Auto
industry has traditionally been considered as a representative
of the economic scenario. Thus it is a cyclical industry,
which cannot really escape the economic booms and busts.
But this time around, the recession in the US economy
is proving to be a drag on the auto majors. US is by
far the largest vehicle market and in the case of the
big three, it contributes to a major chunk of their
revenues. The forecasts are none too bright. autoPOLIS,
a consultancy of automotive industry, predicts that
the demand for new cars and trucks will be at least
15% less in the US despite generous sales, incentives
and discounts. The other markets such as Europe, Japan
etc., are not poised for growth.
The
falling demand caused by the economic downturn was aggravated
in the aftermath of September 11 attacks. In order to
keep up the sales, GM pioneered heavy discounts as well
as interest-free financing. These discounts have initiated
a price war. Ford was left with no choice but to follow
suit. And Chrysler, which had resisted offering discounts
for long has also jumped onto the bandwagon. Even after
two years, the discounts, are nowhere close to their
end. In fact, they have placed companies in a vicious
loop. With consumers expecting and getting discounts,
automakers are in no position to reverse these incentives
without severely affecting their sales projections.
While
these measures sure keep the sales volume propped up,
margins are taking a severe beating. James Durance,
Research Manager, World Markets Research Center explains,
"Incentives are likely to continue because automakers
find themselves in an impossible position. Even GM,
the original market leader in the incentives, in the
wake of the September 11, 2001 attacks, has admitted
that the pressure of incentives may not be sustainable,
and is having a big and lasting effect on Detroit automaker
profitability." He continues, "On the other
hand, none of the companies can afford the risk of pulling
incentives from the market and watch the market collapse,
creating a vacuum that would need urgent adaptations
in production schedules, employment levels, and capacity
in the North American industry." |
