Outlook is 'fundamentally' upbeat

TRAVERSE CITY, MI - The big shots from the U.S. Big Three got most of the headlines at the University of Michigan's annual Automotive Management Seminar which took place in August in this northwestern Michigan resort community by Lake Michigan's Grand Traverse Bay.

But then, they always do.

Officials representing foreign automakers and top brass from key supplier companies also shared the rostrum and had their say on a variety of topics, many of which are covered elsewhere in this issue.

Almost overlooked on this year's agenda, whose theme was "Focus on Fundamentals," were some fundamentally upbeat reports from numbers-crunchers: The folks who track the industry's fundamentals and major trends using their extensive data bases, research facilities and analytic skills.

Maybe it's because they were scheduled for the final day of the five-day session, when many among the hundreds attending were tuning out - or, perchance, out on the Bear, the tough $100-per-round golf course designed by Jack Nicklaus that's a key distraction at the Grand Traverse Resort, where the meeting took place.

Whatever the reasons, what these folks had to say is that, contrary to conventional wisdom, there are good reasons to believe that the U.S. auto industry's recent downward blips may be aberrations - that the basics remain in place for continuing strong vehicle demand for at least the next two years. And even then they don't see a drastic slump coming in 1997, when most experts suspect the next true down-cycle will kick in. Farther out in the '90s, total North American demand could top 17 million units.

John A. Casesa, managing director of New York-based Schroder Wertheim & Co., hauls out impressive charts strongly suggesting things aren't nearly as bad as many believe. He terms recent sales setbacks as "probably just an interruption" in a typical cyclical upturn.

Among his chief points is that during the current upturn. which began in 1991, sales growth has been modest compared with previous up-cycles, leaving plenty of room for continued strength. By Mr. Casesa's reckoning, growth in the 1991-94 period ran at only 20.3% compared with 49.2% in the 1982-85 period of rebounding sales and 38.7% during the 1975-78 upturn.

All of this indicates that so far "we haven't had excessive demand," and that if consumer sentiment remains high - as key studies indicate is the case - car and truck sales this year (less heavy-duty models) will come in at around the 14.6 million to 14.7 million range - healthy, if not a barn burner, but down from 15 million last year.

Mr. Casesa looks for another 4% to 5% growth in U.S. sales during 1996 and "a little slower pace in 1997."

Although his forecast indicates sales at a high plateau with less cyclicality through 1999, Mr. Casesa observes that "it looks like essentially a no-growth business in the United States, so it's going to be a lot tougher for the auto companies."

In that respect, he thinks the Big Three U.S. automakers will have an advantage because they already have invested the cash and time to put in or revamp capacity - and, in the case of General Motors Corp., mothball facilities. Demand, he says, will rise faster than North American assembly capacity.

"The Japanese are short on both (time and U.S. capacity), and that opens things up for the Big Three," he says.

Although the Japanese until fairly, recently have focused on boosting market share in the U.S., their attention now is zeroing in on profits due largely to the strong yen and a slowdown in their home market, he points out. Again, that serves to ease pressure on the Americans.

He also sees another big plus for the Big Three: A "balance of power" between the U.S. and Japanese on the product-introduction front. Each supplied some 40% of the new vehicles affiving on the market in the 1992-95 period, and, therefore, they were roughly at parity despite the much larger market share enjoyed by the Americans (European and Korean automakers shared the other 20%). His calculations show Japanese automakers dropping steadily to 30% of new-product introductions during the 1996-99 period while the Big Three's share moves above 50% and the others remain about the same.

"Since 1993, the U.S. automakers have been boosting their product introductions and the Japanese have pulled back," says Mr. Casesa. By 1999 "it will be a 5-3 ratio favoring the Big Three," which reduces their vulnerability to further market-share losses, he says.

Mr. Casesa backs up his findings with hard data. For example, total spending on vehicles as a percentage of gross domestic product (GDP) during past upturns has averaged 4.63% and climbed above 5.2% in record-year 1986, he says. During the current resurgence, that important indicator has risen from under 3.9% in 1991 to about 4.6% - just average and, by past standards, still on the ascent.

Mr. Casesa also is bullish about the Big Three's all-important cash flow (after capital spending). Their combined cash flow in 1994 exceeded $10 billion and will drop this year to an estimated $8 billion-plus. But by 1997, he sees the Big Three's cash flow soaring to $22 billion, more than double the cash they generated in the mid-'80s up-cycle - a key to their ability to weather the next downturn.

On a lighter note, Mr. Casesa was asked his reaction to Kirk Kerkorian's recent successful tender offer to raise his stock holdings in Chrysler Corp. to 13. 1%.

"I think he's behaving like a guy who thinks it's a company with a cheap stock price and great prospects," says the Wall Street analyst. The revelation that the Fidelity mutual fund group has raised its stake in Chrysler to 13% doesn't surprise him. "Fidelity routinely has stakes above 10% in companies they invest in," he notes.

News that Hiroshi Okuda had been named president of Toyota Motor Corp. filtered in just before Mr. Casesa's talk. Asked his reaction to Mr. Okuda's reputation as a mover and shaker, decidedly not in the tradition of previous Toyota top honchos, Mr. Casesa comments that "If Toyota takes off the gloves it's going to be tough for the Big Three and disastrous" for its home-market rivals, most of which already are ailing thanks to sliding sales and the ramifications of the strong yen,

Mr. Casesa's observation that the spring dip in vehicle sales and the since slow - but higher - pace gets support from Richard T. Curtin, director of consumer surveys at the University of Michigan. The group has reliably tracked how consumers feel about the economy and, more specifically, their car-buying intentions for more than 35 years.

If anything, Mr. Curtin is more firm about what he sees than is his fellow panelist from Wall Street.

"The most recent data indicate that ended," he flatly states.

Although an anticipated sales rebound in this year's second half won't offset first-half losses sufficiently to bring the year-end tabulation quite up to last year's level, "sales in 1996 are likely to remain in the same favorable range as recorded during 1994-95," says Mr. Curtin, adding that "three consecutive 15 million-unit years certainly do not justify anything close to a negative judgment on the outlook."

Mr. Curtin supports his conclusions with a sheaf of recent survey information. Based on the Michigan Index of Consumer Sentiment, things are looking up. Right now the index stands at 93.2%, up from 92.3% in 1994 and well above the recent-year low of 77.3% in 1992. It is, in fact, roughly in the same range as it was in during the mid-'80s up-cycle.

Moreover, the survey's index, broken out for "vehicle buying attitudes," shows gains each month through July since the bottom fell out of the market in April (see chart p.71). By the reckoning of most experts, that data reflect the Federal Reserve Board's recent move to stem anticipated inflation by reducing the prime lending rate following numerous increases during 1994 and early this year.

Like Mr. Casesa, Mr. Curtin sees the overall annual U.S. sales rate easing to about 2% during the coming decade compared with double that in previous 10-year periods.

What automotive marketers need to focus on is not so much the market's size but, rather, buyer demographics, Mr. Curtin emphasizes. By 2005, his data shows, some "12,000 Americans will turn 50 each and every day. Meeting the changing needs and preferences of an aging population will dominate industry trends and favor those companies and products that best meet those needs."

Maybe Cadillac's hulking Brougham, long a favorite of older folks, is dying prematurely; it will be dropped in 1996.