Auto Industry Hits Rougher Road

THE United States auto industry faces tough new bumps in the financial roadway. Overall car sales, compared to past years, have slowed. Meantime, sales of Japanese imports continue to climb. Japanese cars, both those made in the US and abroad, constitute 27 percent of the total US passenger car market, up 3 percent from a year ago.

Last week's revised growth figures for the second quarter shows the economy humming along at an impressive 2.7 percent annual basis in the second quarter. But, according to industry officials, it is consumer confidence - not growth - which remains the key to a solid car year.

As measured by the Conference Board, a New York-based business research group, overall consumer confidence remains high. But consumer ``sentiment'' - the willingness of consumers to rush out and actually buy big-ticket durable goods - has been falling this year, as measured by the University of Michigan.

Nonetheless, Chrysler forecasts total 1990 unit sales to be off only slightly from 1989 levels, down to 14.2 million cars and trucks from 14.8 million units this year.

Fortunately for the carmakers, recent car sales have been fairly strong, the result of ``a combination of attractive incentives and the fear of price increases on 1990 models,'' according to Charles Brady, an auto analyst with Oppenheimer & Co. He believes that sales will cool somewhat during September and October, but pick up substantially during the last part of the year, aided by a new round of price incentives. Based upon such findings, Mr. Brady recently concluded in a review for Oppenheimer that ``the shares of Ford, GM, and Chrysler represent excellent value.''

What concerns many industry observers, however, is the ubiquitousness of the incentives being offered on new cars and trucks. According to Jack Kirnan, an auto specialist with Kidder, Peabody & Co., current incentives at both the dealer and retail level are the ``most generous in automotive history.'' Incentives are offered on almost every model, Mr. Kirnan notes. Further, they can run as high as $1,000 a vehicle, he says.

What that means, he suggests, is that those consumers eager to trade in their old carriage for a new model may rush out to do so now, rather than wait until later this year or next year.

In addition, Detroit has indicated that list prices will be rising on many models in the coming auto year by as much as 8 percent to 10 percent.

Kirnan believes that the current gains by the Big Three may be somewhat illusionary and that the entire industry faces a unique structural setting characterized by at least three factors:

1. The coming on line of at least 1 million Japanese transplants (Japanese cars made in the US) by the end of next year.

2. Possible costly new federal regulations pertaining to fuel economy, emissions, and safety.

3. The financial impact of new incentive, leasing, and car-loan programs on trade-in values. Currently, Kirnan notes, trade-in values are at historically low levels. ``People buying new cars find that they either can't get all that much on their old car to apply to a new car, or that they find it hard going to borrow that extra $1,000 needed for the expensive new car.''

Kirnan has recently boosted the status of the stocks of General Motors, Ford, and Chrysler from ``underperformer'' to ``performer,'' based on recent sales performance. But at the same time he sees major structural challenges clouding their futures.

However, individual Wall Street analysts view the stocks of the respective US car manufacturers, the two dominant market factors remain: Some 10 foreign-owned car plants are on line in the US and Canada, churning out new car products and going head to head with Detroit. South Korea's Hyundai Motor Company will be building cars in Canada in the near future. And second, prices of Big Three cars continue to climb.