A Glimmer off Hope in Detroit

By Charles Alexander

Sales accelerate, but the automakers still have a long way back

Of all the tonics that would help revive the sagging U.S. economy, few would be more potent than a turnaround for the long-depressed American auto industry. For that reason, the news out of Detroit last week was especially encouraging. The automakers announced that May sales of American-built cars surged 11% from the same period a year ago.

The figures stirred hopes that the auto industry, which has lost nearly $6 billion since 1979 and laid off roughly 250,000 workers, may be poised, at last, for a rebound. Says General Motors Vice Chairman Howard Kehrl: "The market seems to have strength again." Chrysler Chairman Lee lacocca believes his slimmed-down company may be able to turn a profit of close to $100 million in the April-June quarter, compared with an operating loss of $89 million in the first three months of the year.

Wall Street analysts, however, are more cautious. "I don't think we can scream that the recovery is at hand," says Maryann Keller of the Paine Webber investment firm. Even after an upbeat May, auto sales for the year so far are 36% less than during the same months in 1978. The automakers continue to confront the problems that first triggered their prolonged slump: high interest rates, a weak economy and fierce competition from Japanese imports. Says Fran McCormack, general manager of Clayton Motors Dodge in East Hartford, Conn.: "There are obviously a lot of people who need to replace their cars who are still waiting for interest rates to come down. People live and breathe those rates."

May's showroom traffic was spurred by a razzle-dazzle assortment of rebates, financing deals and warranties that the car companies say they cannot afford to keep offering forever. GM garnered a 22% sales increase by giving customers 12.8% financing, which was far more attractive than the 17% auto loans available at banks. That offer has now expired, however, and GM sales may slow again as a result. Says Analyst David Healy of the Drexel Burnham Lambert brokerage house: "Early June could be pretty wobbly without an incentive program at GM."

The other companies, which were too financially weak to match GM's 12.8% deal, scored much smaller gains. Ford, with a sales rise of 1.3%, offered rebates of 5% on the price of most models and a broad two-year warranty for maintenance and repair costs on all of its cars. Chrysler's warranty, which is good for five years or 50,000 miles, helped boost sales 4.8%. To promote these gimmicks, the companies launched costly advertising campaigns. It became almost impossible to watch television without hearing Telly (Kojak) Savalas hawk Fords or Chrysler's Iacocca growl: "If you can find a better car, buy it."

Not all the sales growth, however, has come from catering to the frugal car buyer. Detroit has also rolled out a new generation of so-called muscle cars for those who want high performance and are willing to pay for it. Earlier cars that had lots of vroom were immortalized by Beach Boys songs of the 1960s, but they went out of production largely because of tough Government fuel-economy and pollution regulations. Now some automakers have produced models that get respectable gas mileage but can still accelerate from 0 to 60 m.p.h. in 7 sec. Some of the hottest sellers: the Ford Mustang GT (up to $1 1,500) and the Chevrolet Camaro Z28 (up to $13,500).

Chrysler has no strong line of muscle cars, but Iacocca has come up with a similar stroke of marketing savvy--the return of the convertible. When he decided to revive the ragtop last October, he expected annual sales of 4,500. Convertible versions of the Chrysler Le-Baron and Dodge 400 are now selling at a yearly rate of 50,000, despite price tags as high as $15,255. "We haven't been able to keep them in stock," says Thomas Pappert, Chrysler's vice president for sales. GM and Ford are rushing to catch up, with their own convertible models.

While the pricey performance cars and convertibles have added a spark to auto sales, most of Detroit's factories will not be in full gear until the American middle class can once again afford a new car. A break in interest rates would help, but many buyers would still be deterred by steep sticker prices. Even the cheapest Chevrolet costs $5,270. William Goff, 52, a Dearborn, Mich., telephone worker, was discouraged by what he saw last week at a GM showroom. Said he: "I can't believe that some of these cars cost more than I paid for my house." Many people are choosing to repair their clunkers rather than pay new-car prices. The average age of cars on the road has risen from 5.7 years in 1972 to 6.9 years by the end of last year. Goff's wife, for example, drives a 1973 Oldsmobile that has already gone 163,000 miles.

Several factors have led to high car prices. For one thing, U.S. autoworkers average about $20 an hour in wages and benefits, which is some $8 an hour more than their Japanese counterparts. In addition, faulty management techniques, including poor systems for inventory control, have increased expenses. These problems have helped give Japanese manufacturers a cost advantage of around $1,500 per car. Partly for that reason, GM decided last month to begin importing subcompacts from Isuzu Motors of Tokyo instead of trying to make these minicars in the U.S.

The United Auto Workers earlier this year agreed to new contracts containing important wage concessions. Nonetheless, some industry analysts figure that these agreements will only cut Japan's $1,500 edge by $200 or so. That cost of production difference will have to fall further before Detroit's sticker prices can come down and a strong, and lasting, sales pickup can start.

--By Charles Alexander.

Reported by Paul A. Witteman/Detroit

With reporting by Paul A. Witteman

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