For the good times

2001 probably won't be another record year but it won't be half bad either

These are unprecedented good times for the auto industry. Last year, factories produced and dealers sold some 17 million vehicles. This year, the number could reach 18 million. Will the increases continue? Can they continue?

Not all that long ago, it was said that the auto industry would be in great shape if it could maintain a flat 15 million units. If the industry dropped to that level next year, people would be wondering if the world were coming to an end.

It isn't very likely that the world will come to an end any time soon. Nor is it very likely that the industry will dip to 15 million units. In fact there many indications that 2001 will be right behind this year's record-setting pace.

The economy remains strong. Unemployment remains low. Consumer confidence continues to be strong. And the New York Yankees won the World Series.

"All I know is the Yankees won the World Series and that means business is going to be good. You can look it up," says a smiling Jim O'Connor, president of Ford Division and a New York native.

There are other reasons for optimism as we head into 2001.

"From a total demand standpoint of sales, the industry is clearly in a very robust environment boosted by the economy as one factor but then also boosted by a significant improvement in vehicle affordability," says Paul Ballew, general director of global market and industry analysis for General Motors. "From an industry standpoint in the U.S., it's the best of times and the most challenging of times. The industry is on a record pace for 2000. We'll shatter the record we established last year in terms of sales and a record pace in terms of production. We will be north of 18 million units in the U.S."

Most economists, including Mr. Ballew, expect next year to come in lower in terms of sales than this year. Standard & Poor's Global Automotive Group expects a drop to about 16.5 million next year.

"Our forecast is high 16 million to right around 17 million," says Mr. O'Connor. "That would be down if this year closes out at 18.

"In 2000 we had a lot of manufacturers bringing to market a lot of new product and new product drives a lot of interest," says Mr. O'Connor. "It had a very stable economy. It had high employment, low interest rates, things like that that are good for the auto industry. And we see a lot of those continuing."

GM CEO Richard Wagoner sees about a 5% drop in sales for the industry in 2001.

"But the fundamental is that the economy still looks pretty good. It's a balanced situation," says Mr. Wagoner.

But fuel prices and interest rates increases could threaten the boom, as well as the uncertainty in the government following the oh-so-close presidential election.

"There's no question that if gas prices go up 20-25 cents like they did over the Fourth of July weekend that sales could be affected," says Mr. O'Connor. But he adds, "The Explorer still had a lot of business during that time."

Mr. Ballew forecasts some "head winds" facing the industry, but the most pressing is the competitiveness of it all.

"Consumers are discriminating with their choices," he says. "So what that prompts you to do is maximize the value for the consumer and in part that means cutting prices and accepting lower margins. That strategy by itself will get you into a whole heck of a lot of hot water pretty quickly."

Says James Holden, former president of the Chrysler unit of DaimlerChrysler, "Whether it's carpets or cars, everybody is getting a deal...I think that will continue next year."

He says improvements in efficiency and effectiveness must accompany any price cutting.

Although Standard & Poors expect a slight dip in 2001 sales, it is predicting a rebound in 2002 to almost 17 million units and up to 18 million again by 2005.

S&P's says it expects the economy to remain strong and that the industry will make the improvements in productivity that Mr. Ballew calls for. It also assumes that the Federal Reserve Board will continue its track record of curtailing inflation.

Sales per vehicle, however, will have peaked this year at 73,000. Between now and 2005, there should be about 50 additional new vehicles on the market, which will drop the per-vehicle average back down to 1995 levels near 64,000, when the market was at 14.7 million.

All this means more competition, and, so, more pressure on prices and profits.