All Business
2006 Auto Industry Outlook

Five Issues for 2006

By Joseph B. White
The Wall Street Journal Online

The Auto Industry Looks to Put a Difficult 2005
In the Rearview Mirror, But Challenges Await

As the year winds down, it's customary to look back and reflect on the events of the past 12 months.

Well, forget about that. At least in Detroit, the attitude about 2005 is, "Thank God that's overyou ." So in the spirit of keeping the gear selector in Drive instead of Reverse, here's a look at five issues auto-industry watchers will be watching in 2006.

GM: COMEBACK KID, OR OFF TO PALOOKAVILLE?

General Motors made a mess of 2005 in the U.S. from the beginning, starting the year burdened with too many unsold cars and trucks, and a bushel basket of unrealistic business expectations.

The wheels came off the company's North American auto business in the first quarter as rising gas prices accelerated a slump in large sport-utility-vehicle sales, and the company's been all over the road ever since. Its effort to put the spotlight on new models was overwhelmed by the Employee Discounts For Everyone summer sales promotion and subsequent sales collapse. Drumbeats of doom on Wall Street -- where a senior analyst from Standard & Poor's said last week it's no longer far-fetched to think GM could seek bankruptcy-court protection to shed its massive healthcare and pension burdens -- haven't helped sell cars, either.

What's surprising in light of all this is that GM executives, starting with Chairman and Chief Executive Officer Rick Wagoner, sounded cautiously upbeat about the coming year during conversations at a holiday reception last Thursday.

Mr. Wagoner was careful not to make predictions of returning to profitability. But he and other GM executives sketched out a scenario in which things get a lot better than they were in 2005. For starters, GM isn't planning to repeat the crash effort to cut a glut of overstocked vehicles, which GM executives say forced the company to cut production by some 250,000 vehicles -- representing a roughly $6 billion hit to revenue.

Second, GM executives expect that during the first part of 2006, they'll be building and shipping a lot of their new, large SUVS, such as the re-engineered and restyled Escalade and Chevy Tahoe. That should be a lot better for the bottom line than slashing production.

Third, North American marketing chief Mark LaNeve says he's ready to go on the offensive in the large-SUV market, with ads that will call out Toyota for selling a large SUV with worse gas mileage than the new Tahoe. Overall, Mr. LaNeve said he's determined in 2006 to stick to his strategy of promoting GM's much-improved vehicles and boosting the images of GM's brands instead of succumbing again to corporate-wide giveaway programs.

GM executives were optimistic in late 2004, too. And the company faces a list of problems too long and daunting to repeat here. But if GM can get its U.S. sales-and-marketing act together, and not resort to fire sales and huge rebates to move metal, no one will be happier than rival auto makers.

FUEL ECONOMY

The post-Katrina surge that pushed gasoline prices briefly above $3 a gallon changed the debate about fuel economy in the auto business. The coming year will show whether that change is long-lasting.

Japanese auto makers such as Honda and Toyota have long traded on a reputation for making more-fuel-efficient cars. Detroit's auto makers, with their near-constant griping about federal fuel-economy standards and their reliance on big SUVs, allowed themselves to get painted as fuel-efficiency knuckleheads.

This year and next will offer a live-action test of whether American consumers are prepared to vote with their wallets in a big way in favor of more-efficient cars and trucks. Toyota plans to start ramping up production of gas-electric hybrid Camry sedans, aiming to sell 30,000 or so. Ford will be pushing ahead with plans to expand its hybrid lineup, and GM by late 2007 is expected to launch gas-electric versions of its large SUVs. In the interim, GM plans to offer a version of the Saturn Vue with a so-called "mild hybrid" system that improves fuel economy by 15% to 20%.

The big question for 2006: Will hybrids that look like ordinary cars start to sell? Or are hybrids a niche -- a status symbol for people who want the world to know that they are technology-forward Greens?

The Toyota Prius, which advertises itself as a high-tech marvel with its distinctive design, has been a sell-out smash. But certain other hybrids, notably the gas-electric Honda Accord, have been comparatively sluggish sellers.

"The next two years will be interesting," says GM's Mr. Wagoner. "More people will have more sizes and shapes of hybrids."

LUXURY CARS GO BOOM

Luxury-vehicle sales have been outpacing the broader market for some time, and that boom is likely to continue. Why? Because luxury-car makers are broadening their model ranges, says Jim Hall, a vice president at automotive-consulting company AutoPacific. For example, he cites the forthcoming U.S. version of the BMW 1-series compact, now sold in Europe as a hatchback priced below the 3-series lineup. For the U.S., Mr. Hall says the car will be offered as a coupe that will stir a chord among people who remember the classic BMW 2002. (BMW hasn't said when the U.S. will get its 1-series, but the smart money's on 2007.) There also will be more cars offered at prices above $100,000.

SWARMS OF SMALL CARS

The success of the Mini and Scion will inspire more car makers to offer more comparatively small cars in the U.S. market. Toyota is gearing up a version of its Yaris small car, sold in Europe and Asia, to replace the unsuccessful Echo in its lineup. Honda plans to launch an Americanized version of its Fit subcompact. Nissan will get into the act with its Versa, which slots in below the Sentra in size and price. BMW's Mini brand, which helped launch this wave of small-car enthusiasm, will expand its lineup. GM's Chevrolet division will push to expand sales of its Korean-made Aveo.

"Every manufacturer wants pocket image cars," says AutoPacific's Mr. Hall, calling the Mini and Scion wakeup calls for other auto makers.

The difference between today's sub-subcompacts and the small cars of the 1970s: "These could be small cars that aren't cheap," he says.

SUVS: ARE THEY THE NEW MINIVANS?

This has been a tough year for what auto makers call "traditional" sport-utility vehicles -- SUVs that ride on rail frames and suspensions adapted from pickup trucks. Ford, which rode the SUV boom of the 1990s to record profits, now projects that in 2006 sales of traditional SUVs such as the Ford Explorer will be surpassed by sales of so-called crossovers -- SUVs that are really unitized body cars underneath.

So does this mean Americans have turned against SUVs? Not exactly. Ford sales analyst George Pipas pointed out during a recent presentation to the Automotive Press Association in Detroit that among the new breed of crossovers, the most successful are those that look a lot like an old-fashioned SUV. (Examples are the Lexus RX330 and the Acura MDX.) Ford's own Escape compact crossover leads its segment and looks like the Explorer's little brother. Ford's larger Freestyle crossover looks like a station wagon -- and hasn't been as big a sales success.

AutoPacific's Mr. Hall argues that even the big-SUV market, which has suffered a double-digit sales decline this year, is a long way from dead. He argues that some of the decline in large-SUV sales reflects "deferred purchases" as consumers wait to see how fuel prices sort out.

Long term, GM and other auto makers will field more of what Mr. Hall calls "postmodern SUVs," crossovers that are every bit as big as the large traditional SUVs of yore. To catch a glimpse of one of these, check out the Mercedes R-Class, which is longer than a Cadillac Escalade.

Large SUVs could wind up in the same gallery of the automotive museum as tail fins. But they could also wind up like minivans. Minivans had all the buzz in the late 1980s. Then the buzz faded, consumers told social-trend watchers that minivans bored them rigid, and SUV sales exploded. But for all that, minivans remain a substantial segment of the market, one in which companies such as Honda, Toyota and Chrysler do very well.

• Send comments to joseph.white@wsj.com.

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