GM and Ford executives have announced they expect a soft landing in the US auto industry.
At the international motor show in Detroit, automakers have been busy revealing gleaming new models in opulent surroundings. But the issue on everyone’s mind is whether the same confidence will exist this time next year. Will the industry experience a sharp reduction in demand or will it face the soft landing that Mr Nasser and Mr Smith now predict?
The downturn in sales at the end of 2000 came as a shock for many manufacturers. Whilst the Fed’s decision to cut interest rates last week has boosted confidence somewhat, the impact of the rate cut is only likely to be felt in the latter half on 2001. Equally, actions speak louder than words. Executives remain mildly confident in public, but the industry has cut back planned Q1 car production dramatically to anticipate a slowing market. For the fortunes of auto players in the US to change dramatically, consumer confidence must return.
At the same time, automakers must develop strategies to deal with worsened market conditions. Last year, a key factor in maintaining volumes were incentives offered to motorists. Car buyers got accustomed to being offered large incentives, a strategy which automakers used to clear excess stock. This must be reduced in 2001 to improve margins. On the production side, automakers must seek further efficiency savings. The increasing use of eCommerce should help unlock value across the automotive chain. The route to profitability in 2001 will depend largely on such cost cutting, rather than price hikes or sales growth. The potential for further consolidation on the scale of 2000 will be limited, but more strategic tie-ups between manufacturers are likely.
2001 is unlikely to break any records. Indeed, many in the industry are likely to cut their profit targets. But prospects for the year largely depend on the state of consumer confidence, so whether the second half of 2001 brings new hope will be the key question for many automotive players. The industry can expect angst before the brighter pastures emerge.
