The 1981 model year will prove to be a pivotal one for the domestic automakers as they bring more models to the market that will compete with imports and meet the demand for small fuel efficient vehicles. Making a major move toward this end is Ford, which will introduce its "world car," the Escort/Lynx, to the U.S. market this fall, as well as a smaller and restyled Granada/Monarch.
An important segment of Ford's marketing plans for these new models is the fleet industry, whose acceptance of new models is a bellweather of things to come in the retail market. This spring, the ford Division previewed its line before some of the country's top lessors, and Automotive Fleet was on hand to record their reactions to the new models. Participating in the overview of the Ford line and the leasing industry in general were A. Samuel Penn, senior vice president, PHH Group; Rene Claussen, president, CIT Service Leasing; Don Gorman, group head, finance lease group, Leaseway Transportation; Robert Miesen, president, Gambles C&M Leasing; and Stan Chason, president, Gelco Fleet & Management Services Co.
In looking at the two major changes in the Ford lineup, Sam Penn said, "The Granada, which is completely styled, will fit in the intermediate portion of the business and it should do reasonably well in that particular area. It's got the size, it's got trunk space and fuel economy. The other car, of course, is the Escort. It has front-wheel drive and fuel economy and that's where the market is really at. The two big fleet cars going into 1981 will be six cylinder and four cylinder cars. So with both of those entries, Ford could certainly improve its position in 1981."
Penn feels that the Escort, although smaller than GM's X-body, will have some fleet applications. When asked if there would be some resistance on the part of some fleets to a car that small, he replied, "It depends on the type of service the vehicle is in. In those areas where you have cars that are doing less than 1,200 miles per month, the four cylinder automobile has greater opportunities. In over 1,200 miles per month, you'll probably go to a six cylinder powerplant." As for the rest of the line, Penn said, "Fairmont looks pretty much the same as it has been and LTD returns with a few changes." He added that both look like two good fleet prospects.
The Granada, which will be built off the Fairmont platform, has similar lines and appearance to Ford's current mid-size entry. "I think that in all probability, Grenada will take some business away from Fairmont," Penn said in reference to the two models' similarity. "Also, Escort will take some business away from Fairmont," he added, "but by the same token, there will be a market for that particular mid-size car," Penn said of Fairmont. "But there is no question that on both sides of that car (again talking about Fairmont) there is going to be some competition."
"I think the Escort will be the car in the Ford line," Rene Claussen said in his review of the model mix. "There will be some resistance on the part of buyers," he predicted, but "management will insist on a lot of fleet use of these vehicles." Fairmont, in his estimation, will not change over last year, while "the Granada shows improvement. It will e a definite alternative for those people in LTDs. Granada's segment will come from there. The future of big cars is very limited, but it will be excellent for limousines."
Sharing that view of a limited future for the big car, Don Gorman sees the Granada replacing the LTD in a couple of years as the big car. "Where Escort will fit, whether there will be large usage, will again depend on the need of the user.
"Looking at the cars today, I am confused between Granada and Fairmont. Just today, at this point in time, looking at the vehicle side by side, there is not much difference. But the two new cars (Escort and Granada) should stand them in good stead for the '81 model year."
Gorman was unsure what types of factors would determine a fleet's selection of either the Fairmont or Granada. "It's a pretty tough question," he said. "Some may view gasoline, some, maybe costs. I don't know. Until I see the pricing, until we have a change to see the fleets' reaction the cars, it's going to be tough to tell. It could be that Granada will be the upper level car. It will take time to get acceptance."
"I agree that the Granada and Escort will do well this year," Bob Miesen said. "I think Phil Benton (Ford Division's president) hit the nail on the head this morning when he said that the biggest challenge of Ford and the biggest challenge of Detroit is the challenge of the Japanese. You see a lot of statistics on what percentage of the marketplace they're taking right now. There was a recent article in Forbes that the Japanese with their subcompact cars will have approximately 27 percent of the market. I think that the Escort will go a long way towards meeting that challenge."
As for the larger cars in Ford's line, Miesen said, "I don't think they're going to do that well. You know, that's not the name of the game today. Everything is stacked against large cars. You have an annual inflation rate of 18 percent, a prime of 19-plus (prime has since hit a peak of 20 percent and is currently in the low teens). The name of the game is fuel economy and you are just not going to find a way to get it out of large cars. Basically the large car today is gone."
While others in the group felt the large car has seen its heyday, Stan Chason said that there is still considerable confusion in the marketplace and that there will still be a market for a larger car. "I think confusion is still pretty much the state of the art," he said. "There is a dichotomy in the marketplace in the fact that the buying public will still buy the biggest car they think they can feel comfortable with as a function of the availability of fuel. The full-size car is in a very down-size, down-trend situation. Maybe I'm very cynical vis-à-vis the buying habits of the public, but I think that once people get comfortable with gas prices, with availability, and once they get comfortable and adjusted to the pricing of gas, you're going to start to see the big cars move back in again." He said that this would happen only to a certain degree and over a period of time. "I know this is totally different than what everyone else is saying."
"I have trouble buying off on that," said Penn.
"I, myself, trying to think objectively, have a problem buying off on it, but the thing that kind of gives me that feeling is occurring in the European market," Chason said. "The percentage of spendable income is considerably less than it is here, but the cost of cars and gas is considerably higher than it is here, and yet - and the United Kingdom is my best example - the cars that the manufacturers are coming out with that are selling the best are the bigger cars. You just don't see the minis, which were the hottest thing in the market a few years back. They've upsized their fleet vehicles. The fleets today in Europe are driving Fairmont-size cars, which is a big car for the European market.
"As I say, confusion still prevails," Chason continued. "There's almost a hysteria vis-à-vis the availability of fuel and the push toward fuel economy-type cars. But by the same token, the people don't want to scrimp, they still want the best comfort that they can possibly achieve or afford within any given environment. I just think there will be a cycle back toward that full-size car. It will never get back to where it was, because there has been an adjustment in the marketplace. But I don't think the big car will go away."
When asked to define how big the big car will be, Chason answered, "In our framework or reference, LTD is big. I'm coming from a fleet point of view, not from a retail point of view. I think that piece of the market is going to stay, it's not going to go away."
Expanding on the factors that will contribute to the big car's survival, Chason said, "If people get comfortable with the fact that gas will be available, irrespective of price, you'll still see the big car. We're still a travel-oriented people. The cheapest recreation people can buy in this country today is by car. You can't load a family of kids and whatever else you go away with in a four or five passenger compact, it just doesn't work. In fact, if anything, the lower you go on the economic scale, the bigger the push for the larger vehicle.
"I guess I'm saying in a sense that the general tone coming through (from the group) is that the big car, for all intents and purposes, is going to go away and that the Granada will be the big car," he said. "I just don't think that will be. Getting into the Granada itself, for fleets, it's a natural step down from an LTD. Psychologically, it will be much easier for fleets to move people into the Granada than into the Fairmont. The Granada is a nice looking car. I am a little less impressed with the fact that it's not a distinctive vehicle as it has been in previous model years. It looks like a part of the Ford line, whereas before it looked like a distinctive car.
"Escort will be a tremendous daily rental car, excellent for the consumer, and will probably be a fleet car, but in those areas that are more service-oriented than sales-oriented," Chason said. "The Escort will be a great car in that application."
In contrast to Chason's assessment of where the big car is headed, Penn said, "I have a problem with the big car. There was a point in time I would have agreed with Stan when he said that there is no elasticity to the price of fuel, that it is strictly a question of availability. But when gas hit a dollar a gallon, then you really saw elasticity begin to work. I thought for sure at 65 cents a gallon there was no elasticity, but now at a dollar and a dollar and a quarter, moving to a dollar and a half, I think there really is elasticity there and I think that if the big car is to survive at all, it will be in a diesel configuration and not in a gasoline engine.
"Quite honestly, I think we will begin to see more and more front-wheel drive configurations, which means they will be able to give you a smaller car with a larger interior package to compensate for the smaller exterior," Penn said. "I will admit the fact it is an interesting point in what Stan has said about Europe and their cars getting bigger, which is, in fact, so. But bigger in relation to what they had, however, is still small. If you look at the Audi 5000, which is a pretty big car by European standards, it isn't really a big car by our standards."
In assessing the current U.S. market, Penn said, "I sincerely believe that people have less disposable dollars today, they're looking at fuel economy harder than ever and that economy is a major criterion in new car acquisition as opposed to price. Acquisition cost is secondary today to fuel economy. I think that's even true with the retail customer." Relating fuel economy to car size, Penn said the only option available if one is looking for both is diesel power. "Sooner or later, someone is going to build a ground-up diesel (for passenger cars in the U.S.) as opposed to converting gas engines, and I think that will be fairly acceptable."
While the U.S. experienced a rapid change in the market following the tight fuel supply situation of a year ago, the Canadian market did not experience the same dislocation, and fuel prices have remained relatively stable. As a result, the changes in that market have been more gradual. "Canada is artificially low" in fuel prices, Rene Claussen said. "So a large car is still saleable merchandise in Canada. As for the long term, where is it going? The same as the U.S. There is less disposable income, so things like meat, jeans and schooling come first. It's true that the lower the scale of income, that family needs a large size car for entertainment and children." But the Canadian market is different than the U.S., he added, in that "you only have one car. I think (in the future) they'll (Canadians) be doing less entertaining and vacationing." He said the prospects for daily rental are very good for Canada. As the Canadian market moves to smaller, more fuel efficient cars, they will "get the large cars for a couple of weeks for vacation. That's where it is going to go."
Agreeing with Chason's assessment of the big car's future, Gorman said it is part of a pattern that middle-aged Americans are locked into. 'We look on the automobile as an extension of our personalities. Sure there's a price and there's a problem. We're witnessing it in Ohio; Sohio dropped its price three cents per gallon and there are long lines. You get all of middle-aged America, tell them they're going to get their gas, you're going to pay for it, and they'll drive the bigger car," Gorman explained. "But if he knows he can get gas and pay for it, he'll factor it in the price of driving the bigger car. How big is big, though, is the question."
Higher fuel prices aren't the sole consideration, according to Miesen, who felt that elasticity of demand for fuel depends on other prices as well. "With inflation today, it simply becomes a question of paying for everything else aside from gas," he said. "Even if it is available, there is still a question of whether you can afford it because you're paying so much for everything else."
Chason feels the current rush toward the smaller cars is similar to the reaction to the Arab oil embargo of 1973 and the recession that followed in 1974. "Look at '73-'74," he said. "During the oil embargo we had fleets go bombing into Pintos and Vegas and bombed out of them just as fast as soon as gas became available. They went from this car to that car just that quickly. Actually, when you take the cost of gas even at two dollars per gallon and take that as a percentage of the man on the road as a profit center, when you include the cost of the man, the cost of travel and entertainment, the benefit of the vehicle, his productivity, that gas cost even at two dollars per gallon is an infinitesimal percentage of the total package."
At the time of the preview, the prime interest rate was just beginning to reach its peak, but according to Chason, fleet ordering activity had been fairly strong up until that point. "The ordering activity had been very strong, and just now it's starting to drop off," he said. "Right now, I see a fairly sharp fall in orders, but that's more a function of the shock or reaction to the 19 percent prime. You have somebody that's driving a vehicle that was financed at eight percent and cost $5,000 and now is looking at a $6,500 vehicle and 20 percent. It's cheaper to spend $500 to keep that vehicle on the road and sweat out the prime.
"The thing that they're not taking into consideration, and there are some interesting statistics on this," he added, "the actual cost per mile for operation does not rise precipitously when you get into the upper mileage range." While that fact may present a strong case for keeping vehicles in service longer, such a decision has unseen drawbacks. "What does happen is that the incidence of repairs goes up," Chason said. "You're not getting into the major repairs such as engine blocks or transmissions, but you're getting a high incidence of minor things that take the driver off the road. When you think that driver is costing that company $25 to $40 an hour to keep out there, there is absolutely no rationale for extending. So there are some very false economies. They far exceed any savings they're accruing in keeping that car longer if they look at it properly."
Some fleets, according to Gorman, are beginning to accept this fact and look into it. "The fleets themselves seem willing to gather their data and take a look at it with a harder nose."
While fleets are willing to look at costs, however, tighter controls on the part of fleets will take time, according to Penn. "There is a greater awareness of the costs because of the magnitude and the numbers because of the fact that overnight you've doubled the cost of fuel. To say that this greater awareness is tantamount to a sophisticated fleet community overnight is not so."
When asked where the prime rate is headed and, if it continues upward would 1981 be as slow as the 1980 model year, Miesen replied, "That's really a difficult question. The first part of that question is where is prime going, and nobody has a ready answer - the answers are all over the ballpark. I was at Crocker Bank yesterday in San Francisco, and their latest prognosis is that prime would not level off or start a really precipitous drop for another three quarters. Maybe one year from now it may be in the 12 to 13 percent range."
"Well, you talk to a number of banks and half say it's going to be up here and half say it's going to be down there," Chason said. Despite the prime rate, Chason feels there is a different attitude on the part of business that will carry the economy through the current downturn. "I tell you what's different in this go-round from '73-'74 when you had the combination of an oil embargo and recession. In that period we saw fleets shutting down sales forces, some companies fired a third of their sales personnel, and we actually saw some fleets diminish. In this time around, fleets are still expanding. There is growth in fleet that didn't exist in that '73-'74 period. In our case, fleet was absolutely flat; the growth that did exist was offset by the cutbacks. This time around, we're not seeing that. We're seeing companies moving ahead with their expansion plans, but trying to conserve all around them. What I think is happening now; they're more attuned to a long-range situation than reacting too sharply to a short-term situation. Which means there is an underlying optimism, whereas in the 1973-74 period it was gloom and doom."
"There was a story in yesterday's Wall Street Journal that said there's a lot of people who are not convinced that we're going to have a recession, or one of any depth," Penn said. "They still have plans for expansion, and the story quoted some executives who said that had they listened to what people told them last year and the year before, they would have shut their plants down. There's a lot of non-believers out there. We happen to live in an environment with which the automobile industry has really been hit, but there's a lot of businesses out there booming right along."
"I agree with Stan," Miesen said. "That's the way we find it. We find a real underlying current of optimism; the last 30 days for us have been the biggest volume period in our history. I don't know if that's the beginning of a trend - I hope it is. That's the case with us, and we're buoyed up that the rest of the year could be a good one."
That optimism, couple with a pent-up demand for small cars, could result in a year that will turn the corner not only for American business but for Detroit as well.