Auto Industry Takes Wait-and-See Approach to Economy

No Major Shifts in Marketing Strategy for Big Domestic and Foreign Car Makers -- Yet

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The automotive industry may have to downshift if weak consumer confidence and turmoil in credit markets translate into lower sales. But there so far is no indication of changes in strategy or marketing.

Credit: Matt Stroshane/Bloomberg News

"I would characterize the current climate by saying we carefully are monitoring market interest," said Matt VanDyke, Ford Motor Co.'s director of marketing communications U.S. "We haven't seen that massive reset in auto shopping yet, but it's too early to see whether a tightening in credit is going to impact auto loans."

There are indications that car sales may slip. Jesse Toprak, VP-industry trends and insights at auto website TrueCar.com, last week was preparing to revise downward a forecast of 2011 U.S. sales from TrueCar's earlier prediction of 12.8 million vehicles.

"The initial reaction when there are a lot of these market fluctuations has always been to postpone buying big-ticket items," Mr. Toprak said. "This time is no different so far. What we're looking at is consumers who are on the fence, ones that do not need to get a car but would like it, who are the most likely to postpone."

Mr. Toprak noted that TrueCar has a metric in which it correlates new-car sales with the Dow Jones Industrial Average. Simply put, when the Dow is up there are more car sales and when it's down there are fewer. A 50% correlation ratio in measurement is considered strong; since January 2007, TrueCar has put the correlation between new-car sales and the Dow at 77%.

"So what does that mean? It's not looking great," Mr. Toprak said.

Honda Motor Co. is bracing for a consumer pullback. Fumihiko Ike, chief financial officer for the Japanese automaker, said a prolonged drop in U.S. equities would lead to a decline in consumption and delayed car purchases, according to Bloomberg News. The unstable U.S. economy "is a new scenario" not incorporated into Honda's current forecast, Mr. Ike said.

Trump hourly chart
U.S. auto/light-truck sales. 2011 is projected range. Source: Automotive News (2000-2010); Ad Age research (2011).
Auto/light-truck sales this year now are expected to come in below 12.8 million units. That's better than still-depressed 2010 (11.6 million) but below the roughly 13 million level that some industry watchers had expected earlier this year.

Automakers are well-versed with perils of a volatile economy. The 2008-2009 economic collapse sent two Detroit automakers into bankruptcy (General Motors and Chrysler) while Ford "damn near mortgaged its corporate life," said industry expert Peter De Lorenzo, who runs the influential website Auto Extremist.

Mr. De Lorenzo said the domestic automakers now are stronger financially with better management and more competitive products. With some Japanese car companies suffering from their own woes with weaker product, recalls and economic tumult at home, U.S. automakers are better positioned to work through another downturn.

But the company in the best position may be Hyundai Motor America. Still riding a wave as the industry darling, South Korea's Hyundai is "the right company in the right place at the right time when it comes to this kind of up-and-down economy," said TrueCar's Mr. Toprak.

Indeed, Hyundai Motor America President-CEO John Krafcik said brands in general that represent value do well even in the midst of uncertainty. Also helping Hyundai is its limited capacity; it basically sells what it makes, leaving little inventory on dealer lots.

"During times like this, people think much more carefully and with much more scrutiny. Brands like ours research well," Mr. Krafcik said. "That's one of the reasons why we did so well in 2009 with Recession Part I, and I'm confident we'll do well in Recession Part II."

Asked if he believed the U.S. was in or headed to another recession, Mr. Krafcik said it was difficult to say. But he added: "Psychologically, we all feel that things should have been much better by now, and they're not. To me, that 's the same thing as a recession. We definitely believe there will be an industry impact. There was some hope that whatever was lost in the wake of the terrible tragedy with the Japanese tsunami [in March] could be gained back in the second half of this year. With the headwinds created lately by the economy, nobody believes that now."

Mr. Krafcik said the automaker will press forward with its marketing initiatives, including the Hyundai Assurance Trade-in Value Guarantee, a riff off of its Hyundai Assurance Program that was initiated in 2009 by then VP-Marketing Joel Ewanick, now General Motors' global CMO.

Where the Assurance Program allowed Hyundai buyers to return the car if they lost their job within one year of purchasing the vehicle, the Trade-in Guarantee locks in a resale value for the car for months 24 through 48, allowing the owner to know well in advance what the trade-in value will be for purchasing a new Hyundai.

"You know, the assurance job-loss program got a lot of media attention and good coverage, but in the end it had a relatively small impact for us," Mr. Krafcik said. "The trade-in program, it's doing about twice as much for the brand as the job-loss program, and we're finding there's twice as much consideration for Hyundai vehicles with the trade-in. It makes sense, if you think about it. Nobody is thinking about a job loss when they purchase a car. With the trade-in, we're giving something of real value -- consumers know exactly what their Hyundai is going to be worth two, three, four years from now."

Automakers -- particularly domestic brands -- are in a far better position to deal with a weak market now than they were in 2008.

Chrysler is back in the game with its much-lauded "Imported From Detroit" ads, improving products and the support of a new majority owner, Fiat, a remarkable turnabout from three years ago.

"Back then, we had little to no new product plus not so much fuel-efficient existing product," Rick Deneau, director of product and brand communications at Chrysler, said in an email. "Thankfully, that 's no longer the case."

At General Motors Co.'s second annual global business conference last week, Chairman-CEO Dan Akerson said that despite the tragedy in Japan and a (now-subsiding) spike in oil prices this year, the business model is working.

"There's been a lot of moving parts here, but we've been able to navigate that and at the same time, both in the first and second quarters, post reasonably good numbers," he said. "I think we're in pretty good shape. ... When the market does recover, we should be able to really leverage it beyond what you've seen so far since our [2010] IPO."

Added GM Chief Financial Officer Dan Ammann: "There is a lot of focus in this company right now on long-term sustainable results. ... All of the things we need to do are, by and large, in our control. We are not in a situation where we're waiting for or relying on us penetrating some market region of the world where we don't have a big position. We're not relying on heroic market-share gain, we're not relying on substantial economic recovery. We have a lot of levers in our control."

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