New-car dealers expect a decline after 2001 surge

Autos: Analysts see big bargains on used cars and more financial restructuring of the worldwide industry.

Automotive

January 20, 2002|By Ted Shelsby | Ted Shelsby,SUN STAFF

New-car retailers ended 2001 on a synthetic high, and now it's time to come back down to earth.

Enticed by zero percent financing, consumers nearly kicked down the doors of auto showrooms as they went on a buying spree during the closing quarter last year that had new cars selling at a pace 25 percent above the record high.

But that was then, analysts say, and they are predicting sales declines of 2 percent to 5 percent for the year ahead.

Auto analysts also see big bargains for used-car shoppers, the continued financial restructuring of the worldwide auto industry that could result in the loss of at least one big-name manufacturer, and status quo for Maryland's two large automotive assembly plants.

"There is a lot of uncertainty in the industry at this time," said David E. Cole, executive director of the Center for Automotive Research in Ann Arbor, Mich. "There are so many variables that it's not easy to understand where the industry is headed in 2002."

He forecasts sales of new cars and light trucks at 15 million to 15.5 million units this year. This compares with sales of 17 million for the year just ended.

Cole said others are forecasting sales ranging from 14 million to 16.4 million vehicles.

Looking at Maryland, a Jacob J. Cohen, managing director of the auto dealers' group of American Express Tax and Business Services Inc., said that 60 percent of the state's auto retailers had their best year ever in 2001. The group provides financial services for many of the state's new-car dealerships.

Cohen foresees sales falling about 4 percent in Maryland this year, compared with a nearly 5 percent drop for the nation.

"Maryland's economy should fare a little better than the U.S. economy," he said. "Maryland also has more large dealerships selling a diversified selection of cars. They will have a better ability to afford the advertising needed to stimulate sales."

Peter Kitzmiller, president of the Maryland New Car and Truck Dealers Association, said state dealers could see sales drop 2 percent, 3 percent or even 4 percent this year. "It will depend on upon whether or not Maryland takes a big hit from the recession and how long the recession lasts," he said.

"The $64,000 question," Kitzmiller said, "is how many sales did the zero percent financing plans take out of first-quarter 2002 sales. It may not be as many as people think."

Kitzmiller said there is also a slight chance that the General Assembly will put more money into the pockets of consumers trading in their old cars.

He said Maryland is one of only five states that charges taxes on the full value of a new car when the consumer trades in an old car. Most states subtract the value of a trade-in before calculating the tax on a new vehicle purchased.

The dealer group wants the Maryland law changed, but gives passage of legislation little hope this year because of budget deficits. "We don't think it's fair for consumers in the state," Kitzmiller said.

In recent years, the law was changed to reduce the tax bite on the purchase of boats and recreational vehicles. "Right is right," he said. "If it's right for boats and recreational vehicles, it should be right for cars, which are more of a necessity."

The big savings this year will likely be on the used-car lots, according to George E. Hoffer, professor of automotive economics at Virginia Commonwealth University.

"During the first half of the year, used cars should be a good buy," he said. "So many people traded in their cars to take advantage of the interest-free financing plans and other incentives that there is a glut of used cars on the market. It's a buyer's market."

Hoffer said that these trade-ins, combined with cars coming off lease, will make used cars so attractive that they will likely put pressure on new models.

"Despite what the manufacturers are saying, there are going to be new incentives to sell cars," Hoffer said. "It may not be zero percent financing, but you can look for new incentives to offset the price of used cars and make new cars more attractive."

Hoffer and Cole noted that General Motors Corp. will be the big winner if gasoline prices remain low. "GM is heavily into the market for large SUVs [sport utility vehicles]," Cole said. "It will benefit greatly if gas prices stay low. GM has a lot of trucks with high profit margins."

Even without the benefit of low gas prices, Cole sees GM faring better than most competitors as the industry continues through a period of difficult restructuring. "They have greater financial resources to better cope with the expensive incentives needed to sell cars at this time," he said.

Cole said there continues to be excess capacity worldwide for auto production. "The industry is broken," he said. "It is not a survivable industry in its present form."

During 2002 and the years ahead, Cole said auto manufacturers will struggle to reduce their number of workers. He expects to see several U.S. vehicle assembly plants eliminate production shifts.

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