Business is booming for carmakers, but can it last?

July 30, 1994|By Ted Shelsby | Ted Shelsby,Sun Staff Writer

The domestic auto industry is back in high gear and hitting on all cylinders.

First Chrysler Corp., then Ford Motor Co. and General Motors Corp. reported second-quarter earnings that were not only higher than expected but the biggest quarterly profits in the history of each company.

For the quarter, the companies had profits exceeding $4.5 billion -- and $7.2 billion for the first half -- and analysts say the good times will not end soon. But they caution that the Big Three can't expect to sustain the rate of growth.

Brett Smith, an auto industry researcher with the University of Michigan's Office for the Study of Automotive Transportation, said it has been "boom and bust, boom and bust" for automakers for decades.

"In the mid-1980s, the industry was reporting record sales and profits, but by the late '80s and early '90s they were reporting record losses," he said.

But Mr. Smith said that the "very significant cost-cutting moves" made by all three auto manufacturers "should lead to less of a bust cycle the next time."

Michael P. Ward, an auto analyst with Kidder Peabody & Co. in New York, said the industry is in the early stages of a cyclical recovery that will likely last until 1996, maybe even through 1997.

"Volume," he said, "is the biggest factor. Higher industry volume can go a long way toward making a company's performance look a lot better. It can cover up a lot of problems."

Industry officials and analysts project combined car and truck sales of 15.3 million units this year and 16.4 million next year. Last year, unit sales totaled 14.2 million.

Jay R. Leopold, with Legg Mason Wood Walker Inc. in Baltimore, said that rising sales will be an enormous help to the Big Three in boosting the productivity of their factories and absorbing fixed costs.

As a group, he projects earnings gains in the range of 20 to 25 percent next year.

Michael L. Bowyer, an analyst with Duff & Phelps in Chicago, said the next three years will likely be good years for the industry but he doesn't think it can maintain the current pace. He said the current gains are the results of a big run-up from a low sales base and it will be tougher for the industry to match these results again next year.

Mr. Ward said all three have done well in "keeping the lid on cost" and have come a long way toward eliminating the profit-eating incentives and rebates.

"Ford cut its marketing costs by 1.6 percent," Mr. Ward said, "That's $300 million in the U.S."

He said, for example, the Ford Explorer is in high demand and Ford doesn't have to offer incentives. The same is true for a number of other vehicles, including the Chevrolet Monte Carlo, Lumina and full size pickup truck; Oldsmobile Aurora; and Chrysler's Jeeps and minivans.

Mr. Ward said these are all factors that will help the industry post higher earnings next year and strong results in 1996.

Mr. Smith said all the carmakers think they have found the answer to their past problems. "GM says it will be the leanest and meanest company in the world within the next five years," he said. "We've heard that from them before. We'll just have to see how it plays out."

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