Is the Party Over?

The early 1990s were disconcerting times in Detroit. Not as bad as the early 1980s, mind you, but most everyone involved in the U.S. auto industry felt a growing sense of uneasiness.

Everywhere you looked the Big Three were losing market share. The top Japanese auto-makers, especially with their newly launched luxury models, seemed poised to completely dominate the American market. Not only was unemployment marching steadily upward, the outbreak of the Gulf War in 1991 brought the economy to a grinding halt. The future looked grim indeed.

But then the Gulf War abruptly ended, and a funny thing happened. American consumers fell head over heels for trucks. They absolutely swooned over the idea of buying and driving pick-ups, sport/utility vehicles and minivans. These products had been available all along, but now, for whatever number of reasons, people just couldn't get enough of them - quite literally, demand outstripped supply.

It was a seller's market, and the Big Three were perfectly positioned for it. Thanks to Americans' reluctance to tax their gasoline to world prices, General Motors Corp., Ford Motor Co. and Chrysler Corp. could build big, rear-drive, V-8 powered trucks to their hearts' content. So what if they didn't get great mileage? They didn't cost that much to fill up!

Since the U.S. was practically the only market where vehicles like this could sell in large volumes, the Big Three effectively enjoyed the most protected market in the world. None of the foreign automakers had the products to take advantage of this seismic shift in consumer preference. It would take them years to catch up. It took them even longer to catch on.

It was around this time that the graphic browser appeared on the Internet, spawning the New Economy. The stock market took off and never looked back, creating a sense of newfound wealth. That surge led to a spending splurge, much of it on new cars. It also led to a windfall in tax revenues. The Federal budget deficit began to shrink, and interest rates fell to recent historical lows, triggering even more buying on the part of people who didn't make a killing in the market. The rising tide lifted all boats, and auto sales hit 15 million units a year like clockwork. The industry had never seen anything like it.

American suppliers gained a new sense of confidence during this era of prosperity and embarked on a bold business strategy. Convinced of the inevitability of industry consolidation, they engaged in global mergers and acquisitions with the clear intent to dominate their markets. They went on shopping sprees, especially in Europe and Asia, snatching up their fragmented competitors, transforming themselves into ever-larger entities with more capabilities, more products and more customers.

But the advent of the new millennium seems to be signaling a change. It was all too good to last. Indeed, it is coming to an end. After having the truck market to themselves for so long, the Big Three now face determined competition from their foreign competitors. Those automakers now have the proper sized pickups, sport-utes and minivans, and most of these are terrific products.

Moreover, many of the foreign auto-makers are making these products in North America. Now we're about to see the truck segment saturated with new products and saddled with overcapacity. You can kiss those big, fat profit margins goodbye.

And suppliers that assumed large debt levels to buy out their competitors are going to see their merger and acquisition strategies put to the test.

It could be quite a jolt. After six consecutive interest rate hikes by the Federal Reserve, car sales are starting to slow down. Plus, the recent stock market corrections are putting a stop to all that splurge spending.

DaimlerChrysler Corp. just announced massive rebates in a desperate attempt to stop its market share slide - a move that is likely to trigger an all-out incentive war. And you can bet Wall Street will focus more on that than any alluring potential of automotive e-commerce.

I don't think that we're going back to the unsettling days of a decade ago. But we're seeing the sun start to set on a Golden Era that was the product of several happy con-vergences. The result is that the U.S. automotive market will not be quite the profit machine that it has been. And that's going to make business a lot more difficult for the hometown team.