Jan 8, 2008

Will a Vehicle Sales Recession Kill Domestic Carmakers?

As we reported yesterday, a major market forecasting firm is one of many that suggest that car sales will be sluggish this year. CSM Worldwide is forecasting light-vehicle sales to descend to a 10-year low of 15.8 million units in 2008, and it begs the question what will this mean to the domestic automakers which have already been downsizing in every way imaginable, including sales expectations?

"Old-Detroit thinking is finally collapsing to a new era that places emphasis on smaller, more profitable quantities and resuscitating ailing brands," said Joseph Barker, senior manager of North American sales forecasting for CSM Worldwide.

At the conclusion of 2007, combined General Motors, Ford and Chrysler sales have fallen by 2.1 million vehicles over the past five years. Detroit automakers are forecast to sell 500,000 fewer vehicles in 2008 than in 2007, while Asian companies are expected to expand by 100,000 units to capture 41.5 percent of the market. In response to weaker U.S. market conditions, import trends and expected inventory management adjustments, CSM is forecasting North American production to decline to 14.4 million units in 2008, the lowest level in nearly 15 years.

To deal with the new reality, Barker suggests that the Detroit automakers will make further reductions in sales to large fleet operators like rental car companies, make measured use of incentives and place less importance on market share. The Detroit Three have built long-range business plans around richer average transaction prices, stronger residual values and wealthier brand equity. This fundamental change in business strategy will shrink sales levels in the near term, but it is hoped to sculpt each into leaner, healthier auto companies in the long-term.

"Though most market metrics will be battered next year, our sales outlook is not as pessimistic as the consensus," said Barker. "The unemployment rate is low, additional interest-rate cuts are likely, and GDP growth continues to exceed expectations. We also cannot underestimate the resiliency of consumers."