Going from Bad to Even Worse

By Kenneth M. Pierce

Heavy Detroit losses, as car sales continue to drop

David Jensen, 38, a real estate broker in West Bloomfield, Mich., has traditionally bought a new car every two years. He purchased his fully equipped Lincoln Town Car for $13,000 in 1979. Last week Jensen returned to his dealer's showroom to eye the new Continental, but he quickly became another victim of what Detroit calls "sticker shock." The price on the car's window: $25,692. Says he: "Damn, that is expensive! It persuaded me to keep driving my '80 until it won't go any more. Then I'm going to buy a down-sized car."

Jensen's reaction has become increasingly common at car dealers around the U.S., and as a result, automakers are off to a disastrous new model year. During the first 20 days of October, sales of U.S.-made new cars plunged to 295,688 units, the lowest level in 23 years and a hefty 31% below last year's depressed rate. Import sales, which amount to 27% of the market, have been generally flat for the year.

"We're getting murdered," said W. Paul Tippett Jr., president of American Motors, which reported a third-quarter loss of $16.8 million. Two weeks ago, General Motors, whose sales fell 33% in October, reported that it lost $468 million in the third quarter, nearly twice the decline anticipated by Wall Street.

Last week the flood of red ink from Detroit continued. Ford an nounced a quarterly loss of $335 million, a bit higher than the $300 million that industry watchers had expected. Though Chrysler is the lone domestic carmaker to boast a sales increase for 1981, up 18% so far, the company reported that it operated at a loss of $149 million between July and September. Total Big Three losses: $952 million.

If sales remain slow through the fourth quarter, industry observers speculate that Chrysler, as a last resort, will be forced to ask Washing ton for the final $300 million of the $1.5 billion in Government loan guarantees authorized during the The Carter Administration. The company, though, says it has no plans to ask for the additional aid. Only three months ago, Chairman Lee lacocca announced a $12 million profit for the second quarter and said, "We've got our act together, and we're on our way back."

Detroit complains that the sales slump has been caused primarily by staggering interest rates. Three years ago, it seldom cost more than 1 11% to finance a new car. Today carrying charges run to 18% lacocca told Reagan Administration officials three weeks ago that the industry would continue to be depressed until interest rates dropped to around 15%. Says Harvey Heinbach, a Merrill Lynch auto analyst: "The consumer doesn't want to commit himself to four years of those high car payments when he is uncertain of the outlook for business, for inflation, for his job."

In private, though, some auto executives concede that they have helped cause the sluggish sales by pricing too many cars beyond the reach of low-and middle-income shoppers. Says Ford President Donald E. Petersen: "The perception of price is a big problem." Beginning in 1979, the industry started pushing up prices rapidly, partly to help pay for its $80 billion program to switch production from big cars to smaller models, and also out of fear of possible Government price controls. Admits one top automaker: "We priced cars too high." The cost of the average American-built car has gone from $6,475 to $10,200 in the past three years.

To stimulate sales, automakers are currently touting rebates and subsidized auto loans that are normally given only at the end of the model year. General Motors is offering 12.9% loans on some models; Chrysler has held many prices at last year's level; and Ford's "Up-Front Money" campaign promises rebates of $400 to $700. Yet in the current recessionary climate, these gimmicks are not working very well. Arvid Jouppi, senior vice president of Rooney, Pace Inc., an investment banking firm, paints a bleak out look for automakers. Says he: "It will be a very weak fourth quarter, with probably only General Motors showing a profit."

Slow sales are forcing the auto makers to cut back still further the number of employees and to reduce investment plans. A sign atop the deserted reception desk in the lobby of the Walter P. Chrysler Building in Highland Park, Mich., asks visitors to the company to sign in and call their contacts on the unmanned phone. Chrysler now has 120,000 employees, down from 250,000 worldwide in 1977.

General Motors two weeks ago canceled plans for a new $500 million assembly plant in Kansas City, Kans. Threatened with the specter of a total shutdown of the 43-year-old GM bearing plant in Clark, N.J., workers last week bought the factory from the automaker for $53 million. They will try to run it profitably themselves. In another cost-cutting move, Ford has threatened to close a plant in Sheffield, Ala., unless work ers there agree to substantial reductions in wages and benefits.

Auto industry officials continue to wait optimistically for pent-up customer demand to make itself felt in auto showrooms. Even though millions of drivers are no longer turning in their cars every two years, consumers will eventually have to take their clunkers off the road. The average car on the highway is now about seven years old. Wall Street's Goldman, Sachs predicts that sales of domestic cars in 1982 will rebound to about 7.8 million, in contrast with 6.6 million last year. Others are less sanguine, in part because imports have tak en a large and seemingly permanent share of the market. A recent industry study made by Data Resources, Inc., an economic consulting firm, concluded that demand for autos may remain depressed because of the "protracted energy shock" and the resulting increased cost of gasoline. If a basic erosion of demand is under way, 1982 could be the industry's fourth consecutive year of recession.

With reporting by Paul A. Witteman

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