NEW YORK - Is the party over?
Outside of Kirk Kerkorian's takeover attempt ofCorp. (see story p.70), that was the major topic of conversation at the New York Auto Show.
Several analysts concluded that there will be no calamitous industry collapse within the next six months. Despite all the pessimistic news circulating this year, Scott Merlis of Morgan Stanley, Stephen J. Girsky of Paine Webber and Jack V. Kirnan of Salomon Brothers Inc. predict that the U.S. auto market will slide sideways in 1995 rather than plunge into a recession.
All three forecast a plateauing this year, with light-vehicle sales tracking a normal sales trend line. The forecasts range from Mr. Kirnan's 14.9 million units to Mr. Merlis's 15.3 million units. All the estimates are well under the bullish forecasts of the Big Three.
But Mr. Kirnan says that the industry has a legitimate shot at having a very long, durable, elongated cycle where volume never gets to 16 million-plus units the industry is used to seeing in peak years. "What we get instead is numbers barely above trend line," Mr. Kirnan suggests. There may never be another mythical year and neither will there be the deep troughs like in '74, '81 and '91, he says. "We have the potential as an industry, if I'm right, for a much less volatile sales cycle than we've ever had before," Mr. Kirnan adds.
Whether this occurs hinges to some extent on what carmakers do about pricing, Mr. Kirnan says. If the manufacturers "fight the tape" and try to buy volume, he says, "we really could get an Armageddon." This would lower prices of new cars and force down today's record high used-car prices at a time when an increasing number of vehicles are coming off lease, Mr. Kirnan says. "It's in the industry's interest - probablymore than anybody else - to not fight the tape, to not stimulate the market by throwing out a lot of new marketing activity," Mr. Kirnan suggests. However, he does not forecast a price war to boost market share.
Mr. Girsky says the leading indicators of auto demand developed by Paine Webber include consumer confidence, federal fund rate, employment, used-car-to-new-car price ratio and gasoline prices. Those indicators started leveling off in 1993 after the first interest hike by the Federal Reserve Bank, Mr. Girsky says. He claims the indicators in 1980 called the top of the market in 1986. The same indicators called the bottom of the market in 1991. He says the indicators are now forecasting a leveling off in the market in the 15-million to 15.5-million unit range.
The indicators don't show any sign of a decline, Mr. Girsky says. Consumer confidence is still very strong and driving the bullish forcasts, he adds. Slowing a rise in the market is the fact that money is harder to get in the wake of the Fed's interest hikes. This has also dried up mortgage refinancing, which helped pump money into the car market.
Mr. Girsky says he doesn't think a big decline is imminent. However, if consumer confidence should dip and used car prices start to break, those would be red flags. On the other hand, if short-term interest should drop, that could pump health into the car market, he says.
There are overall factors that argue against a big jump in car sales again, Mr. Girsky says. These include the fact that the growth rate of the number of people physically old enough to drive cars is slowing down. This number grew 2% in the '70s, 1.4% in the '80s and will slow to 0.9% in the '90s, Mr. Girsky says.
Another depressant is the graying of America. There are 0.91 vehicles on the road for every person of driving age. It was 0.8 moving into the '80s and then the number of vehicles exploded because of a growth in two-wage households. It's unlikely to explode to the same extent in the '90s, he says.
The slowing scrappage rate is another factor that holds down car replacement because cars are built better today and last longer.
Mr. Girsky says his biggest worry - "the thing I lose sleep over at night" - is capacity. "This industry is going to add about 1.8 million units of capacity," he notes. Most of the new capacity is for light trucks.alone is going to add a half-million units of capacity.
The comingPrevia replacement (to be built in Georgetown, KY), 's new U.S.-built minivan and the expected GM APV replacement next year all will add to truck capacity. "Is it a big surprise that minivan margins are starting to compress?" Mr. Girsky asks.
He also hints that it won't be a big surprise to see SUV discounts next fall because Chrysler is boosting Grand Cherokee production to 340,000 units from the present 260,000 just when the model is at its highest days supply ever. Grand Cherokees in March sold at a 240,000 annualized rate. GM added about 110,000 units of new capacity with the just-introduced Blazer/Jimmy.launched the Explorer with at least 150,000 units of incremental capacity. The industry as a whole has added up to 400,000 units of SUV capacity, Mr. Girsky says.
Mr. Merlis sees a brighter 1996, but he's the only member of the trio who does. He forecasts a 15.9-million-unit year, which he calls a "nice re-acceleration." However, Mr. Kirnan estimates '96 sales at 15.3 million units and Mr. Girsky offers a 15.4-,million-unit forecast.
"The onus is on me to prove the contrary.thesis," Mr. Merlis says. His scenario contains some long shots: lower interest rates, more than 200,000 new jobs, disposable personal income growth above 2%. People buy cars with income, not consumer confidence, he maintains. In addition, Mr. Merlis contends the U.S. has 12 million more drivers since the last peak year in 1986. He also says that despite the recent rise in interest rates, auto loan rates remain modest and baby boomers are earning much more.