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Auto Industry Recovery Once Again Postponed

by: Trader Mark October 02, 2008 | about stocks: F / GM / TM    
Trader Mark

Trader Mark

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I said in late 2007 (when many were arguing there would be no recession and in fact everything was fine since the Federal Reserve had our back) that 2008 would be the worst year in two decades for auto sales. Ford's (F) numbers are out and they are staggering (down 34%). Yet another group of companies who promised "second half recovery" back in the spring.

  • Tight credit, economic worries and high gasoline prices combined to cut Ford Motor Co.'s U.S. sales once again in September, with the beleaguered automaker reporting a 34 percent decline from the same month last year.
  • It was Ford's worst sales month this year, and the results are a strong indication that analysts' forecasts of another dismal month will come true.
  • Analysts have predicted September declines of more than 20 percent for most major automakers when compared with the same month last year as upheaval in the financial markets unnerved consumers.

Many Americans were buying autos with their house ATM. Again, a year ago at this time, along with Paulson's " subprime is contained" sing song, we were treated to "what is the fuss about the general economy? housing is only 4.5% of GDP" sing a long on CNBC. Now you are going to see the lagged effect of the "fuss" a few of us were making.

Again, this will be (and is) the first consumer led recession since the late 70s/early 80s. Too many investors do not read history, and are not old enough to have lived through that so are used to "corporate" led recessions of the early 90s and early 00s. We've created such a bubble that this is the first time housing leads the economy down rather than vice versa. We've been so inoculated from downturns by government actions that even a 1978 type of recession is going to feel a lot worse than it did back then, since we've not been allowed to have a true recession for so long.

Further, we actually had a national savings rate in the late 70s - people saved some of their income instead of spending every last dime as we do now. (some as part of the culture, and others forced to - just to survive in dog eat dog America) [Dec. 2007: Do the Bottom 80% of Americans Stand a Chance?] So there is no buffer for most now - with our 0% savings rate - as there were for some in the last major consumer led recessions (we had multiple ones in the 70s/early 80s). I am just hoping it does not get worse than that period - this credit crunch adds a dimension that is simply impossible to model with all the permeations.

I know no one cares about auto jobs because that only affects "midwest people" with their "old school industry that is useless in our new and cool service economy", and it is not the high and mighty in NYC finance, which instead of producing "things" produce "financial innovations of great value".... but some say 1 in 10 jobs in America have at least an indirect relation to automotive (i.e. restaurants, grocers, hair salons etc that serve auto related workers).

Reuters has an interesting story that potentially 1 in 5 Auto Dealers could go up in smoke in the next year or so. So mock the industry all you like, but each loss has a ripple effect... this is one of the last things we actually build (mostly) in the country now that we've gotten rid of most textiles, most steel, most everything that doesn't have to do with Wal-Mart (WMT), healthcare, restaurants, defense, or government.

  • As many as 3,800 U.S. car dealerships could fail this fall and into 2009 -- nearly one in five -- because of weak sales, increased operational costs and the credit crunch, according to a forecast released on Wednesday.
  • "An increasing number of dealers are simply closing their doors because sales have plummeted, credit has dried up, the overall retail environment is increasingly challenging and potential investors are sitting on the sidelines," said Paul Melville, a partner with Grant Thornton LLP, which issued the forecast.
  • "In addition, the domestic automakers who badly need retail consolidation are not spending much of their scarce capital on the problem because the economy is doing it for them," he said.
  • Bill Heard Enterprises Inc, one of the biggest General Motors Corp (GM) Chevrolet dealerships, filed for bankruptcy on Sunday, citing operating losses, decreased demand for vehicles and lack of credit. At its peak, Alabama-based Heard's revenue was about $2.5 billion per year, according to the bankruptcy filing.
  • With U.S. light vehicle sales predicted to drop to the 13.7-million-unit range in 2009, the study said that about 3,800 dealerships, about 18 percent of the total number of U.S. car dealerships at the end of 2007, will need to close. (a typical year in the "credit is free! economy" has been 16-17M+)

CNNMoney.com chimes in:

  • If you want to see how America's credit crisis is hitting the streets of your hometown, go to your local car dealer. Auto dealers depend on credit. They need it to run their stores and their customers need it to buy their products. From every angle, credit trouble hurts.
  • There could be 300 to 400 fewer auto dealerships in America by the end of the year, predicted Paul Taylor, an economist with the National Automobile Dealers Association. In an ordinary year of economic growth, the industry adds 75 to 150 dealers, he said.
  • "We're seeing people with Beacon scores that are pretty darned good," Fitzpatrick said, "and the finance companies are just looking for reasons to turn them down."
  • In most of the country, the collapse of the housing market has left consumers without the low-cost home equity loans that drove car sales in recent years. (house as ATM for people who live paycheck to paycheck and have to "keep up appearances" and "spend like the Joneses") Also, the drain of home equity has left potential customers feeling poor, said NADA economist Paul Taylor. That, as much as the actual loss of low-interest credit, has hurt car sales.

You know things are bad when Toyota (TM) the "king of US auto" has sales down 30%+!

  • Beleaguered Ford reported a 34 percent decline, while Chrysler said its sales fell 33 percent and Toyota posted a 32 percent drop. "It was tantamount, really, to a natural disaster," he said.
  • General Motors Corp., buoyed by its offer of employee pricing on most of its vehicles, saw U.S. sales drop a less severe 16 percent, boosting the automaker's market share to its best level all year. "A few years ago I'd have jumped out the window with these numbers, and we're on the 39th floor here," he said in a conference call from GM's downtown Detroit headquarters.

Frankly, as I've written the past year, there is an oversupply of everything retail in America (including car dealers) - that is what happens when you consume over your head for decades - you overbuild everything that serves the consumer. So we'll see a lot of shrinking or as they say in corporate America "right sizing". Now the problem is we've taken a national mandate to turn into a "service" economy that is based 70% on consumers spending. That is a far different economy than we had in the 1970s - the last time the consumer led us into a recession. Job losses we've seen so far (which are heavily under reported by the government) are going to look benign compared to what is coming down the road. This is because so many more people now (vs 70s/early 80s) work in jobs that demand consumers to spend, spend, spend.

Remember, the fictitious monthly government report on unemployment is coming this Friday and the market always reacts strongly to that. But we are just in the early stages - as we focus on saving the financial system no one is really talking about the crumbling economy. Where are all those pundits who screamed "no recession" in latter 2007 and then screamed "second half recovery" in early 2008? (Older readers will remember me mocking that call almost daily.) They are back on their normal posts in the media saying "once we get this bailout passed we'll be good, first half 2009 recovery is on track".

Why do we continue to bring out these retreads who have been wrong every step of the way? If you are wrong every step of the way, I am now supposed to trust your judgment on when we recover? Please.

We are going to be a leaner, meaner (hopefully not literally?) nation when we come out of this. But it won't be next quarter, or the quarter after that, or the one after that - one day the pundits will realize this. 2008 has been very ugly for the stock market, while it has only begun to really hurt the Main Street economy. In 2009, I think that the Main Street economy is going to get the hurricane force winds - the less credit available in a credit driven economy, the worse it gets. 2009 will be the Year of Shrinking.

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This article has 17 comments:

  •  
    Oct 02 12:12 PM
    Want to help the US economy? Go buy a US-made vehicle from a domestic manufacturer.
    Reply
  •  
    Oct 02 01:18 PM
    I agree with this article...the auto industry has a lot more of an effect on the economy then most Americans think. The people out there that post such comments as "GM/Ford/Chrysler need to go under" ...are uneducated idiots who know nothing about the economy. All they think is hey i drive a Toyota I dont need Detroit...but in reality Detroit has helped build this Country from the ground up. Not to mention they still continue to support thousands of jobs directly and millions of jobs indirectly thoughout America. This is a fact, not theory or opinion. If you take a spin around Detroit today you will see this first hand as a lot of non- auto manufacture companies have went under/jobs cut etc over the years which is directly related to the job lose from the Big 3. The day Americans wake up and stop pointing fingers at each looking to place blame is the day our economy starts heading in the right direction towards a recovery.
    Reply
  •  
    Oct 02 03:42 PM
    Holy cats!!!!!!!!!!! Someone actually gets it. Kudo's to the author.
    Reply
  •  
    Oct 03 09:38 AM
    It is refreshing to read such an intelligent and thoughtful article like this one. (Worthwhile articles are a rarity on the "Seeking Alpha" site) Studies clearly show that the number of US jobs for each car/truck produced by GM/Ford/Chrysler are at least 3 times higher than off-shore nameplates. We should all be thankful that bankruptcy is not an option for the "US big three." GM is the biggest private provider of healthcare in this country. And it supports a million families in retirement. If those responsibilities had to be transferred to government managed programs, good luck for the recovery everyone is working towards.
    Reply
  •  
    Oct 03 01:02 PM
    Sir,

    Some of us are still "fussing" about Detroit's lack of desire to help themselves, in lieu of simply showing up in Washington for the first of TWO promised $25 billion bailouts in return for Michigan's electoral votes this November. Why not send your lobbyists to help us secure lower gas prices, which would increase auto sales, instead?

    At the risk of sounding redundant, I'll repeat my questions that NONE of you Detroit apologists have attempted to answer so far -

    1. Why not build the 40+ mpg compacts these automakers manufacture that sell so well in Europe here?

    2. Why not offer the dual-fueled (CNG + gasoline) trucks you sell in other countries (19 models in Canada alone!) in the U.S., which Boone Pickens has spent $60 million advertising for you? You could help equip your starving dealers with CNG pumps to refuel them, which would keep them in business.

    3. Dealers could also do a brisk business in converting consumers' now worthless big trucks and SUV's to run on CNG, which costs HALF the price of IMPORTED gasoline.

    And don't tell me you can't do the above because of government red tape and regulations. If your Congressional delegation and lobbyists can secure $50B in "loans" (Right!), they could certainly figure out how to resolve such minor impediments to doing MORE BUSINESS, instead of crying for MORE HANDOUTS.

    That is, IF THEY WANTED TO !!
    Reply
  •  
    Oct 03 01:09 PM
    P.S. And by the way, far from failing, U.S. domestic manufacturing has actually DOUBLED over past 15 years. Read "Fleeced," which is appropriately titled when you consider the job the Congress and Detroit have done to us.
    Reply
  •  
    Oct 03 01:14 PM
    And don't forget to vote DEMOCRAT next month. That way you can work that into yet ANOTHER $50B before the NEXT election. I gotta admit, It sure beats WORKING for a living!
    Reply
  •  
    Oct 03 01:18 PM
    Oh, and lest I forget, more VOLTS at $45K apiece. If you play your cards right with Obama and Pelosi, maybe you can even replace the government's fleet with these winners!
    Reply
  •  
    Oct 03 07:50 PM
    Paul8756
    It would help you to remember that companies produce what consumers want to buy.
    CNG is not a panacea. It has been available for many cars and trucks for 30+ years and is subsidised in Canada, where far more CNG cars&trucks are sold than in the US. Unfortunately, cost per mile driven with CNG is greater than gasoline.
    In Europe, consumers have demanded the fuel economy in lieu of size and comfort because high fuel taxes make the gas prices so high. The governents have also favored Diesels which are very fuel efficient. In the US, increasingly strict rules against particulates and emssions are introduced with the apparent intent of legislating Diesels out of existence.
    I for one will definitely not vote Democratic.
    But when Congress passes the new fuel economy requirements that demand dramatic product changes, and as a part of the bill, allocate money to help US manufacturers retool US plants, it seems fair that they follow-up by funding the program they approved.
    Reply
  •  
    Oct 03 10:31 PM
    Paulk8756, the $50B is NOT a bailout--it is what congress should do EVERY TIME they mandate (no, that's not a Barney Frank term) any action on any entity.

    Simply put, if Congress in their dubious wisdom requires any entity to do something for the common good, they should BE REQUIRED to cover the costs with taxpayer funds since the taxpayers benefit from the increase in the common good.

    Up until now, we have had to eat a multitude of unfunded mandates, the most offensive being the requirement to sort through a tax code that has more words than the Bible. And, if a mistake is made, it's assumed that you are guilty--penalties include fines and jail time. The total cost of congressional and administration regulation on automobiles is well above $8,000 per car. And the taxpayer is paying for that TWICE--first through taxes and once again in the purchase price.

    It's high time that congress remembered who signs their checks.
    Reply
  •  
    Oct 03 10:50 PM
    Sting,

    Fair enough. NGV's may not be a panacea for everyone, but nothing else is either. The problem is we're importing half a TRILLION dollars worth of foreign oil each year, and NG is the only viable substitute available. (Indeed, we have a proven 100 year supply!) .

    But just because it's been around a long time, doesn't mean it isn't a superior product to gasoline. The EPA says the Civic GX tested cleaner than the Prius Hybrid. (I don't have a problem with modern 60+ mpg diesels by the way. Bring 'em on, too!)

    I would question your notion that NG isn't cost competitive with gasoline, however. (Even if it weren't, of course, it's still DOMESTIC.) On an eqivalency basis you burn a bit more to go the same distance, but it costs 40% or more less to start with. In fact, NGV owners in OK and UT (who live in proximity to NG production, granted) fill up today for less than $1 per gallon.

    It's interesting to note that the only other alternative, EV's, have actually existed for quite awhile themselves. The only difference being they have NEVER WORKED, and they can't operate heavy duty vehicles in the first place. That's probably why 7 MILLION NGV's exist worldwide, compared to a handful of electrics.

    It is also true that the new Hybrids may be different. Great! Between them and NGV's, we can survive quite nicely. But at a cost of $45K (including its $15K REPLACEABLE battery pack, the Volt and its ilk are destined to be "boutique" vehicles throughout our lifetimes.

    And even without our present financial squeeze, TIME is one luxury not currently on our side when it comes to resolving our transportation dilemma. NGV's are ready to go, and the alternatives are only dreams in laboratories somewhere.

    In truth, I like it ALL. Drilling for oil, NGV's, hybrids, sugar (NOT corn) and switchgrass ethanol for transport. Along with wind, solar, hydro, nuclear and clean coal for electricity. Longer term, gas hydrates can do it all.

    But we've got to still be alive and kicking (which is now perhaps in doubt) just to get there!




    .
    Reply
  •  
    Oct 03 11:14 PM
    IXL,

    You're EXACTLY right about the hidden cost of mandates. They are the stealth regulations that may well bring our economy down with or without the bank bailout.

    I lived on Capitol Hill when they were just getting started 35 years ago, and it was easy to see where they would take us eventually. The evil genius behind them was that they only attacked one industry at a time, albeit almost indirectly. So voters never caught on, and they still haven't for the most part.

    Before our present economic malaise is over this time, however, we'll have to confront them directly if we're going to make any real headway.

    That is, if we don't go in the OTHER direction and regulate our economy out of existence entirely. At the moment, unfortunately, that seems to me to be more likely.

    (That's another reason why I like NGV's, actually. We've built them already, they're proven, and they fit into the present regulatory scheme. And Boone Pickens and Aubrey Mc Clendon are executing their plans to refuel them conveniently as we speak.)

    Reply
  •  
    Oct 03 11:16 PM
    Good luck to both you guys! I have a suspicion we'll need it.
    Reply
  •  
    Oct 04 09:36 AM
    Paul,
    So we're in agreement that all forms of alternate energy sources should be pursued. I think they should all be pursued for the simple fact that no one knows which new technology will work best.

    A new battery technology (Lithium Ion) is about to become available for electric cars. The lack of a practical battery has been the key factor that has made electric cars irrelevant for the last 100 years. So, I don't understand why people dismiss the Chevy Volt concept as a "boutique" vehicle. It is more likely that in 20 years, we will see that breakthroughs like this and others will have "electrified"... auto propulsion. It is already happening, although it may not be apparent to the general population yet.

    Also, cellulostic ethanol - truely renewable energy. Another power source with great potential. How many people know that all Brazilian vehicles are powered by ethanol derived from sugar cane (three times more productive than corn based ethanol) Or that electric power for the entire Island of Maui is derived from sugar cane?

    The right things are happening, but it will cost money to bring these new ideas to market. Good to debate them, but not dismiss them.
    Reply
  •  
    Oct 05 03:08 PM
    Plug-in Electric cars and solar rooftop power are the ONLY full solution to reducing oil and oil-based pollution.

    GM and the other Auto Alliance members just this year killed the Zero Emission Vehicle Mandate (California and 13 other states) all over again; clearly, without some strength of character in the government, the auto makers won't make a plug-in car.

    The oil industry has too much control over car makers, because oil is where the big money is.
    Reply
  •  
    Oct 05 03:13 PM
    We already have Nickel Metal Hydride, the onl y battery proven to last longer than the life of the car; but lead-acid works too. Lithium has not been proven to work in an Electric car, no Lithium EV has so far gone more than 50,000 miles without significant battery degradation.

    Yet we are still driving 2002 Toyota RAV4-EV with NiMH batteries, the same battery packs, but we can't buy replacement NiMH because Toyota stopped making them after Chevron funded a lawsuit that collected $30 million. Chevron bought control of the worldwide patent licensing rights from GM, and renamed GM-Ovonics to Chevron-Ovonics BAttery SYStems (cobasys).

    So why not NiMH??

    The fact that no supposed EV maker is using the batteries that work tells you that they are not serious and don't intend to make an EV that works.

    Lithium: higher cost, lower life, no junk value;
    NiMH: Chevron (an oil company) controls the patent licensing rights, none offered.
    Reply
  •  
    Oct 05 07:12 PM
    GM, Ford, and Chrysler should make a pack to postpone all advertising, with the exception of auto show offers, until March of next year. This way, when they do advertise, the economy may be better, especially if Obama wins, and people will be more likely to buy cars. Right now, they are throwing dealers and stock holders money away advertising cars and trucks people can not afford to buy right now.
    Reply
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