker prices.
With the 1975 price boost, average list prices now stand about $1,000 above what they were 16 months ago. But small-car prices jumped about 25%, while those of full-size models went up only an average of 15% during that period. For example, the cost of Ford's latest subcompact Pinto has climbed 27%, to $2,919; Plymouth's Duster is up 29%, to $3,243. By contrast, full-size Dodge Monacos have increased 18%, to $4,605, and Ford's LTD is up 11%, to $4,615.
Many customers took one look at the new prices and walked out of the showrooms--or, worse, did not even bother to visit them. Small-car sales fell to 46% of the market in October and continued down slightly thereafter; in December they held 45.3% of the market. Ironically, the price spread between the basic full-size cars and the gussied-up small ones narrowed enough to stimulate some sales of bigger models. So the automakers, who had a glut of big cars during the energy crisis, have now wound up with an oversupply of small cars too.
Shrinking Desire. Consumer Pollster Albert Sindlinger, who for years has accurately predicted trends in the auto industry, sent out early warning signals to the companies to pare prices on new small cars--to no avail. Says Sindlinger: 'They totally misjudged the market. They overproduced and overpriced."
Even after the economy recovers, efforts by Government to restrain gasoline use are bound to hurt the carmakers. There is a strong possibility that Detroit will not soon again match the average annual 3.8% increase in new-car sales that it posted over the past decade. Says Chrysler's Lynn Townsend: "I think to some extent we will see a shrinking of desire for some of the things we always wanted--those two cars per family, two color-television sets and lots of other things. We certainly as a people cannot continue piling luxury upon luxury. There has to be an end."
Myriad Models. The hopeful note is that the automakers seemed to have learned their lesson. The rebate programs, for example, are at least a temporary effort to soften the public's indignation about the high price of the 1975 small models. Moreover, the industry leaders now agree that there will have to be more small cars in their future. Predicts Ford's President Lee lacocca: "By the end of the 1970s, we think that small cars will be selling over large cars 60 to 40. We're planning it that way, and we think we're right."
All the automakers are working on plans to shrink the size and weight of their models, while keeping the interiors as roomy as ever. Engines will be smaller, less powerful and more lean on fuel. The most gas-stingy cars on the U.S. market are imports: the Japanese Honda Civic and the Datsun B-210, which get 39 m.p.g. More light-weight metals will be used. Tires will be smaller, and front ends may be built of plastic. The myriad models that now confuse all but the most ardent car buff will be drastically trimmed--at a substantial savings in production costs. Major model changes will probably be made only once every six years, instead of every three years.
GM announced last week that it will spend $3 billion over the next four years to develop and produce smaller versions of its Buick, Pontiac and Chevrolet models. In April it will roll out a new Cadillac tailored for the age of rising gasoline costs: it will be 1,000 Ibs. lighter, 2 ft. shorter and almost 1 ft. narrower than today's four-door, 5,100-lb. Calais De-Ville. In addition, GM is planning to reduce its five distinct body styles to two or three. The company's eight engine varieties may be cut to four (one four-cylinder, two sixes and a basic V-8).
Next month Ford's Mercury division will introduce the Bobcat, a fancied-up, $3,000-plus version of the Pinto, as its entry in the small-car field. Ford has also come out with two trimmed-down models aimed at the standard-car buyer: the Mercedes-size Granada and Monarch, which are 26 in. shorter, 8 in. narrower and more than half a ton lighter than the standard-size sedan, but longer on mileage (between 18 and 26 m.p.g. on the highways).
Chrysler produces two compacts, the Plymouth Duster and Dodge Dart. Says Townsend: "We have been reducing the number of models we make and increasing the commonality of parts." Chrysler once used up to 60 different window regulators in its cars; now the number is down to five. According to Chrysler President John Riccardo, "The new program means longer production runs for each model and fewer parts to stock in plants and dealerships."
Market System. American Motors, which now holds 5.3% of the U.S. auto market--the most it has ever had--is out with what it regards as its most potentially successful model: the Pacer. Glassy, small and wide, with plenty of room for passengers, the Pacer, says A.M.C.'s Gerald Meyers, "is our strongest product expression yet of giving the public what it wants." Because of the unavailability of the light-weight Wankel engine that had been planned for the car, the Pacer is still 3,000 Ibs. But, says Meyers, "we're going to get there --a 2,000-lb. car with an engine big enough to carry an air conditioner."
A.M.C. Chairman Chapin expects that along with compactness, "people will want cars that last longer and are more trouble free. That will require significant design innovation." Such changes will require massive investments. Yet the need for such expenditures could not have come at a worse time for the industry. With sales down, earnings have also dived. For example, compared with the record earnings of the first nine months of 1973, GM's profits in the first three quarters of last year were down 76%, and Ford's 60%.
At least one comforting lesson can be drawn from the mess in auto sales: the much maligned market system still works. Prices went up and buyers rebelled. Now that the rebates are bringing prices down--at least temporarily --buyers are beginning to find their way back to the auto showrooms.
What about the rest of this year? GM's Chairman Murphy scoffs at the most pessimistic forecasts. "No way are we going down to 6 million cars," he says. Some 8 million of the nation's 100 million cars are scrapped every year, and thus the automakers estimate that the "normal" level of new car sales should be 8 milhon to 8.5 million. Says Murphy: "That to me is the floor." But he also concedes that motorists can upset the forecasts if they keep old cars on the road, as they did during World War II and appear to be doing today.
Ford's lacocca grants that 1975 may be "a difficult transition year," but he reckons that '76 and '77 will be "pretty good." Says he: "We do have the underpinning. People still want to be mobile and they need four wheels. Cars are going to continue to wear out, and that means a big year sometime soon."
No Alternative. The simple fact is that the nation is structured around the auto. It makes the suburbs possible, nourishes the motel and resort industries and links the country. More than four out of five Americans drive cars to work, usually because they have no alternative. Even if the U.S. began spending many more billions for mass transit, it would take a long, long time for the nation to build an adequate system of buses and commuter trains.
In sum, the U.S. society and economy will continue to depend on the car. But the car, of course, will be different. Now that the manufacturers are listening to what the market is saying, they have reason to believe that their smaller, more efficient autos will lead them to that big sales year--sometime, somewhere just over the horizon.
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