A Gulf War Could Sink US Car Sales

IT'S knuckle-chewing time in Detroit, as chiefs of the Big Three US auto makers await the outcome of the Gulf crisis. A peaceful settlement could mean a boost for US car sales, renewing public confidence; but a shooting war - particularly a fairly-long conflict - could sharply reduce US vehicle sales, says Arvid Jouppi, an industry expert in Grosse Pointe, Mich. Such a downturn would add to bad news already coming out of Detroit. Last week it was announced that total industry sales of North American-made vehicles, including those made by overseas companies with plants here, were down 19 percent in the mid-December period. In fact, the sales rate for the 10 days ending Dec. 20 was the slowest since August, 1982, when the US was emerging from recession. For the three US-owned car makers - General Motors, Ford, and Chrysler - a prolonged sales slump would occur against a backdrop of recent marginal earnings gains (for GM and Ford), to outright losses (for Chrysler).

Mr. Jouppi predicts that total sales of cars and trucks in the US during 1991 should be slightly more than the 14.2 million units projected in 1990. (Final results for 1990 are not yet available.) But even sales in the low-14 million range are down from recent years; total sales reached 15.8 million units in 1988 and 14.8 million units in 1989.

How badly could sales plummet in event of war? Jouppi says that sales might drop below 10 million units.

Detroit would clearly be injured in such a scenario. For the 12-month period ending this past Sept. 30, Chrysler lost $627 million; Ford saw its net income fall from $4.7 billion to $1.7 billion; GM earned a minuscule $332 million.

Scott Merlis, an auto analyst with Morgan Stanley & Company, agrees that sales would drop in the event of war. But he reckons that the maximum period of decline would be only 20 to 30 days. Without a war, Mr. Merlis anticipates a sales decline to 13.6 million units in 1991, down from 14.2 million units in 1990.

Merlis is watching the Big Three US car makers with particular attention these days, given investor concerns about whether Detroit might be tempted to cut future dividends in light of declining sales, and uncertainties about the Gulf, as well as the economy. Merlis downgraded his recommendations on the three US companies this past August; he currently suggests that investors should ``hold'' existing stock of the Big Three, as opposed to buying new stock.

As a stock sector, the auto industry finished 1990 in a dismal 77th place - out of the 87 stock groups that comprise the Standard & Poor's 500. Moreover, GM, which is one of the 30 stocks making up the Dow Jones industrial average, saw its price fall 18.6 percent from Dec. 31, 1989 to Dec. 31, 1990.

Despite all the uncertainties facing the industry, Merlis forecasts that total vehicle sales will bottom out in the first half of this year and then rise in the second half. Only a significant deterioration in the Gulf or the economy, he says would prompt GM, Ford, and Chrysler into cutting dividends. However, he notes, ``Ford's and Chrysler's dividends appear at greater risk than GM's.'' Assuming the Gulf crisis diminishes in the next three to six months, the current dividends should be safe, he suggests.

Morgan Stanley is forecasting that total car sales in Europe will also decline this year, to 12.8 million units from an estimated 13.2 million units in 1990. Truck sales will drop about 4 percent.

A downturn in Europe would presumably hurt Ford more than GM, since Ford has its greatest exposure in Britain which is now facing higher unemployment; GM's biggest European presence is in Germany, where the auto market has been buoyed by fairly strong demand from Eastern Europe.

Whatever happens with sales, the Big Three will certainly weather 1991. Chrysler is in the most difficult position of the three. But new company leaders are in place at both GM and Ford. Nor should it be forgotten that, for all the concern about Japanese imports, the three US firms still account for nearly three-fourths of all vehicle sales in the US.