By David L. Brown
What lies in the future for the American automobile industry? I am a realist now, not a pessimist, so let’s look at the situation from a realistic point of view.
I note that sales of American automobiles and light trucks have dropped by somewhere north of 40 percent since last year. That was as of November, and December isn’t likely to improve that record. That is a substantial drop, and truly bad news for the auto makers.
One might like to think that with a little help they can get back on their feet in a few months and begin to sell new product again, get factories rolling, improve their cash position. But… There are some problems with that.
For one thing Detroit has continued to build cars and light trucks that they cannot sell. That might seem like a poor business decision, but it wasn’t really a current decision at all because years of contract negotiations with suppliers, unions and others set them up so that it is almost impossible to stop making cars that don’t sell. Union workers get paid whether they work or not. Suppliers are contracted to deliver parts and components to assembly factories on a just-in-time basis. Those supplies keep coming, so the auto companies are virtually forced to keep making the vehicles.
I read a report recently by someone who has business contacts with auto company facilities. He described how as he drove to a GM plant he noticed that every abandoned shopping center or unused parking lot for miles around was packed with new, unsold cars. The same story can be seen anywhere that cars or light trucks are made. Dealer lots are also overflowing with inventory and the seriousness of the situation can be measured by the offer I received a few months ago to buy a brand-new 2008 Dodge quarter-ton pickup for 50 percent off of the MSRP. Half-price sales on expensive-to-produce items such as pickup trucks hint at an almost unimaginable level of desperation.
Here is a graph showing market share of U.S. auto sales by the top five manufacturers for the ten year period through November (credit: Wall Street Journal):
It is sad to report that the blue line represents GM sales, the orange line is for Ford, and the maroon line is for Chrysler. All zooming steadily down. But what about the other two lines? Sorry, but the green one is for Toyota and the brown one at the bottom represents Honda. The U.S. auto industry has been sinking steadily for more than a decade while Japanese companies took an increasing market share.
Now here is the graph for all U.S. auto sales for the past year, including imports and cars made in America by foreign companies:
The blue bars indicate sales of cars and the tan bars represent light trucks. Notice the vicious downward trend starting about last June or July. Keep in mind that this trend is in spite of price reductions of as much as 50 percent off of list. The decline began when the gas prices went through the roof, but the high price of petroleum and other events were also creating other problems for the auto market. Credit began to dry up, causing the suspension of lease programs. Money for purchase loans began to be pulled back. And perhaps worst of all, consumers began to realize that the resale or trade-in values of their present vehicles were so low that they couldn’t afford to get rid of them.