Hot, Hot, Hot

This year is shaping up to be even more heated than the past two when sales declined to 16.8 million and 16.6 million in 2002 and 2003, respectively, after two straight years of 17 million-plus units.

They're still the fourth and fifth best years in the history of the U.S. auto industry, which ostensibly means they should be considered good years.

But not really. When sales, even historically high annual volumes, have to be propped by widespread 0% interest loans and rebates averaging $3,000 to $4,000, anything below 17 million now has to be considered lukewarm at best.

Manufacturers, especially the Big Three, are looking at 2004 to give them some relief from the costly incentive programs they've been plagued with to keep sales volume afloat and factories running.

Loaded for bear with a slew of new and redesigned products just released in 2003 or coming in 2004, on top of a burgeoning economy, most of the industry is hoping to ride through 2004 with bigger profit margins and more volume.

U.S. sales started off 2004 on a downer, though, as bad winter weather in the Midwest and Northeast, and perhaps too much of a pullback on incentives, dashed hopes for a fast start out of the block.

The significance of a tepid start is that it suggests the pattern of the previous two years will repeat itself in 2004. Sales start out sluggishly, the hot brands pull market share away from the others, the others start increasing incentives to maintain penetration, and total industry volumes are artificially lifted.

To avoid being caught short, production volumes stay strong and the industry maintains historically high inventory levels.

But in the sluggish economy of the last two years, small increases to already generous market spiffs only did so much, and inventories as a whole started to snowball.

That led to aggressive sales programs at the end of the summer in 2002 and in 2003 to get rid of the old model year vehicles, followed by a sales dip at the start of the new model year, with inventories somewhat pared and manufacturers hoping that the newer products would allow them to cut back on incentives. That led to blowouts at the end of both years.

Different this year is that the economy is on the upswing. Manufacturers aren't expecting pricing power to improve dramatically, but in theory it should.

Still the name of the game, the driving force more so than ever before, is competition. More companies are selling an unprecedented larger mix of high-content vehicles, and the skirmishes on each battlefield are going to become bloodier. The heated competition, alone, should lift sales this year to 17 million.

The bottom line: The economy might be stronger, but pricing power may not get any better. Dealers may benefit from continued strong manufacturer-subsidized incentives but may have to scrap even harder to vie with the competition down the street.

Haig Stoddard is manager of industry analysis for Ward's Communications.

Key U.S. Programs in 2004

Small Cars

Chevrolet Cobalt (replaces Cavalier)
Kia Spectra
Suzuki Reno (new)
Toyota Echo
Volkswagen Golf

Midsize Cars

Buick LaCrosse (replaces Regal)
Mitsubishi Galant
Pontiac G6 (replaces Grand Am)
Saab 9-2X (new)
Subaru Legacy
Volvo 40 Series

Large Sedans

Chrysler 300 Series (replaces 300M)
Ford Five Hundred (new)
Mercury Montego (new)
Toyota Avalon

Luxury Sedans

Acura RL
Audi A6
BMW 1-Series
Cadillac STS (replaces Seville)
Infiniti M45
Lexus GS 300
Lexus GS 430
Lexus IS 300
Maserti Quattroporte (new)

Specialty Cars

Bentley Continental GT (new)
BMW 6-Series (new)
Ford Mustang
Scion tC (new)
Toyota Celica

Sports Cars

Aston Martin DB9
Chevrolet Corvette
Ferrari 612 Scaglietti (new)
Ford GT (new)
Lamborghini Gallardo (new)
Lotus Elise (new)
Mercedes SLK

Minivans

Buick Terraza (new)
Chevrolet Uplander (replaces Venture)
Chrysler Town & Country
Dodge Caravan
Honda Odyssey
Pontiac Montana SV6
Saturn Relay (new)

Cross/Utility Vehicles

BMW X3 (new)
Chevrolet Equinox (replaces Tracker)
Dodge Magnum
Ford Freestyle (new)
Hyundai Tucson (new)
Kia Sportage
Mercedes M-Class
Mercury Mariner (new)

Sport/Utility Vehicles

Infiniti QX56 (new)
Jeep Grand Cherokee
Land Rover Discovery
Lexus LX 470
Mercedes G-Class
Nissan Pathfinder

Small Pickups

Dodge Dakota
Nissan Frontier
Toyota Tacoma

Source: WardsAuto.com