U.S. Car Rally Is Slow to Start
Hopes Fade for Sales Revival Of Detroit's Coupes, Sedans; 'Hammered' on Resale Values

The Wall Street Journal 04/05/05
author: Neal E. Boudette
(Copyright (c) 2005, Dow Jones & Company, Inc.)


The year of the car is getting off to a slow start.

Expectations were for 2005 to mark a passenger-car comeback for Detroit. Through most of the 1990s, the big three U.S. auto makers built ever-bigger pick-up trucks and sport-utility vehicles -- and ceded much of the mass-market car business to Japanese rivals.

But over the past few years, General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler Group have all spent heavily on a new crop of sedans, coupes and compacts, betting a barrage of fresh designs would turn the tide back in Detroit's favor. Most of these cars -- the Ford 500, Pontiac G6, Buick LaCrosse, Chevrolet Malibu, Chrysler 300 and Dodge Charger among them -- are now on the road. The results so far are mixed.

Chrysler has a genuine hit with the aggressively styled 300 sedan. With its big grille, big tires and narrow windows, the 300 has lifted the Chrysler Group's car sales 23% for the first three months of the year. Most observers also think the forthcoming Charger, which is a remake of the 1970s muscle car and which uses the same parts as the 300, also will sell well.

But other new U.S. cars are having trouble gaining ground on competing models from Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co.

Three months into the year, sales of GM's nonluxury cars are down 7%. The much-heralded Pontiac G6 got a massive publicity boost in the fall, when Oprah Winfrey gave away more than 100 G6s on her talk show. The car hasn't exactly flopped, but it is only selling well enough to warrant a single shift of production at GM's Pontiac, Mich., plant. A second shift that was supposed to start by now has been postponed until at least July. The Chevy Malibu isn't exactly drawing crowds, either. Last month, about half of all Malibus sold went to rental car companies and commercial fleets.

GM's sales slowdown had repercussions at the auto maker yesterday: GM Chief Executive Rick Wagoner said he would personally assume the driver's seat at GM's troubled North American operations, displacing two executives including the division chairman, Bob Lutz, who was the brains behind the G6 and LaCrosse. Both Mr. Lutz and division president Gary Cowger were reassigned.

But there isn't much a management shuffle can do, beyond new incentives and ad programs, to recharge sales of cars already in the market, due to their six-year life cycle. GM can make modest changes to vehicles over their life span, but for the most part it is stuck with the Malibu, G6 and the others for another five years.

A few decades ago Detroit's wheels ruled the automotive world. In the 1960s, drivers across the U.S. and around the world aspired to own Mustangs or Camaros. Owning a Buick was a sign someone had made it. The Big Three have tried to reach back to their heritage. Ford has succeeded with the redesigned Mustang it launched last year. Chrysler looked back to past cars for inspiration in developing new Dodge trucks and Jeeps, as well as cars like the Charger. GM remade the Pontiac GTO, but the car has flopped.

At Ford, sales of Mercury and Ford-branded cars are up 5% but most of that is due to one new sports car, the redesigned Mustang. The No. 2 car maker had high hopes for the 500, but after only six months on the market the company intends to rework the car's design by 2007, a year or two sooner than expected, according to people familiar with Ford's plans.

Toyota's car sales, meanwhile, are booming, up 23% so far this year. Car sales at Honda and Nissan have declined 13% and 3.2%, respectively, for the first three months, but their sales were up slightly in March and generally have been edging up over the last five years.

Worse, GM's new cars have been in showrooms less than a year but already they are being discounted. The G6, which starts at about $21,000, is selling with rebates and other incentives valued at an average of $3,635 -- about 50% higher than the industry average for midsize cars, according to Edmunds.com, a car-shopper Web site. The incentive package for the Malibu, which starts at about $19,000, is only slightly less.

By contrast, Honda is offering an average of just $743 in incentives on the Accord (starting at a little over $16,000). On the Toyota Camry (starting at a little over $18,000), the average package is $1,350, according to Edmunds.

Jesse Toprak, director of pricing strategy at Edmunds, says the relatively high level of incentives on the GM cars is a sign they are having trouble pulling in buyers. Either the demand is not there, or the price is wrong and now they're adjusting to it, he said.

Paul Ballew, GM's executive director of global market and industry analysis, says the auto maker is pleased so far with sales of the G6, Malibu and other new cars it has launched, adding that it is too early to make a fair judgment on them. G6 sales are limited for now, he said, because only the sedan version of the car is in the market. A two-door coupe arrives later this year. Let's see how the next few quarters play out, he said in a conference call last week.

Ford, in an effort to preserve the 500's image and value, has kept a tighter rein on incentives for the car and is offering only $917, on average, according to Edmunds. Chrysler is offering about the same on the 300.

The problem isn't that Detroit auto makers make lousy cars. Customer-satisfaction surveys repeatedly show U.S. brands now come quite close to Japanese makes in quality. And many critics say the G6 and the Ford 500 aren't bad-looking cars: The G6, Mr. Toprak noted, has an amazing sun roof. But overall, the styling of the new sedans is conventional and bland: Unlike the strong-selling 300, for example, Chrysler's other new models don't really stand out on the road.

And the new U.S. cars face strong, entrenched competition from Toyota, Honda and Nissan. During the years when American auto makers concentrated on SUVs, the Japanese makes built up large and loyal followings with the middle-aged customers who were the sedans' best customers. Toyota said about 60% of its sales go to people who are current Toyota owners. For Nissan, it's about 40% to 45%.

Passenger cars from the three Japanese makers offer something Ford and GM can't produce overnight -- strong resale values. A 2003 Malibu with 33,000 miles typically sells for about $9,999; a 2003 Camry with the same mileage sells for $15,999. Part of the explanation is the Japanese makes' reputation for reliability. But another part is that the heavy rebates offered by GM, Ford and, until recently, Chrysler, eventually backfire by undermining the residual value.

That effect has been on Martin Gill's mind lately. The 51-year old lawyer, from Montclair, N.J., is looking to replace his 2000 Volkswagen Passat. Last month, he went to the New York auto show to check out the Buick LaCrosse and the Malibu. They have list prices between $22,000 and $29,000 and with rebates will probably sell for somewhat less than a Camry or Accord.

But when the substantially lower resale values are taken into account, Mr. Gill says, you get hammered financially when you trade your car in for a new one. I do think the quality of American cars is underrated, he adds, but there's still a big value gap.

 

junk bonds here we come!

 

If GM's stock goes to any number below $25, I'll buy every share I possibly can.

 

Pacer,
My thoughts exactly. GM isn't going anywhere, and all the bad news continues to WAY undervalue the stock. Just like Chrysler stock in 1992 before the LHs came out, GMs low stock prices are only going to help those looking to buy in. $25 was my magic #, too.

 

I got in with Rick. I hope you guys never see $25.

 

1) Lutz had nothing to with the G6
2) G6 sales are climbing every month (isn't that a good thing? I though flops went the other way )
3) Malibu sales are kicking ***

If GM keeps that dividend and the price goes lower I'd load up my IRA on some GM stock while its cheap, I don't think GM will go 100% under in the next 25 years

 

Problem is, it is through fleet sales. 50% of Malibus sold in March were to fleet customers. That hurts resale. I wonder what percentage of Malibu sales for the whole 2005 model year are to fleet customers?

 

Seems the GM doom and gloom here over the last couple of weeks is starting to lift.

 

i seriously wouldn't buy GM stock until their credit rating goes as low as it'll go.

by almost all accounts in the financial industry GM's bonds will hit junk status before the end of the year, and when this happens lots of stock will be automatically dumped.

wait until this happens, THEN buy GM stock...

 

are you sure they are not counting the Chevy Classic (old Malibu) sales

 

I keep hearing that Lutz wasn't responsible for cars like the G6, LaCrosse, and Malibu. But the guy's been on the job for over 3 years. Even given GM's extraordinarily long gestation periods, I'm sure there were plenty of critical decisions being made during those 3 years, and for whatever reason, the cars still hit the market with a thud. I think it's time to quit making excuses for him.

 

I was actually surprised today when I was eating breakfast and watching headline news. An investment company stated that GM bonds are now paying 9% maturing in 5 years. I'm pretty sure GM will be around way longer than 5 years and I wish I had some extra cash laying around... GM stock below $25 would be a steal too.

 

Im pretty sure thats whats going on...The new malibu is not availible to fleet buyers...

 

I'm sure things like interior materials, exterior & interior trim, and maybe even some if the details of the sheet metal of the G6 & LeCrosse was under Bob Lutz. But everything else about the cars were done already. The new Malibu had absolotely no influence from Bob Lutz whatsoever. Pontiac's Solstice & Buick's Lecerne will be his 1st no excuse cars here.


On a side note, I roasted the cooling fan bearings in my T-bird yesterday (with 16 years and 208K miles on it, I'm not complaining at all ) and the Z is 120 miles away in Monterey, so I've rented a Malibu Classic till either the Bird's fixed or a new Mustang comes in.

Believe it or not, I really like the Malibu. It has really good power, it feels solid, and it's materials (though obviously cheap) at least pretend to be good quality. But the car really moves.

I'll post more on a separate thread when I finish with the car. With a little lick, I'll be able to include the new Mustang as well (both are "intermediates" and cost the same...$37 per day.... to rent).

 

The difference between an adequate car and a great car is in the execution, the details, the tuning, the finishing-- all things that were in Bob's control during the last three years of the car's development. Sure the platforms were largely frozen, but by all acounts the Epsilon platform (in the case of the G6 and Malibu) was world class to begin with. So to make an also-ran vehicle out of top drawer basics, well, that happened under Bob's watch.

An example of the difference that execution makes: Ion and Cobalt share the Delta platform, however Cobalt got QuietSteel, better suspension tuning, better fit and finish, and ends up being a far more satisfying car. Almost all of the things that make Cobalt better than Ion are decisions that happen in the final three years of development.