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WESTLAKE VILLAGE, Calif. — The auto industry has likely seen the worst of its drought, and though certain issues and challenges must be addressed, new-vehicle sales are headed toward the 11.7 million unit mark for 2010, according to J.D. Power and Associates. 

And four years from now, they could be back to the 16 million mark.

While healing the overall auto industry hinges largely on the health of the broader economy, automakers themselves must focus their lineup on ensuring what consumers look for in terms of "value, quality, performance, economy and utility" in addition to "excellent styling and a strong brand image."

These were just some of the topics examined during a Q&A with Jeff Schuster, executive director of automotive forecasting at J.D. Power and Associates, and Dave Sargent, J.D. Power's vice president of vehicle research.

"No question, 2009 was a difficult year, and we believe the worst is over. We're currently forecasting total auto sales at 11.7 million units, or 9.6 million at the retail level, both representing a 13-percent increase from dismal 2009," Schuster noted.

"That doesn't mean 2010 is without risk," he continued. "The key variables are the pace of the country's general economic recovery, with a focus on unemployment; the availability of credit; what manufacturers do in terms of pricing and incentives, which they insist they're going to cut; and the general level of consumer confidence."

Sargent was then asked what is necessary for the industry to repair the loss in consumer confidence and foster demand.

"The recovery of the industry as a whole is dependent on the wider economic picture, but for individual automakers, the key is to maintain a portfolio of products that meet consumers' needs for value, quality, performance, economy and utility, as well as less tangible attributes such as excellent styling and a strong brand image," he suggested. 

Looking forward, Schuster addressed the "new norm" in the industry and examined whether new-vehicle sales can ever again reach their high-level marks seen through most of the 2000s. 

Schuster said he expects the market will rebound at a modest pace for the next few years and it won't be until 2012 that the industry surpasses sales of 15 million new vehicles, but the 16 million new-vehicle sales mark is likely to be achieved four years from now.

"We are projecting a slow and steady recovery during the next few years, but we've gone through some significant structural changes that will likely lead to a permanent decline in the level of 'normal' sales," he shared.

"We don't expect light-vehicle volumes to cross the 15-million-unit level until 2012, but they should reach 16 million by 2014," Schuster continued. "This is more of a function of stable replacement demand and the addition of new households, with less focus on fleet sales." 

State of Fleet

Looking particularly at the fleet side of the market in more detail, in light of J.D. Power president Finbarr O'Neill's letter to the Wall Street Journal that called on the industry to put more emphasis on consumers rather than daily rental fleets, the executives weighed in on whether that, indeed, was happening within the industry.

"A significant amount of ‘bad' fleet was removed from the system, with fleets accounting for just 17 percent of sales in 2009, down from 22 percent in 2005," Schuster said.

"Most of the reduction was with daily rentals, which is a low-profit business," he continued. "Cutting excess capacity helps the industry — and especially domestic brands — shift to a healthier mix. The question going forward is: Will manufacturers remain disciplined throughout the recovery and the 'new normal'?" 

Toyota Recalls

Continuing on, the J.D. Power executives also addressed the Toyota recalls and their effect on sales. Schuster indicated that 1) the length of time these issues stick around and 2) consumers' reaction will largely determine the degree to which the industry is affected.

Downward effects for Toyota have already been noticed, as the automaker's February sales fell 11 percent year-over-year, versus a 13-percent in the overall industry, he pointed out. Moreover, Toyota's market share was down from 13.5 percent in February 2009 to 10.7 percent in February 2010.

"There is no question we are seeing a negative impact currently," Schuster shared. "As the situation drags on, there is an increasing probability that the impact could shift from affecting sales within 2010 alone to a longer-term problem."

Sargent added: "Toyota has been a quality leader in the U.S. since J.D. Power started measuring the entire industry in the mid-1980s. Great quality is the cornerstone of how it built its reputation, so it must do everything it can to protect this.

"Toyota by its own admission was slow in fully reacting to the situation. However, it is clearly taking responsibility for the problems and is taking steps to ensure that its vehicles are safe," he continued. "This is critical, as regaining its reputation among consumers is more important than short-term sales and profits." 

How are Domestics Faring?

Moving on, Schuster and Sargent turned to General Motors and Ford, both of which have made significant improvements in terms of quality, as of late. Though J.D. Power does not project future quality scores, Sargent said it wouldn't be a "surprise" if the automakers' growth in quality ratings continues in the short term.

"The key challenges are, as always, the launch of new models and, in particular, the launch and proliferation of new technologies in these models," he pointed out. "Making high-tech systems as flawless and intuitive as possible will be a key battleground for all of the automakers in the future."

As for Chrysler, its management has acknowledged issues the automaker faces when it comes to quality. Sargent suggested "there is no doubt" that the automaker knows just how pivotal quality can be on its performance.  

He also indicated that Chrysler has both the means and the drive to narrow the quality gap, but a big hurdle will be tackling the issue of quality perception, not just actual quality.  

"The simple answer is that no automaker will survive over the long term without competitive quality levels, and these days that requires world-class quality," Sargent said when asked if Chrysler could survive if it doesn't achieve world-class quality levels. "This is the price of entry, and any automaker that has serious quality deficiencies will see its reputation — and ultimately its ability to earn viable profits — diminish rapidly."

He added: "There is no doubt that Chrysler understands the importance of quality and its impact on business performance. If Chrysler attacks the quality issue with the same level of determination and rigor as automakers such as Ford, GM, Hyundai and Volkswagen, then it should be able to close the gap over time.

"We certainly think they have the determination and ability to do so. The toughest part will be closing the perceived quality gap with consumers. As other automakers have found, this is harder than closing the actual quality gap," Sargent concluded.