By on November 24, 2009

He looks alive. Picture courtesy

Think everything will be hunky-dory by, well, 2012? (Watch the  movie.) Fitch Ratings thinks the U.S. auto industry won’t get back on its feet anytime soon. Worse, the industry may be caught in an “airline-style” cycle of repetitive bankruptcies because of weak sales and a glut of production capacity. It is unusual for a U.S. airline (and many elsewhere) to not be in bankruptcy or not have been at some point.

Amongst the rating agencies, Fitch is the only halfway good one. They were the lone voice that had warned against the dangers of the collateralized debt obligations that brought the world to the brink of disaster.

In a report cited by Reuters, Fitch says that high fixed costs, the lengthy periods required to develop new products and chronic overcapacity will leave the industry “littered with failures—plants, product lines, brands and companies.”

Even in peak conditions, companies would not generate enough cash to repair their balance sheets, leaving them vulnerable to severe financial stress in downturns. Fitch calls it “boom and bust cycles without the boom.”

According to Reuters, “the Fitch report was one of the rating agency’s starkest outlooks yet on an industry battered by recession, slow-selling products and crushing labor and retiree costs.”

Fitch thinks 2010 may see a 7.8 percent rise in U.S. light vehicle sales to 11.1 million units. Even that will leave much of the industry bleeding cash in 2010. Fitch sees more government money going down the black hole in 2010. Fitch thinks hell will freeze over before GM or Chrysler could successfully access the equity markets. You will continue making payments to GM or Chrysler even if you don’t own their cars.

Fitch prognosticates that a number of suppliers that have emerged from bankruptcy will go belly-up again. “The manufacturers could also fall into the same pattern.” If there is a double-dip recession or spike in gas prices, all bets are off.

In the fourth quarter of 2008, capacity utilization for motor vehicles and parts stood at 53.6 percent, says the Federal Reserve (2009 numbers are scheduled to be published in March 2010.) In an industry where capacity utilization below 80 percent portends gloom and doom, using only half of the capacity is a guaranteed trip to Jonestown. The rest of the world is not much better off. According to a CSM Worldwide study, global capacity utilization is 65 percent: The plants of this world could make 86m light vehicles, 30m more than the market demands. The healthy thing to do would be to hand industrial policy to Darwin: Survival of the fittest. Instead, governments the world over, led by the USA, are keeping their barely used auto industries on life support, even if it looks more and more like preserving the body of Vladimir Lenin.

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16 Comments on “Carmageddon 2.0...”

  • avatar

    This is unscientific and based in nothing but opinion, but based on what I’ve seen, Ford only needs half of their NA engine plants.  Lots of empty, lights-off-and-gathering-dust space in those buildings.  I understand they may have a bit of a hard time selling them, but why not just capacitize a couple, move all the extra crap to the other ones, turn off the utilities, and let the vagrants steal the metal for scrap? 

  • avatar

    In an interview on a Bloomberg podcast last week regarding Buffett’s purchase of Burlington Northern, Tom Keene asked equity analyst Donald Broughton about Amtrak and passenger service and his reaction was thoroughly dismissive, saying that no one ever makes money: “moving people has historically been a bad business”.
    In the United States, the automobile culture has lost so much of its passion that driving is a chore for most people, a daily commute not unlike taking the train, and the car is an expense, an inconvenience and a nuisance.  When I fly I hear grey-haired lamentation over the loss of the golden age of airlines.  Does the airline industry’s lava-lamp churn portend tomorrow’s auto industry?  Does moving people, regardless of mode, always devolve into an unprofitable drumbeat of bankruptcy and government assistance?

    • 0 avatar

      A car is still the second-largest purchase that most people will make. There is still the opportunity to add some style and sizzle to a car…all things (quality, economy, safety, and performance) being reasonably equal, most people would prefer a car that looks attractive and stylish.

      The auto industry’s main problem is that it thought everyone was going to be buying vehicles that cost at least $35,000. Detroit also thought that they would be based on trucks.

      The run-up in gas prices, along with the bursting of the real estate bubble (which eliminated home equity loans as a source of financing), has ended that dream.

      The challenge is to provide affordable, stylish cars with something extra – much like the original Mustang or Honda Accord did. These cars should sell in the $16-24,000 range.

      Given the choice, most people would rather drive something that shows some thought and attention to detail in its execution, as opposed to something that looks like the manufacturer wants to punish you because you can’t buy anything bigger or more expensive (think Cobalt and Aveo).

      Right now the Honda Civic does the best job of meeting this challenge; having driven the Ford Fiesta this summer, I would say that Ford has a winner that doesn’t scream “cheap” despite a reasonable price tag and small size.

      While it sells at a higher pricepoint, the Toyota Prius also meets this challenge – it offers a high-tech drivetrain, excellent room and a distinctive look for a reasonable amount of money. The people I know who have one could have bought something more expensive, but didn’t.

    • 0 avatar
      Ralph SS

      While I think there is some truth to “In the United States, the automobile culture has lost so much of its passion that driving is a chore for most people, a daily commute not unlike taking the train”, there are still some key differences that public transportation.  Not being tied to a train schedule would be one of them.  Having your own confined space to travel in might be another.  I’m sure others could think of additional  reasons. 

      These things might be considered as being part of the reason America overwhelmingly chose this mode of transportation in the first place.  IMO, public transportation will not replace private automobiles until there is no other choice.

  • avatar

    Hey, Found on Road Dead has a real winner:
    Now Ford will make a comeback.

  • avatar

    I think criminalenterprise is onto something. Cars appear to be gaining somewhat of a bad rap sheet. For the many that powered the expansion of the industry on credit, they are now a significant luxury. Many people will find ways to manage with the existing car for longer, or one car rather than two or just without it altogether.
    As a luxury, people will migrate to quality. The “value” players will find it ever harder in mature markets.
    The auto manufacturers are holding out hope that the complete conversion of the developing economies to a fully fledged car dependence will save them. Good luck with that.

    • 0 avatar

      Did you and I read the same comment?
      I took criminalenterprise’s post to mean exactly the opposite; people view the car with as much hum-drum disdain as they view the bus, the subway, or flying coach.  It’s a necessity, a mode of transport undifferentiated from any other.  It’s the value players that will succeed in the mass market and the luxury players that will have difficulty justifying the price necessary to sustain their low-volume production.  As the mode of transport and the market for it matures there is progressively less about it that is aspirational and therefore the appetite for luxuriousness within that mode of transport diminishes.

    • 0 avatar

      @ cdotson
      Interesting and thanks – I just re-read it. I guess I picked up on “expense, an inconvenience and a nuisance”. I believe you too have an excellent point, and I expect you’re right about “value” players, but for the moment “value” is possibly seeing out an existing commitment, and then an excellent used car.
      Time will tell, but like Bunter1 suggests, the easy credit drive bubble won’t be returning anytime soon for a SAAR above 12m in NA.

  • avatar

    One item that comes to my mind is that a fair chunk of the peak SAAR was supported by bad credit practices, the kind that contributed to the mess we have seen this past year.  Even at that level we had gross over capacity.   I am not sure a return to a SAAR of 16-17 million would actually be a good sign…long term.
    Perhaps if governments, around the globe, keep propping up the corpses this will devolve into the cycle you guys are hypothesizing.

    Interesting thoughts guys.


  • avatar
    johnny ro

    In USA its often cheaper to keep a useless older car factory offline but still “live”  than close it unless you can run it through bankruptcy court and pay nothing. That is, when they are superfund toxic mess sites.
    It makes a certain sense to keep the jobs in-country, unless the subsidy is greater than the compensation paid to the workers. I envy them their pensions, if they can hang in there to collect.

  • avatar

    The fundamentals that sank the US car manufacturers are still in place.
    Prior to the emergence of European and Japanese competition, US industry management caved in to the UAW’s demands for what clearly became unsustainable worker pay and benefits.
    What a lot fail to recognize is that thereafter, the US manufacturers virtually ceded the production of CARS to the foreign competition.  TRUCKS kept them in good profit, largely because that half of total vehicle demand in the US was protected by a 25% import tariff.  In turn, cheap fuel enabled the American public to enjoy the use of the pickups and SUVs which fit their lifestyle very well.
    In the meantime, the US government rules on CAFE (corporate average fuel economy) enabled the car manufacturers to skimp on quality and features in cars they sold cheaply to comply with the rules while selling fuel-inefficient “passenger trucks” produced at high cost.
    With the emergence of high fuel costs coinciding with the collapse of the financial sector, demand for inherently low fuel mileage trucks collapsed.
    The rescue program undertaken by the US government illustrates the principle that simply throwing money at a problem will rarely solve it.
    The unions have accepted diminished entitlements, but there remains a large difference in labor costs between the foreign and domestic manufacturers.  The rules still do nothing to cause the domestic manufacturers to do the hard things to be really competitive. . . And the tariff wall is still there.
    So is there a bright future for the GMs and Fords of this world?  Don’t bet on it.

  • avatar

    And the looming jump in CAFE standards will take a bad situation and make it worse.  When CAFE first jumped in the late 70s-early 80s, it was at least accompanied by high fuel prices which temporarily allied CAFE and consumer demand.  And still, both Chrysler and Ford nearly went under.
    Now, the industry is weak to start with, fuel prices are relatively low and CAFE is about to jump.  Meaning that US manufacturers will have to start re-engineering their platforms for more mpgs, even if the result is not what consumers really want.

  • avatar

    The population projections I’ve seen show us adding about 90 million people by 2050.   How will they be transported if not by car?    We haven’t even begun to get serious about mass transit.  

  • avatar

    And even if everything else was equal, the N.American car industry never came to grips with the decline of the baby boomer demographic. In the 90s, the boomers were in their prime earning years; with lots of money and likely to own two cars. When these same people retire, guess what? They typically own one car, and that one car lasts longer since the now retired boomers don’t drive as much.
    David K. Foot warned Canada in the 90s that overcapacity problems were developing in the auto industry and would be unwise for Ontario to become reliant on auto manufacturing. Nobody listened.
    From a Canadian perspective, this sort of total policy planning failure is just another example of how Canada’s industrial development plan in general has totally failed. But instead of, y’know, demonstrating some leadership and actually admitting this, Canadian leaders are obsessing over embalming procedures. It’s certianly easier cheaper to look after corpses then the next generation, that’s for sure.

  • avatar

    It will be a long time, if ever until car sales once gain go above 15M SAAR. Even if they do the days of the domestics selling Tahoes, Grand Cherokees and Expeditoins with 10-15K of gross margin shall never return.

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