U.S. Auto Sales Accelerated 13%, Driven by Deals
August Results Put Big 3 On Track for Strong Year; A Bright Spot in Economy
September 5, 2002
DETROIT -- U.S. auto sales surged 13% in August to the highest level this year as consumers, shrugging off economic worries and stock-market woes, thronged car dealerships to take advantage of sweeping no-interest-financing offers.
Industry officials said sales are on track to make 2002 nearly as strong a year for the auto market as last year, which was the second-best in U.S. history. And there are few signs auto buyers are likely to grow skittish, despite the sluggish economic recovery.
General Motors Corp.'s sales jumped 18% to 490,150 vehicles, including a record number of sport-utilities. Ford Motor Co.'s results were up 8.2% at 364,776, while DaimlerChrysler AG saw its sales jump 21% from a weak month the year before. All the results, which helped spark a late-day rally in the stock market, are adjusted for 28 selling days in August this year, compared with 27 the year before.
"Consumer fundamentals remain favorable," said Jim O'Connor, head of North American sales at Ford, which reported its best August sales ever, including an all-time record for its Explorer SUV. "Low interest rates and inflation, and affordable vehicle prices and terms continue to support strong demand for new cars and trucks."
Auto sales have been one of the few bright spots in the economy since GM kicked off the no-interest-financing deals to breathe life into the market in the wake of the Sept. 11 terrorist attacks. August's sales result, an annual rate of 18.7 million vehicles, on a seasonally adjusted basis, was the highest since the original no-interest deals drove sales to a record of 21.3 million in October 2000
Even as the country has shaken off the initial shock and horror of the attacks, auto makers have stuck with similarly generous offers, sustaining demand. In the first eight months of this year, sales are up 0.8%, defying forecasts of a double-digit decline.
Much like strong home sales, which also have been driven by low interest rates, the auto makers' results are becoming an unexpectedly important factor in any economic recovery. Comerica Bank economist David Littman calculates that auto demand has added between a quarter and a half a percentage point to GDP growth over the past year.
The latest performance offers a significant contrast to the way the U.S. auto industry has fared in past economic downturns. In the early 1990s, U.S. auto makers sustained sharp sales declines, slashed production and shuttered factories, much as they had done in decades before. High interest rates and unemployment dried up demand.
But this time is different. Consumers have continued to spend, and auto makers have stronger reasons than ever to fight for those dollars. Under withering attack from foreign competitors and faced with high costs for unionized workers and retirees, U.S. auto makers see little choice but to use discounts to sustain sales and market share, despite worries about the economy.
The classic boom-and-bust cycles that defined the auto business since its inception appear to be giving way to a dynamic in which overall sales volumes remain relatively stable, because car makers have an enormous imperative to discount their wares and keep the factories churning. The biggest impact of the business cycle thus falls on manufacturers' profits and pricing.
"People say, `Aren't incentives hurting you?' " says GM Chief Executive Rick Wagoner. "I say, `Relative to what?' . . . We do better when we run our plants."
Yesterday, GM raised its 2002 earnings forecast for the fourth time this year -- by 50 cents to $6.10 a share -- as it boosted production plans to help rebuild inventories depleted by the torrid sales pace of recent months. But GM didn't back off much on discounts, either, offering cash rebates and no-interest financing on nearly all of its 2003 models. Though the terms of many offers weren't as generous as GM had offered last month on the outgoing 2002s, the new deals spread to some of GM's hottest new models, including the Cadillac CTS sedan and the Pontiac Vibe hatchback.
"We're going to put our foot on the accelerator," said Paul Ballew, GM's chief market analyst. After two decades of losing market share, GM is gaining ground this year, thanks to a popular lineup of pickups and sport-utility vehicles. GM sold 132,826 SUVs in August, which it said was a record for any auto maker.
Ford, meanwhile, said sales of its Explorer also set a record of 51,021 in August, the most ever for an individual SUV. That performance, powered by no-interest financing for terms as long as five years, was particularly striking in the wake of the controversy surrounding recalls of Firestone tires mounted on Explorers that began two years ago.
The continued popularity of SUVs, despite concerns about their increased risk of rollover highlighted by the Firestone recalls, also reflects a major shift in the U.S. auto market over the 1990s.
Middle-class buyers who once dominated the new-car market have increasingly shifted to late-model used cars, which often deliver more value for the dollar. Wealthier buyers, meanwhile, have stepped up their new-car and truck buying. In 1995, the richest quarter of households, those with annual incomes of roughly $75,000 or more, accounted for 30% of new-car sales, according to GM. Last year, that figure was 46%.
An increasing number of middle-class buyers still in the new-car market are buying upscale, fueling sales of so-called entry-level luxury vehicles, such as the Mercedes C-Class, which starts at about $30,000 and the BMW 3-Series, which can be had for even less.
Sarah Riker, a 25-year-old Appleton, Wis., nurse earning in the mid-$30,000 range, just bought a house, got married and picked up a black $29,000 BMW 325i she ordered weeks ago. She doesn't balk at the $450 monthly payment on the three-year lease, figuring, "If you're making money you should enjoy it."
BMW sales, including the new Mini subcompact, were up 13% in August, marking the company's strongest first eight months ever.
The strength of sales this year has extended beyond brands offering deep discounts. Japan's Toyota Motor Corp. and Honda Motor Co., which haven't matched the broad no-interest offers from the Big Three, both reported sales records in August. Toyota sales were up 13%, powered by gains for Camry sedans and Highlander SUVs, as well as a big jump in sales for the Lexus ES300 luxury car. Honda's sales also rose 13%, thanks to strong sales of its SUVs and minivans.
Mike Jackson, chief executive of AutoNation Inc., the country's largest auto retailer, predicts strong demand will continue as auto makers launch new products and keep discounts coming on older ones. AutoNation's biggest problem, he says, is getting enough vehicles to sell. "Availability is going to be a challenge through year end," he says.
Auto makers and dealers warned that sales could slow somewhat in the next few months because many popular models are in short supply after the blowout sales of the last few months. The car companies also are trying to avoid further escalation in the discounting war, as consumers increasingly come to demand deals. Unlike GM, Ford has so far avoided offering no-interest financing broadly across its 2003 models. The auto maker expects to post a modest profit this year after a $5.45 billion loss last year. DaimlerChrysler's Chrysler group said it would add no-interest financing on its 2003s. While DaimlerChrysler's sales, including its Mercedes luxury brand, were up in August, the German-American auto maker's sales are down 0.5% so far this year. While it doesn't provide per-share earnings forecasts, it said in July that it expects operating profits of at least 4.05 billion euros ($4 billion) this year.
GM's Mr. Ballew said he doesn't expect much easing of the discounting pressure until the economy picks up steam. "We expect no backing off," he said. "We're seeing a moderate recovery."
