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Chrysler, Ford and GM have taken steps to reduce pickup truck output, but more may be needed as the market is likely to soften further in 2008.

Insider: Don’t Batten Down the Hatches

Those who thought 2007 was a difficult year in the auto business should prepare for another battering, as 2008 is likely to be even worse.

For Detroit’s automakers, 2007 is a year better left in the past. Overall U.S. light vehicle sales ended the year at the16.2 million-unit level, slipping from the 16.5 million-unit pace in 2006. Detroit’s share of the market hovered at around 50%, down more than 2% from a year-ago. The slow and painful decline—sales fell for eight out of the twelve months—is unlikely to abate in the New Year as prognosticators estimate 2008 U.S. industry sales will likely fall another 3% - 4.5% thanks to a number of headwinds outside the control of automakers and their suppliers.

The most significant problem continues to be the weak housing market, which just gets worse as time goes on. Median home prices in the U.S. declined an average of 1.5% in 2007, according to the National Association of Realtors, while personal debt increased an average of 5.25%, according to the Federal Reserve. These statistics do not bode well for the U.S. auto industry in the coming year as home construction and consumer borrowing are likely to decline.

A recent projection by the White House economic office pegs U.S. economic growth at a tepid 2.7% pace in 2008, down from earlier projections of a 3.1% growth rate (the Federal Reserve expects economic growth to slow to as little as 1.8% during the year). Amidst all of this, the drawn-out Presidential election is likely to remain front-and-center as the field gets narrowed during the first quarter and the rancor builds through to November, causing massive distraction in the psyche of the American consumer, who will likely be bombarded with mixed messages on the standing of the U.S. economy.

All these countervailing winds and the resulting constant stream of bad economic news will likely result in more layoffs, plant idlings and incentives in the first half of 2008. The Detroit Three have already taken action to stave off the expected weakness in truck sales due to rising gas prices and weaker demand from the construction sector, idling a majority of pickup truck output for the month of January, while signaling future production slowdowns in the months to come. Demand for trucks and SUVs—the profit centers of the Detroit Three—will be further negatively impacted by continued increases in gasoline and diesel fuel prices. This undoubtedly will put additional downward pressure on profits. Thankfully, the new national U.A.W. contract provides Detroit’s automakers with additional leeway when it comes to temporary idling of plants to adjust for inventory, so the financial impact will not be as devastating as it otherwise could have been.

The supplier industry, which has had to take the brunt of several years of automaker cutbacks, is likely to feel the pressure again. Pinching every penny is going to be the order of business for the foreseeable future, although automakers seem to be maintaining their commitment to robust levels of investment in new product, which will be sorely needed as competitors fight for incremental gains in market share. What needs to be avoided is overreaction. Detroit’s automakers should not fall back on the tired business model of cowering into a corner and waiting for the storm to pass, nor should they bow to the pressures of Wall St. analysts to eke out a few extra pennies on the balance sheet. The old adage “you need to spend money to make money” needs to be embraced in this dog-eat-dog world.

Failure to look beyond the next quarter could mean the difference in survival and failure at this critical juncture in automotive industry history. Now’s the time for true innovators to step up and show the world a future that’s not all gloom-and-doom. The U.S. market will undoubtedly rebound—although when is the big question—and those who are willing to make the difficult decisions to continue to invest in lean times are the ones who will reap the biggest benefits when the turnaround comes. 

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