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Friday, January 9, 2009

Automakers Fear a New Normal of Low Sales

Rebecca Cook/Reuters

A sign removed from a former Ford dealership in Warren, Mich. It planned to reopen as a used-car business as new-car sales fall.

By BILL VLASIC and NICK BUNKLEY

DETROIT — The historic collapse of the new-car market dragged on in December, raising questions of whether the auto industry will ever again have sales levels that it took for granted just a few years ago.

The across-the-board decline of 35 percent, reported by auto companies on Monday, is certain to put more pressure on the fragile finances of several manufacturers, particularly General Motors and Chrysler.

G.M. and Chrysler received emergency federal loans last week to stave off bankruptcy while they accelerated their reorganization efforts.

But unless consumers change course and return to vehicle showrooms, the entire industry will be forced to make sweeping adjustments to cope with declining demand.

After several years of sales topping 16 million vehicles, the United States market plummeted to 13.2 million cars and trucks sold in 2008. Analysts expect another sizable decrease this year and do not predict a year with 15 million in sales until 2012 or later.

“After an era of excess indulgence, we’re now entering a prolonged period of conservation,” said John A. Casesa of the consulting firm Casesa Shapiro Group. “Trading in a car every three years is a luxury that the average American can no longer afford.”

The dismal sales reports for December punctuated the worst year for vehicles sales since 1992. Sales dropped 31 percent at G.M., 32 percent at the Ford Motor Company and a stunning 53 percent at Chrysler, a unit of the private equity firm Cerberus Capital Management.

Foreign automakers hardly fared better, with sales plunging 37 percent at Toyota, 36 percent at BMW and 35 percent at Honda.

For the year, industrywide sales declined by 18 percent — the worst year-to-year drop-off since the early 1970s.

The impact of the shrinking market could be felt for years to come, as automakers will continue to cut production and employment, and reduce the number of new vehicles they bring to the market.

“With these declines in revenues, you will see research and development budgets cut,” said Jesse Toprak, chief auto analyst for Edmunds.com, a Web site that offers car-buying advice. “We are going to have fewer new vehicles and less variety for at least the next couple of years.”

Mr. Toprak is forecasting sales of 12.4 million vehicles this year and 13.5 million in 2010. He said the chances of the industry reaching annual sales of 16 million were slim for the foreseeable future.

“The question is, What will be the natural level of demand in the U.S. market when the economy recovers?” he said. “Based on our best guess, it is probably in the range of 14.5 million to 15 million.”

Auto executives said on Monday that the industry had little chance of improving in the first half of 2009 because of a continued lack of available credit for prospective car buyers and a profound lack of confidence in an overall economic recovery.

“The first quarter is going to be bad no matter how you look at it,” said Emily Kolinski Morris, a senior Ford economist. “Once we get into the second quarter, we’ll have a better idea.”

G.M.’s chief market analyst, Michael C. DiGiovanni, said the automaker was predicting industry sales of 10.5 million to 12 million vehicles for the year.

While the Bush administration approved up to $17.4 billion in loans to G.M. and Chrysler, analysts say they expect the Detroit auto companies to need longer-term assistance from the incoming president, Barack Obama.

“The internal problems of the Big Three are so great, there is no way they can survive without government help for several years,” Mr. Casesa said.

Both G.M. and Chrysler have to submit reorganization plans to the Treasury Department by mid-February as a condition of their loans.

“We have prepared our restructuring plan at a worst-case scenario,” said James E. Press, a Chrysler vice chairman. “We’re hoping for the best, but we’re prepared for the worst case.”

Mr. Press said Chrysler was operating as if the severe fall in demand in recent months was the “new reality” for an industry that had grown accustomed to nearly unfettered growth since the mid-1990s.

The industry thrived on cheap credit that allowed automakers to offer low-interest loans and rock-bottom lease payments to encourage consumers to regularly trade in and upgrade their vehicles.

As a result, American consumers went on a sustained buying spree for new cars, trucks and S.U.V.’s.

In 1970, less than 6 percent of American households owned three or more vehicles, according to the Department of Transportation. By 2000, that percentage had jumped to 18.

More than 244 million vehicles were in operation in 2006, far outnumbering the 202 million licensed drivers in the country, according to the most recent federal statistics.

Auto companies fed the growing appetite for vehicles by broadening their lineups with new products, like car-based crossover vehicles, inexpensive sports cars and a wide array of luxury models.

Companies were forced to redesign their cars more frequently to keep up in the race to put ever-fresher products in dealerships.

“In 1988, the average age of a car in a U.S. showroom was 4.1 years,” said Mr. Casesa, referring to the time that lapsed in model redesigns. “Today it is 2.9 years, which is a tremendous difference.”

With annual sales of 16 million as the norm, the industry expanded its infrastructure to meet demand.

Even though the Detroit automakers have been shutting excess factory capacity and shedding jobs to cut costs, their foreign rivals have been adding new plants in the United States to make up the difference.

Now, with sales plunging to levels not seen since the early 1990s, the industry will be forced to cut back significantly on product development.

Analysts also predict that the era of expansion of foreign companies in the United States is probably over, as well.

“So many foreign transplants came so quickly because they had visions of grandeur in their eyes,” David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., said. “Now they’re saying, ‘Oh my, what have we done?’ ”

Besides the drop in demand caused by the tight credit and a weak economy, the quality of vehicles themselves has improved to the point where consumers do not need to replace them as often.

Twenty years ago, the median age of cars and trucks in use in the United States was about six years. Now the typical vehicle on the road is nine years old, according to federal statistics.

“You may not want to drive your car for 10 years, but you can if you need to,” Mr. Cole said.

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