Despite a financial maelstrom in Hong Kong, Thailand and Brazil, plus fourth-quarter turbulence on Wall Street and a late-fall slippage in U.S. vehicle sales, the U.S. Big Three economists - to a man and a woman - dauntlessly look for a seventh straight record year for the auto industry's U.S. market in 1998.
The year just completed already has prolonged the winning streak, and the economists expect more of the same - a 15-million to 15.5-million market as they offer a lengthy list of factors for their confident forecasts.
The lady goes first. Ellen Hughes-Cromwick, senior economist forMotor Co., eyes four major components of economic strength: "High consumer confidence, low inflation and interest rates, no major imbalances in the economy and a healthy banking sector to provide for capital expansion by the corporate sector."
AndChief Economist Martin Zimmerman naturally concurs: "I don't think anything fundamental has changed in the U.S. economy. There are some real economic problems in Southeast Asia. They have some adjusting to do, and that implies a slowdown in their economies. But to the U.S. what that means is a slowdown in exports to Asia. I don't see that as a major threat, because we still have good markets in Latin America, Europe and Canada," he says.
Mr. Zimmerman adds that the U.S. has had terrific inflation performance, "a key to the sustainability of the recovery." He sees modest pickup in inflation in 1998, "but nothing dramatic."
's chief economist notes that the U.S. has had four straight years of stable sales. "That is totally unprecedented," observes W. Van Bussmann. "We've never had more than two years back to back."
Mr. Bussmann thinks that if the industry had rung up sales of 16.5 million units a year, we would be headed toward a recession right now. He explains: "One of the reasons the recovery is so long is that it hasn't been as robust as most previous recoveries. Some people call the recovery half-speed. If that's the case, it should last twice as long and give us at least twice the staying power."
HisCorp. counterpart, G. Mustafa Mohatarem, decries opinions that Southeast Asia's troubles can be traced to an overheated period of growth:
"Is Asia growing too fast? I don't know what that means. Look at Japan in the '50s and '60s, China since 1979,Korea in the '80s. Growth has been fast but they have been able to sustain it," says Mr. Mohatarem. "You should not put a U.S. paradigm on Asia because the savings rates are just so much higher there, so they can sustain higher rates of investment.
"I think the problem with Asia comes from arrogance - arrogance by Asian leaders themselves, mainly government, that comes from that kind of economic growth," he says.
Mr. Mohatarem observes that there is irony in Asia's problems that may help the U.S. "Asian stock market gyrations could reduce consumer confidence here and that would reduce spending to forestall a rise in interest rates." That, in his opinion, would mean the Federal Reserve would not have to raise rates to cool the economy.
GM is building big plants in Shanghai and Thailand that are scheduled to go on stream in 1999. Mr. Mohatarem expects to see a recovery in those areas by that time.
Japan's economic downturn has a two-pronged impact on the U.S.: a stronger dollar vs. the yen and an export drive to compensate for lost sales in its home market. Ford's Ms. Hughes-Cromwick says a tax hike last April damaged Japan's economy far more than had been anticipated. "I think 1998 will be a very difficult year for Japan. Some improvement in economic growth and auto industry volume is foreseen, but I don't anticipate any major acceleration."
's Mr. Bussmann frankly concedes that his company's sales in Japan in 1997 were worse than in a poor 1996. "The market there is not growing rapidly and they have excess capacity. It's really, really tough to break into that market. We want them to understand that they no longer can operate behind a closed wall and use that as a base to attack other markets. It's just warfare, that's all."
GM's Mr. Mohatarem, noting that Japan's economy is second only to the U.S. and different than the rest of Asia, says Japan is one of many countries that are tough for U.S. products. He recalls that the apolitical Federal Maritime Commission recently cracked down on Japan for its failure to give American shippers freer access to its ports. "That action is consistent with the trend in U.S. policy. If countries do not abide by trade agreements with us, we will react quickly and appropriately."
There are reports that the White House showed little enthusiasm for the Maritime Commission's actions. The GM economist says the U.S. also is taking a hard look at Indonesia and South Korea. "It's about time we became more decisive," he suggests.
The Japanese yen in December sank to around 130 yen /$1. Mr. Bussmann sees the dollar depreciating slightly - perhaps to 110 yen - although ruling out a return to 100 yen or 105 yen. Mr. Mohatarem says the yen should strengthen in 1998. Ford's Ms. Hughes-Cromwick declines a yen prediction, but says 100 yen to 110 yen would be a competitive level. "Japan has a lot of wood to chop to improve the growth of domestic demand," she says. "Once they get their policies in place to stimulate home demand, dollar and yen values will be more appropriate."
Japan faces tough competition with expectations that the Chinese economy, now about ninth in the world, could leapfrog Japan and move into second place by 2010. Mr. Mohatarem reminds that Japan has capacity to build 15 million vehicles a year but only sells 10 million. He sees South Korea as another area with too much capacity, but regards North America's supply and demand as well-balanced.
Ms. Hughes-Cromwick sees China's annual growth rate continuing at about 9.5% in 1998. "Companies investing in China are not earning a rate of return they might want," she says, "but, this (China) is a growing economy with expanding markets, and over the long run, it is likely to be a very vibrant market for the automotive industry."
Commenting on China's willingness to open its markets to U.S. producers, Mr. Mohatarem thinks the climate will be warmer than it has been in Japan. "Numbers suggest that 90% of what we import from China we previously imported from other Asian nations. Our trade gap with China is a $40-billion deficit. But, China is unique."
Chrysler's Mr. Bussmann concurs that a brighter outlook in China will have to wait until 2005 to 2010. "Brazil and Argentina offer far greater opportunities from now until 2005," he asserts. "The growth in the number of Chinese families able to buy a car from 1995 to 2005 is 1.8 million compared with 3.1 million in Brazil. Argentina also is well ahead of China."
Other economists also remain bullish about Brazil despite a sharp boost in the excise tax two months ago. The small-car tax will rise from 8% to 13%, with the increase added to the retail price. Brazil, guarding its own economy, reacted to the Asian currency crisis. The country also increased income tax rates and gasoline pump prices.
Mr. Mohatarem reports sales in Brazil have reached an all-time peak and should moderate in 1998. "Brazil, Argentina, Chile, Colombia and Venezuela are all very significant and profitable markets for GM," he attests.
The GM analyst says Mexico was pleasantly surprising in 1997. "It has recovered solidly and continues to recover," he comments. "The North American Free Trade Agreement (NAFTA) has been a huge factor in Mexico's recovery.
"The Mexican government bit the bullet. Unlike some elements in Southeast Asia right now, Mexico did not seek a scapegoat, admitting that it was its own fault that policies became unbalanced."
Ms. Hughes-Cromwick predicts 1998 will be a strong year for Brazil, Argentina and Mexico. "Those countries produced some of the strongest economic growth across the globe in 1997. Argentina accelerated from 4.5% to close to 7% in 1997. Mexico's growth rate was 5% in 1996 and 6% last year." She notes that Ford had a good year in those three nations and that South America is now back in the profit column.
Across the Atlantic, the European Monetary Union meets in the spring to determine which nations will adopt a common currency on Jan. 1, 1999. The four major members are Germany, France, Italy and Spain.
Mr. Mohatarem predicts Norway, Sweden, Greece, Denmark and the United Kingdom will not join. "The Union will build consumer confidence in Europe and will coincide with strengthening economies in at least Germany and France. I'm very optimistic about Western Europe and see it on the same path as the U.S. and Canada over the last six or seven years."
Mr. Bussmann sees American corporate interests possibly simplifying their operations in Europe if the monetary union occurs. "We would not have to look at differential pricing in one market versus another. In the past, that has led to a gray market where Germans were buying cars from Italy."
The United Kingdom is on a roll. "The U.K. has one of the best economic expansions in the world over the last few years," says Ford's Hughes-Cromwick. She expects the final 1997 figures to show a gain of as much as 3.5%.
A more perplexing problem Stateside is a potentially severe labor shortage. Chrysler sees it not only in skilled blue collar rolls, but in salaried personnel as well.
Mr. Bussmann says there may have been a chronic shortage of skilled workers in recent years but not to the degree the industry is now experiencing. Mr. Mohatarem says the labor market is exceptionally strong but he does not view that as an inflationary threat. "I keep reading that, and it frustrates me. You get inflation whenever the government prints too much money. Our market right now does not allow any pricing flexibility. We can't raise prices. If we want to hire more people or pay more, we have to be able to offset that with higher productivity. That is how you get rising incomes, real incomes. Only those companies that can pay higher wages and maintain prices are the ones that are expanding.
"A tight labor market is good for the country, good for the economy, good for auto sales."
Or, what's good for the auto industry is good for the country. And globally, good for the world.