Profits of US auto industry in overdrive
Last Friday, when Lee Iacocca met with Boston security analysts, he was eager to spill the beans on Chrysler's first-quarter earnings. What chairman wouldn't be? When the numbers are officially announced Wednesday they are expected to show record profits.
''I would love to have you at my meeting five days from now because we'll have (some) barn-burner. It's going to knock your socks off,'' he joked with the group of analysts, who laughed back. Mr. Iacocca said Wednesday will be ''just as big a day'' in his life at Chrysler as last July 13, ''when I went to Washington, paid back some loans, and got the government off our back.''
Detroit is on a roll that will last at least until the end of the year, analysts say. It is estimated that first-quarter profits for the Big Three automakers will total around $3 billion. That's compared with $1 billion a year ago, and a $24 million loss the year before that.
''I think that Quarters 1, 2, and 4 this year will be outstandingly good,'' says Arvid Jouppi, a longtime auto analyst in Detroit. General Motors and Ford think so, too. They recently raised their sales forecasts for the year. (Their chairmen have also just received bonuses of $1.5 million and $1.4 million, respectively, for their performance last year.)
No forecast is ever fail-safe, though. There are elements that could dull the shine of brilliant earnings performance in 1984: interest-rate increases and a possible strike by the United Automobile Workers at Ford and GM this September when their contracts expire.
Mr. Iacocca says the profit picture at Chrysler looks good at least through September of 1985, when Chrysler labor contracts come up for renewal. Demand for Chrysler cars - especially the new minivan - is overwhelming. It appears that modest rises in interest rates, at least in the near term, would not do too much damage.
For the near term, analysts believe interest rates will remain stable through the summer. Even though the prime rate has risen from 11 to 12 percent in the past few weeks, it looks as if the economy is slowing down, thus easing credit demand and keeping a lid on further increases.
''Our position is that interest rates are going to affect the marketplace,'' says Wesley Stuchlak, an analyst with the automotive research division of Chase Econometrics. ''It's going to happen by the end of this year and through the first half of 1985. We can expect fairly heavy interest-rate pressures (then).
''Auto loan rates have edged up a little bit lately. For (some people) a few more or less dollars in monthly payments is the difference between buying a new car or a used car.''
John Hammond, an auto researcher at Data Resources Inc., agrees with this interest-rate scenario. But the bigger clincher this year could be a strike, he says. ''I can't think of anybody that I talk to privately who doesn't think there will be a strike . . . a major strike.''
Mr. Hammond explains that both union and management have ''boxed themselves into a corner.'' Union leadership, citing record profits, promises to regain concessions made during the recession. Management, on the other hand, ''is keenly aware of the importance of the costs side. They know that the continued expansion beyond this year is very fragile. . . . Who will give in more? Probably the manufacturers.''
Where have these profits come from, and, perhaps more important, where are they going?
Profits come from auto production - sales to dealers, not dealer sales to consumers. Profits have gunned their way up a steep incline for a number of reasons. ''The recession masked the improvements made on the cost side,'' says Hammond. ''As soon as the recovery started . . . cars produced added so much more to the bottom line that you had these incredible historic increases (in profits).'' At the same time, employment, income, and pent-up demand rebounded much faster than anticipated.
Where have these profits gone? ''They have gone to shoring up balance sheets , they have gone to some moderate payoffs to stockholders, and they have gone to major world capital expenditures (to improve plant efficiency),'' says Mr. Jouppi.
Beyond mid-1985, profit forecasts start to blur. With the election, federal policy could change. Japanese import restrictions are a question. It's too tough to call, as meteorologists often say.
Mr. Jouppi seems to be the exception. He believes that profits will be even better in 1985. Autos ''are behaving more and more like a commodity . . . if they are not like food, clothing, and shelter, then they are awfully close. There are (tens of millions of) people in the baby-boom generation. There is a very strong market, if you will give the consumer what the consumer wants.''
In his talk, Iacocca told analysts not to worry about the impact of labor or the Japanese on Chrysler profits in the next one to five years. ''I'm not going to worry about jobs anymore, I'm going to worry about doing what I have to do to compete,'' he said. That will mean going with high-margin cars and possibly moving manufacturing offshore.