What Donald Petersen, chairman of Ford Motor Co., has just done is extraordinary. Ford is now the world's most profitable auto company. It has $9 billion in spare cash. Its products are popular. Unlike other companies, its plants operate near full capacity. Now comes Petersen proposing sharp new limits on Japanese imports -- a move calculated to keep car prices high or raise them higher.
There's an unkind word for Petersen's suggestion: gouging. The industry's total sales are declining, in part because prices are already too high. Japanese companies are building more plants in the United States. Ordinarily, the pressures of supply and demand would depress prices. Petersen might still sell all the cars Ford makes, but his profit margins would be lower. Rather than stimulate demand, though, he prefers to constrict supply. Almost all U.S. auto executives are wedded to high prices. At the moment, Petersen is simply the most bold about it.
You should understand that the auto industry's developing slump isn't primarily an aftereffect of the stock market crash. In 1987, sales of cars, light trucks and vans will drop an estimated 7 percent to 8 percent. Even before the crash, projections for 1988 showed flat or declining sales. Ford's economists doubt that the crash has yet reduced sales. Maybe it will ultimately hurt. If so, it will make a poor situation worse. The industry's problems are mostly self-inflicted.
Everyone knows that the auto industry has become vastly more competitive in the past 15 years. Gone are the days when General Motors, Ford and Chrysler could count on dominant and guaranteed market shares. No one doubts that customers have benefited from greater competition; so has the industry. The U.S. companies have been forced to improve car quality. But the one area where competition has been muted is pricing, largely because the Japanese were forced to accept "voluntary" limits on exports in 1981.
If prices rise too high, demand suffers. The U.S. auto industry hasn't escaped this logic. The average car buyer now pays $13,520 for a new car. That's nearly 80 percent higher than the average new car in 1980 ($7,574). Only a small part of the increase reflects consumers selecting more options or shifting to bigger cars. Price increases have outpaced the growth of family income so that cars are about 25 percent more expensive as a proportion of family income than in 1980. To prop up demand, the industry has resorted to two approaches that are both increasingly ineffective.
First, it has cut the monthly payments on car loans by increasing loan maturities. Cars are initially more affordable, but owners have to keep them longer while the loans are repaid. Total sales suffer, because there's less turnover. In 1972 the average car loan had a maturity of 35 months. Now loans are written for 60 months; the average maturity is 53 months. Not surprisingly, the average car is now 7.6 years old, the highest since 1950. But realistically, loan maturities can't be extended much more.
Second, the industry has recently offered more "incentives" in the form of cash rebates and low-interest loans. Incentives are price decreases. The trouble with them -- aside from the fact that they're temporary, complex and inadequate -- is that they distort buying patterns. Consumers won't buy until there's a big incentive program. Car sales are less stable. Production and inventory control are more costly. The only beneficiaries are car-company marketing executives, who stay busy devising intricate incentive plans.
There's nothing wrong with the auto industry that a 10 percent price cut wouldn't help solve. No one can expect Ford to do that. It can sell all the cars it makes. But GM, which has a slipping market share and lots of spare capacity, ought to be taking the lead. Other companies would be forced to follow GM's cuts. A 10 percent price reduction might raise sales 10 percent, says auto analyst Michael Luckey of Shearson Lehman Bros.
But a move of this sort would be out of character. Auto executives are defensive and preoccupied with short-term profits, which might drop. Long-term gains are overlooked. GM might recapture some of its lost market. Weaker Japanese companies, already hurt by the rising yen, would be hurt more. So would European exporters. Lower prices and higher industry sales would also minimize plant shutdowns caused by the completion of new Japanese factories in the United States. Fewer shutdowns would help preserve the industry's labor peace.
Of course, all the new Japanese plants may mean lower prices anyway. Without higher sales, domestic-production capacity may exceed demand by 20 percent or more in the early 1990s, estimates Luckey. Petersen's proposal aims to limit the downward price pressure by reducing permissible Japanese imports as the U.S. production of Japanese companies rises. The first cutback would be 600,000 cars. What's most troubling about his plan are the questions it raises. If U.S. car companies have become so much more competitive, why aren't the efficiencies showing up in lower prices? Are the gains vastly exaggerated?
Remember the claims of Chrysler Chairman Lee Iacocca that his company -- given time to recover and a realistic exchange rate for the yen -- could compete with anyone? Well, he's had time and the yen has risen 50 percent since early 1985. Japanese car prices have increased 20 percent in the past two years. Their market share has barely fallen, and Chrysler also wants tougher import limits. Indeed, Chrysler thinks the government should limit the Japanese share of the U.S. market, whether the cars are made in Japan or in the United States. This is competition?
The Japanese import limits were supposed to be "temporary" -- at the most, three years. They're now in their seventh. A third of the U.S. trade deficit stems from autos. Tighter restrictions would reduce that, Petersen says. The argument is weak. Limiting the number of imported cars causes the Japanese to import higher-priced models, which keeps the deficit high. Excessive U.S. car prices then attract low-priced imports from other countries. Rising imports of small cars from South Korea, Brazil and Yugoslavia result partly from the restrictions that limited small Japanese cars.
Protectionism isn't good for car buyers or, ultimately, the companies. It breeds inefficiency and poor quality. The automakers should stop complaining and start competing.