Sometimes we factory people think that the auto industry was born in Michigan. Well, of course it was, in a strict historical sense. But the cars traveling our roads today are probably as much a creation of California and its unique life style as they are of Michigan. California gave us muscle cars, four-on-the-floor, exotic wheel covers, live-in vans, crazy cars, hot rods and most of the other mutations of the basic automobile that started life in Michigan. You people really found the way to the kids - and the youth market - there's no question about that. 

Then, too, California gave us some other things that we in Michigan aren't too happy about. It gave us the import boom - the little cars and little trucks that have done so remarkably well. And it gave us some supercharged emission standards that have almost transformed California into a foreign country for us manufacturers back in Michigan.

In truth, California has given us an awful lot of good things and a few bad things. It has been said before, but I will say it again: California is really the mirror of the future. Sometimes we don't like everything we see when we look in the mirror, but we'd be crazy if we didn't look.

But I didn't come here this morning to talk about California. I came to talk about the future of the industry I've devoted so much of my life to - almost 32 years, to be exact.

Some people don't pay much attention to the future because they tend to believe the old French saying that everything changes but everything remains the same. In the auto industry we have to pay very close attention to the future because, while everything does change in the auto industry, very little remains the same, at least today.

At Ford Motor Company, we're looking intensely at the future all the time. This year we're also casting a glance at the past because we're celebrating our 75th anniversary. As we look at the past, we realize the importance of change and how it has made this industry prosper.

After all, some people wanted Ford to stick with the Model T, simply because they feared change. Fortunately, more courageous spirits prevailed. In the same way, we find many people in the industry who want to stop the clock because they fear the changes the future will bring.

I believe that those who fear the future are wrong. Although we are encountering some tough problems, the future of the auto industry does promise continuing growth and prosperity for dealers. I say that because there's no substitution on the horizon for this country's fifth freedom - the freedom of mobility. But before I move into the future, what about today?

Last night several dealers asked me what I thought of the U.S. economy and the car and truck business, in this fourth month of 1978. Although we've been kicked around by one of the toughest winters on record, and you in California have been hit by torrential downpours, mud slides and 20-foot waves battering the coast, the game this year is not going to be called because of weather - or anything else. In fact, I expect industry sales this year to approach 15-million cars and trucks. This year could be as good as 1977 overall - maybe even better, if we work at it.

We have recovered from the frostbite of January and February. March wasn't a turn-around, it was resumption of sales. The market was there; it was buried in the snow. March came in as the first one-million-plus month since October 1977. After pushing toward a 90-day supply, inventories are down to a more normal 60 days. Trucks are very, very strong, with industry sales up five percent in the first quarter.

As for the economy overall, I believe that it is basically sound, with a few rough spots that I'll mention later. The most important thing for car and truck dealers (and their sales managers, I might add) is that this country has 93-million people employed. That's nine million more than were working only three and a half years ago, and that means there are nine million more car and truck customers out there for you to sell.

In short, with the end of the coal strike, the arrival of spring and the right kind of action in Washington, I think the economy will remain strong for the remainder of the year.

This opinion is borne out by the March economic indicators. Items:

  • The Industrial Production Index rose at an 18.7 - percent seasonally adjusted rate, the largest increase since March 1977, when output was recovering from weather-induced production cutbacks.
  • Housing starts rose 32-percent over February, the largest month-to-month increase since the U.S. Department of Commerce started keeping figures in 1959.
  • Personal income increased by more than $19-billion, or 1.2-percent, in March, the largest increase since December.
  • Retail sales were brisk, rising at a seasonally adjusted annual rate of about 25-percent.
  • Non-farm payroll employment rose by 443,000, the largest increase in a year.

And of course, as all of you know, the stock market woke up from its long sleep only a few days ago, revealing new confidence in the basic strength of the economy. So much for the sunshine.

The biggest clouds we have on the economic horizon are one old familiar thunderhead - inflation, and one late starter - the sagging dollar. Both of these are tied closely to the country's international trade deficit and that, in turn, is closely linked with the continuing absence of a national energy policy.

We need positive action to control inflation, strengthen the dollar, and solve our energy problems. Inflation, of course, seems to be our most serious economic problem and I was pleased that President Carter addressed the question in a major speech earlier this month. It seems to me the most important element of any anti-inflation program is a full-scale campaign to check federal spending. Either we re-establish federal fiscal responsibility and bring inflation under control, or we are going to find American products priced out of the world market, and maybe even our own.

What about the future of the auto industry itself?

With downsizing, government regulations, technical advances such as electronics and new, lightweight materials, our industry is up to its chin in revolutionary change. What does this change mean to the auto manufacturers and - more importantly this morning - to you dealers?

First, for manufacturers and dealers, we can look for continuing government regulation - probably accelerated and probably having a greater impact on you dealers than ever before. I could talk all morning about government regulation, but I'll resist that temptation.

Although I won't give you my complete anti-regulation speech this morning, I do want to point out that one big automobile company has already dropped out of the heavy truck business because, by its own account, it "could not keep pace with the growing list of government standards."

I would also like to remind you that just eight months ago, this industry was faced with the very real prospect of closing down or not starting its 1978 production because we couldn't meet government emission starndards. Congress only acted at the eleventh hour to authorize standards that we could meet. That's gut poker with the other guy holding all the aces.

Business and industry desperately need a breathing spell from new regulatory legislation if the United States is to remain competitive in the world market place. Such a pause would give us time to digest the unbelievable diet of regulation that has already been imposed on us. Over-regulation is slowing the country's technological progress, costing American workers jobs, and hobbing American business in its race for world markets.

The cost of regulation is unbelievable. The U.S. Energy Department's budget of $10-billion amounted to $50 for every member of the U.S. population, or 10 cents for every gallon of gasoline consumed in the United States in 1976. Talk about saving energy. Hell, we're going to run out of money before we run out of energy!

Clearly, however much we dislike it, government regulation is here to stay and will be showing up in ways we never imagined a couple of years ago.

You already know about the new truck fuel economy standards up to the 8500 GVW level for 1980. The original version of these regulations was just about impossible. Fortunately, the Department of Transportation backed off somewhat, after learning that their proposed stringent numbers would probably force truck manufacturers to close factories, reduce production and lay off thousands of workers. So we avoided serious trouble on that one. But whenever one fire is smothered or cut back a little, others keep right on smoldering.

An example: Joan Claybrook, the head of the National Highway Traffic Safety Administration, has talked about future barrier crash tests at 50 or 60 miles per hour, and she says it wouldn't be unrealistic to plan for fuel-economy figures of 40 to 50 miles per gallon.

By the mid 1980s, we will be turning out cars that are, on the average, more fuel-efficient than the average car on the road in Europe today, if you can believe that. European cars have always been small and comparatively more fuel-efficient because of narrow roads and streets, few expressways, and the high cost of gasoline, which is now running about $1.70 per gallon in France, for example. Here in the U.S. up to a few years ago gas was 30 cents to 40 cents a gallon. We have 38,000 miles of freeway, we need family cars to take the wife, kids, puppy and half-ton of luggage from Detroit to Yellowstone National Park and back. But now we're going to have to beat the Europeans in fuel economy anyway. The Europeans are amazed at us, to say the least.

Government regulations are here to stay, and with them, enormous expenditures that are ultimately passed on to consumers.

According to published reports, the auto industry has already committed itself to spend approximately $50-billion by 1985 on the development of new cars and trucks that will meet government fuel-economy and emission standards.

How much is $50-billion? It's twice the cost of the entire Apollo space program and greater than the gross national product of eight Western European countries in 1975!

Think what this means to one company alone. Ford Motor Company will be investing $15- to $20-billion on new North American products for the 1978 through 1985 model years. That amount of money is equal to all of the profits Ford made in the first 74 years of its history - from 1903 to 1977!

We're literally tearing up our plants to make a new generation of cars, and the costs are enormous. Our 1978 Fairmont and Zephyr compacts cost us $600-million. That's just one example.

What else are we doing?

[1] We have launched a massive plant expansion program. It's too extensive to detail here, but as an example, a new transmission manufacturing plant near Columbus, Ohio, that will cost more than a half-billion dollars and employ 3,500 people when it's in full production. Just last week, Ford announced we will start work on a major expansion and renovation of our Dearborn Engine Plant. The expansion, which will cost $415-million and add 1,800 employees to the work force, will equip the plant to produce a new generation of four-cylinder engines to be used in the small cars of the 1980s.

[2] We've announced plans to hire 300 new employees, most of them technical and professional, for our North American Car Engineering organization since January 1, with another 1,000 to come.

[3] We're pulling out all the stops to develop new light weight materials. Example: We're building a prototype car with a body, chassis, and powertrain made, for the most part, of graphite fibers. One Granada we're testing already has a graphite drive shaft that is five-and-one-half pounds lighter than the conventional steel one it replaces. That same car has a graphite hood that is 25 pounds lighter than the sheet metal one it replaces.

[4] We are moving headlong into the electronics age. We already have 12 new electronic devices on our 1978 cars, including an engine control module with its own small computer. These devices and others like them will play key roles in increasing fuel economy, controlling emissions, reducing weight and production costs, and adding new features that will help sell our products.

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[5] We're already working on the third generation of electronic engine controls, and we expect to introduce electronic fuel metering in the early 1980s at about the same time we get into PROCO engines.

Let me say a few words about PROCO engines. The PROCO engine uses a programmed combustion process to put just the right amount of gasoline into the firing chamber at just the right time. It's sort of a gasoline version of the diesel engine. The results we're looking for include a 20-percent increase in fuel economy over today's engines and a quiet, smooth-running engine with substantially fewer emissions. There are many problems to oversome before we can put this engine into production, but I'm confident that we can get it all together by the mid 1980s.

I could go on, but those are some of the things Ford has lined up for the future. I'm sure the other manufacturers have similar programs to talk about.

Of course, while we're trying out dozens of new ideas for the future, not everything we try works out. As one example, we had planned to introduce a new-concept truck engine on a limited basis this year and, at the last moment, we had to postpone the project indefinitely. We called it the Dual Displacement Engine because it could operate on all six cylinders when power was needed, but on only three cylinders at other times.

This engine cost us $10-million to develop and was tested for 3.4-million miles. We were confident right up to the end but when we got there, we had to concede that the engine wasn't yet smooth enough to be a success in the marketplace. We still haven't given up on the concept, and we're experimenting with other versions of this engine.

The revolutionary changes that are taking place in the auto industry today - changes prompted in large measure by government regulations - amount to an enormous gamble, in terms of market appeal. The huge sums we're spending make Las Vegas look like bingo at the church supper. While we don't like to gamble, we do believe that the odds our products will succeed in the marketplace are a lot better than you can get in Las Vegas.

Still, the uncertainties make us a little nervous. In the past, the auto business has responded largely to the fickle tastes and changing needs of the consumers. We thought that was bad. We still have the changing tastes of consumers to contend with. Now we design to meet government standards.

The plain fact is that government-sized cars are not necessarily consistent with the public's needs or wants. We all know that, but I think we ought to realize at the same time that the picture is not all gloomy.

Let me tick off some of the plus points. I'll add right here that some of the pluses are a little thin, even for an unquenchable optimist like myself.

  • What about family size? Families are getting smaller as the cars are getting smaller. That's a happy coincidence, and I only hope that the families are getting smaller as fast as the cars are getting smaller.
  • While family size is shrinking, leisure time is expanding. Many observers estimate that by 1985, workers will have 200 more leisure hours each year than they have now. This will increase the market for vans, trucks and recreational vehicles. People will probably be using their cars more than they do now, and will need to replace them more often.
  • Another reason people will depend heavily on cars is that the move to suburbs will continue. This has been going on for decades now, but the trend will accelerate. The exurban/suburban population is expected to increase from 39-percent of the total population in 1975 to 43-percent in 1985. And suburban residents are more likely to be multiple car families than city dwellers.
  • While people will travel more and have more leisure time, they'll also have more money to spend. By 1985, some 30-percent - nearly one in three - of American families will make at least $25,000 - and that's in 1975 dollars.
  • What about extended-term financing? That's a trend you're all familiar with. The move to stretched-out-payments has helped the market already and it's expected to help it more in the future.

 

Let me expand on this point just a bit. Long-term financing is something of a phenomenon. Auto finance contracts now average 42 months. By 1985, with the expected offering of 54- and 60-month contracts, this average is expected to reach 48 months.

Does this mean the trading cycle will be stretched out, too? If we can depend on past indications, the answer is "no." In 1977, Ford's marketing staff surveyed 1974-model Ford buyers and found that longer-term financing did not extend the trading cycle. As a matter of fact, the percentage of buyers who traded in their 1974 vehicles was actually higher for those with 42- and 48-month contracts than for those with 36-month contracts.

What does all of this mean for dealers?

One of the concerns of dealers is that smaller cars means smaller profits. That's probably true, on a per-unit basis. But total volume will increase over the next decade, and with it, total profit per dealer. Incidentally, we expect combined U.S. car and truck sales to reach 17 million or more by 1985.

All indications, therefore, are that the U.S. automobile market is going to expand in the decade ahead. At the same time, we can see some yellow flashers on the road ahead - some of them right outside the front doors of your dealerships.

For one thing, your sales people are going to have to do a lot better job than they have in the past in matching customer wants with what is available. As difference in size diminishes as a selling point, you will need sophisticated sales people who know more and more about the fine points of their products, about options, about comparative interior room, about electronics.

On the subject of size, let me interject here that massive downsizing doesn't mean there will be a dramatic shift in buying habits. We expect that people who like big cars will simply buy the biggest car available, while people who like small cars will buy the smallest cars available. The whole range of car sizes will shift downward, but we don't look for any radical changes in the market share of each segment.

Another flashing light - for dealers of U.S. makes, anyway - is the question of imports. Many of you dealers here are selling imports, and let me say that we in the East continue to be amazed at your success - about 40-percent of the California market.

I believe imports will continue to be strong but, frankly, I don't think that things are going to be quite so easy for the imports in the future. As the dollar sinks, import prices have to rise, as they already have. I certainly hope the dollar perks up, but the currency situation will probably continue in favor or domestic makes for the foreseeable future.

A more important problem for the imports is the appearance of the new American small cars such as Fairmont, Zephyr, Chevette, Omni and Horizon. These and other U.S. small cars in the wins are going to be giving the imports a run for their money.

One of the most ominous danger signals ahead for dealers (as well as for us manufacturers) is increasing consumer unhappiness with service. All the evidence we have points to a growing need for dealers to spend more time, energy and money on service. Our studies show that the biggest problem in service departments is not with the mechanics but with some of the dealer owners. The plain fact is that many dealers don't pay much attention to what's going on in the service department.

Another flashing light for dealers is increased media and government scrutiny. Believe me, consumerism isn't dead. It isn't even sick. In fact, it's quite healthy and appears to be growing.

The government has been, and will continue to be, very responsive to the demands of the consumer advocates. We manufacturers live in a goldfish bowl, and you dealers are in there with us.

Dealership management interest in service must be improved because customers are demanding better service. I don't really have to tell you that, because you know that from firsthand experience. Miss Claybrook only recently announced a study which purported to show that 40 cents on every dollar spent on car repairs is wasted. This is the kind of study which triggers more controls.

One very good reason the government is so responsive to consumer advocates is that many consumer advocates are now on the government payroll. Many of you may have read an article in last October's issue of Fortune magazine entitled "Nader's Invaders Are Inside the Gates." The article lists more than 60 men and women holding key jobs through the Executive Branch who have come straight to government from consumer and public-advocacy groups. Fourteen key White House aides came out of the public-interest movement, and many other Naderites can be found in agencies such as CAB, EEOC, OSHA and FTC.

With consumerism a growth industry, dealers are going to have to concentrate more than ever before on service. The technical changes such as electronics that I mentioned previously are going to complicate your job.

But there is a brighter side to the service picture. For one thing, there's a lot of money there. A recent report on automotive maintenance predicted that service sales will increase 50-percent by the mid-1980s, from $50-billion to $75-billion.

In addition, the number of service outlets should decrease drastically from the present 300,000 to about 175,000 by the late 1980s. As the number of gas stations declines, the ratio of vehicles per service outlet should increase from 360: 1 to 680:1. That means more business for you.

Add all of these factors up, subtract the minuses from the pluses, and what does it say on the bottom line for the dealers? Will owning a dealership be as good a business for your children as it is for you?

The answer is a resounding "yes." Despite such challenges as government regulation, inflation and aggressive consumerism, the love affair between Americans and their automobiles is a permanent fact of American life. More than an affair, it is a strong marriage that won't be dissolved by Washington, a marriage that will withstand the pressures of recession, the energy shortage, future oil embargoes and the revolutionary change to a new generation of automobiles.

Change creates challenge, and challenge creates opportunity. For auto dealers who prepare for change, the future will offer opportunities that have never existed before.

 

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