Sunday, November 18, 2007

Auto Sales Slip

Sources: Reuters, Wall Street Journal, Bloomberg

American automotive sales are predicted to suffer its biggest drop in nearly fifteen years. The weakest forecast is for a possible 9.4% drop in sales. The prediction was made by the top three investors in the automotive industry: Jerry York, an adviser to billionaire investor Kirk Kerkorian; financier Wilbur Ross; and Thomas Stallkamp, a former Chrysler president. Light auto sales could slip to 15.5 million or less next year, marking the second consecutive year sales dropped. 15.5 million would be the lowest level of sales since 1998. Others predict that auto sales could slump to 14.5 million units—the lowest level since 1993.

This drop would be sector-wide. This grim picture can be attributed to the housing credit disaster. The credit crunch, drop in home values—all paint a picture of some panicked consumers who are unwilling to make big-ticket expenditures. Stallkamp states, “I think the mortgage issue is going to freak people out and that will hit pretty hard in '08." Ross calls it a “sort of poverty effect from house prices going down.”

All of the major automakers agree that a drop is imminent, and are better prepared for a sales drop. Most automakers have cut production in their factories, and thus are better equipped for the lower demand. Analysts predict that there will not be the massive discounting seen in the post 9-11 era of car sales. Furthermore, carmakers will be adjusting production to meet the existing demands. With fuel prices the way they are, Toyota is likely to produce more Camrys, Corollas, and Yaris, instead of the fuel-thirsty 4-Runner. Chrysler is, for example, is preparing a restructuring plan that would cut its work force, streamline its product offerings, and eliminate dealers.

Question: The Big Three automakers have fallen behind some of the top foreign automakers in sales and profitably. What can they do, in the wake of this drop in sales, to regain some of the dominance they once enjoyed when the “slippage” is over?

1 comment:

Anonymous said...

KENN, in a nutshell its not going to happen. The US auto industry buried its head in the sand for so many years that its clueless of how to operate in a global economy.

Its latest approach of trying to buy off the foreign competition is a failure.

In the bigger picture, the USA will lose its number one position in global economics, not because of international terrorists, but due to economic suicide, driven by the insatiable appetite for higher quarterly profits at any cost.