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Call it the incentive factor: auto industry sales are widely predicted to shrink in the first half of 2002 before a gradual second-half rebound.

Helped by 0% financing, automakers sold roughly 17.1 million vehicles in 2001 in the U.S., just below the 17.4 million record set in 2000. That's sure to fall this year, although Jim Hall, a VP at consultancy AutoPacific, said the amount of "pain" in the first quarter will depend on the amount of incentives offered by leading carmakers General Motors Corp., Ford Motor Co. and DaimlerChrysler's Chrysler Group. Much will depend on whether rivals follow General Motors Corp.'s lead to adopt $2,002 rebates or renew no-interest finance deals. He predicts the industry will sell 15.9 million units in 2002.

Susan Jacobs, president of Jacobs & Associates, puts auto industry 2002 unit sales even lower, at 15.3 million-if the incentives stay as high as in late '01. But if the incentives fall, she predicts sales will only reach 14.5 million. "If all zero financing goes away in the first quarter, a soft landing is very wishful thinking," she said.

Paul Ballew, GM's executive director-market and industry analysis, estimated 0% finance deals industrywide stole away 500,000 unit sales from calendar 2002 as consumers pushed forward their purchases to avail themselves of good deals. He dubbed his 2002 industry-wide sales estimate, of between 15 million and 15.5 million units, "somewhat conservative."

The segments most expected to be off are minivans and lower, mid-size cars, while sport utilities and entry-level luxury vehicles will still be favorable categories in 2002, he predicted. The total premium market for vehicles $25,000 or more will fall a bit, but not as much as that of the entire industry.

Aggressive price competition will continue, putting pressure on profit margins, Mr. Ballew said. Part of the overall 2002 sales' decline will be rental car companies reducing fleets in reaction to the travel decline. Mr. Ballew said GM, for example, is reducing its sales to car rental firms by 150,000 vehicles in 2002.

When asked whether profits per vehicle were suffering as a result of strong incentives, Mr. Ballew said, "We're all struggling to make acceptable rates of return. Profit margins have been an issue for the last decade in this industry."

AutoPacific's Mr. Hall said auto brands in the best position are those that got through 2001 without incentives-such as Hyundai Motor America, American Honda Motor Co. and Mercedes-Benz USA-because they'll have more capital in 2002. He also predicted carmakers will have to keep healthy ad budgets for new vehicle launches in 2002, although those who run aggressive incentive deals will need to advertise them.

Many leading carmakers started to cut costs across the board after Sept. 11, and advertising is expected to take a hit in 2002 as it did during the last recession. For the first nine months of 2001, the 11 carmakers in Ad Age's top 100 U.S. marketers spent $5.7 billion in measured media, according to Taylor Nelson Sofres' CMR, vs. $6.4 billion during the same period the prior year.

This recession is unlike the one in 1990-91. Then, industry sales declined sharply. In 1991, sales fell to 12.3 million from 13.8 million units in 1990, according to Ad Age sibling Automotive News; ad spending skittered from $5.7 billion in 1990 to $5.3 billion in 1991, according to CMR. Normal sales levels did not return for five years, stated Mr. Ballew. Because the industry's sales didn't fall off a cliff this time around, he doesn't expect sales to collapse in the first half of 2002. "The industry will track with the overall economy."

Eric Conn, assistant VP-advertising at Honda for both the Honda and Acura brands, said his ad budget for the fiscal year beginning April 1 will most likely be flat. He said the company is projecting slightly higher unit sales in 2002 versus last year for both brands. "Honda has never had big spikes in sales, but also never suffered deep sloughs," he said.

Mr. Conn predicted vehicle marketers who "don't have quality products or a quality sales process" to handle well-informed consumers will fare poorly this year.

Mike Wells, VP-marketing at Toyota Motor Sales USA's Lexus division, also expects his ad budget to remain flat with 2001. He believes Lexus is well positioned because of its brand equity and consumer trust. "We believe people are falling in love with cars again." One of his goals this year is to expose more consumers to Lexus through test drive events.

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