By Scott Jacobs


When the bottom fell out of the American car market last May, it was widely viewed as God’s revenge on America for our dependence on foreign oil.

The price of oil was headed to $147 a barrel, and Detroit automakers were taking heat for their failure to produce the kind of fuel-efficient hybrids their foreign rivals like Honda and Toyota committed to years earlier.
When the last auto sales figures for 2008 were tallied in January, however, it turns out Honda and Toyota did almost as poorly as Chrysler, General Motors and Ford. Americans weren’t switching to more fuel-efficient cars. They simply stopped buying cars altogether.

17 Million Cars A Year

At the height of the American car market in 2000, Americans bought 17.4 million cars and “light trucks”––a category that included everything from pick-ups to SUV’s––and foreign automakers were rushing to build assembly plants in the United States to fill the demand. Toyota and Honda led the way, but Mitsubishi, Nissan, BMW, Volkswagen, Subaru, Mercedes, Kia, and Hyundai all wanted new factories here, even as overall car sales were declining.

For most of the last seven years, annual car sales hovered in the 16 to 17 million range. With their market share shrinking, Ford, Chrysler and GM tried a series of marketing gimmicks––zero percent financing and employee discounts––that only added to their losses. As a result, none of the Big Three has made a profit in the last four years.

Since 2004, they have, in fact, lost a combined $114 billion (so far) on their worldwide operations. The bright spot on their balance sheets are overseas sales in Eastern Europe, South America and Southeast Asia. But on their home field in the United States, they are tanking.

Nobody is giving management awards to the Big Three. In an industry that demands style and innovation, they tolerated too many mediocre brands for too long. They missed the boat on hybrids. And even though they knew there were too many dealerships in America (20,770) and their union contracts saddled them with outrageous costs––like the “job bank” that paid workers 80 percent of their salaries during layoffs––they lacked the gumption to take on the entrenched interests, the state legislatures and unions, that perpetuated them.

Red Herrings

But many of the problems facing the Big Three today are not of their making, or the unions, who take too much criticism for their role in this crisis.

One widely reported fact, for instance, is that non-union workers at Honda and Toyota plants earn an average $45 an hour while United Auto Workers at the Big Three get $72 an hour. That figure is attained by adding the hourly wage to other benefit costs like retiree health care and pensions.

After ten decades in the business, with hundreds of thousands more retirees than their new competitors, the Big Three have substantial “legacy” costs foreign carmakers don’t. These are benefits that employees who labored 40 years on the assembly line under previous contracts already earned. The difference between the starting hourly wage paid to a new employee today at union or non-union plants is only a couple dollars. Legacy costs account for most of the rest.

Another red herring is that company-paid health care benefits add $1,500 to the cost of every vehicle made in America. Foreign cars, this argument goes, can be sold cheaper because health care is provided free by the government in the country where they are manufactured.

This argument breaks down when you realize that building cars in foreign countries (with the notable exception of Canada and Mexico) and shipping them to the United States is an expensive proposition. That’s why over 50 percent of foreign cars sold in America are made in America. (In the case of Honda, it’s 75 percent of the cars and 83 percent of the trucks.) And health insurance in these American factories is provided pretty much the same way as in other companies, with the employer paying its share of the costs.

New Is Better

The biggest advantage foreign carmakers have (besides, arguably, better cars) is their factories. Competition among states to attract auto industry jobs with tax breaks for new assembly plants cut both their construction and operating costs. New auto plants are inherently more efficient than old ones, even those that have been retrofitted, and are designed to build multiple platforms interchangeably. They have the latest robotics on the assembly line. They take advantage of advances in systems technology, energy conservation measures and supply chain economies.

They are also designed to scale up or scale down to a smaller dealership networks, which was initially a drawback when foreign brands were trying to gain market share, but now presents them with fewer headaches.

Who Needs Cars

You may not need a new car, but America needs you to buy one. Car purchases are second in size only to buying a new home. An average of 18 percent of the sales tax collected by states derives from new car sales. License plate transfer fees, city stickers, toll booth revenues and any number of other vehicle fees, not to mention gas taxes, keep local and state governments operating and underwrite road repairs and construction.

The impact of a slowdown in auto manufacturing ripples through the economy like a tidal wave. The average automobile has over 2,500 pieces, most provided by outside suppliers. One estimate has it that one of every five manufacturing jobs in America is auto related. The same companies that manufacture crankshafts for cars also make parts for construction equipment, farm machinery, lawnmowers, and any number of other engines, large and small. Without car parts to stabilize their production process, they suffer as much as the auto makers, without the cash cushion the Big Three have to get them through.

The first warning sign of the severity of this depression came last June when Ford announced it was shutting down all the assembly lines for its iconic F-150 truck.

The F-150 sits atop the auto sales charts. It not only dominates the light truck category; it has for 27 years been the top selling vehicle of any make or model in America. In June, Ford discovered it had 180,000 of them sitting unsold on dealer lots, so it pulled the plug on manufacturing new ones until the old inventory sold. But the trucks didn’t sell.

After the credit markets seized up in September, neither did the cars. New car sales in September were off 27 percent from the year before. They dropped another 32 percent in October, 36 percent in November, and 35 percent in December.

By the end of 2008, General Motors was reporting it sold fewer cars than in any year going back to 1959. Ford matched its previous low set in 1961. And Chrysler, poor Chrysler, was selling less than half the cars it did only a year before.

We Are Not Alone

American carmakers weren’t the only ones to suffer from America’s sudden lack of self-confidence. The carnage spread from the gas guzzling pick-ups, vans and SUV’s to their foreign competitors. Toyota sales were off 30 percent for the year. For the first time in 50 years, the Japanese automaker declared a $1.8 billion loss for the year. By December, even Toyota’s Prius hybrid was selling 45 percent fewer vehicles than the year before.

Most of the major automakers responded to the drop in sales not only with layoffs, but complete plant shutdowns. A week in November, three weeks in December, another two weeks in January. As if the 500,000 a month rise in unemployment claims in November, December and January weren’t bad enough, even those workers who kept their jobs in the auto industry were idle roughly a tenth of all last year.

Off The Cliff

The January car sales numbers were not reassuring either. General Motors sales fell 49 percent, Chrysler, 55 percent, Ford, 40 percent, and Honda and Toyota, at least 30 percent.

On an annualized basis, the January numbers project out to total car sales in 2009 of 9.6 million vehicles versus 16.1 million only two years ago.

The Chicago Auto Show

At the Chicago Auto Show last weekend, Jim Farley, the global marketing chief of Ford, announced (with more hope than logic) that the American car market is “bottoming out.” His reason for his optimism is that that used car prices actually rose in January. If you are looking for the bottom on the car market, used cars are a good place to start. But they don’t create jobs.

The floor of The Chicago Show was filled with optimism. Every car on display, it seemed, was suddenly a green machine. Chevrolet had its Volt, a $40,000 version of an electric car that you too can buy––in 2010. Ford introduced its new line of hybrids, but focused on design improvements that pushed fuel efficiency closer to 30 miles per gallon. A spokesman for Toyota said the company is proud of its leadership in “green” cars, but he admitted that hybrid car sales will ultimately account for only 20 percent of Toyota’s American car sales.

Buried somewhere in the back of Toyota exhibit was the Toyota Tundra truck, the feature attraction at last year’s show. Currently out of favor with consumers, the Tundra is a key to Toyota’s American sales strategy. Selling one Tundra truck produces more profit than five Priuses. The money in the automotive industry is now, as it always has been, in light trucks and SUV’s where American consumers still believe they get more bang for their buck.

All the brouhaha in Washington over President Obama’s decree that Detroit automakers must make more fuel-efficient cars will hasten the incorporation of energy-saving technologies in the larger vehicles. But we won’t know that America is recovering from this depression until the F-150 regains its dominance on the car sales chart. That will signal that America is working again––and needs a reliable vehicle to help us do our jobs.

The Upside Down Equation

The prospect that America will buy only 9.6 million cars this year paints a bleak bordering on catastrophic portrait of the decade ahead.
But it is hard to imagine it will come true. One reason is that––for only the ninth time in 100 years––more cars are being scrapped than are being sold.

Last year, Americans sent about 13 million cars to the junkyard. That’s one million fewer than the year before––a clear sign we are holding onto our junkers longer–––but also a sign that people who are holding onto their old vehicle longer will soon need another one. In marketing terms, this is called pent-up demand.

Over the last decade, the American population grew by 10 percent from 272 to just over 300 million people. The fleet of vehicles on the road grew by the same amount in the same period. 2008 is the first year that it has shrunk.

America may not be a rapidly expanding auto market like China and India, but it is not shrinking. Sixteen million cars a year is not a bad long range projection for car sales in America, no matter who makes them.

And that still makes us the #1 car market in the world.

Unfortunately, Cars Won’t Get Cheaper

The discount gimmicks have run their course. The labor contracts have been renegotiated (or soon will be). You might think that cars, like houses, will fall in price as the depression worsens––and you will be wrong.

The underlying cost of manufacturing a new car is not labor, or advertising, or excessive management compensation. It’s the cost of the energy and raw materials that go into cars, mostly iron and steel, but also nickel, cadmium, coal, aluminum, plastic, rubber, and other commodities that go into manufacturing the parts. That is determined these days by a global market driven by the needs of manufacturers in China and India to feed their own production plants.

One of the key barometers of the cost of a car in America is the cost of scrap iron from old cars crushed and bundled into cubes for melting into new ones. Only four years ago, the price of scrap iron was $110 a ton. Today, it is $300 a ton. A year ago, it reached $950 a ton.

China and India are exerting extreme demands on the global market for the raw materials to fuel their own growth and it is reflected in commodity prices. Although the bling-bling of new technologies (like that cool rearview parking cam that appears on their GPS screen) drives consumers to the showroom, bling-bling doesn’t really matter when you are pricing a new car.

An automobile running at 80 miles per hour torques out its engine at 4500 RPM and no automobile in the world would take the risk of using a supplier who doesn’t consistently make parts that meet that critical specification. In America, that guarantee is supplied by meeting stringent international automotive quality standards. Those companies who have taken the time to achieve this certification are in the cat’s bird seat when the economy recovers.

Unfortunately, making safe cars costs money. There are no more corners to be cut. So why buy a new car?

Why Buy A New Car

If you never had one, you probably don’t need one. If you have one, you’ve probably noticed that new cars are better than old ones. Whether you afford one is a chicken and egg question. The Obama stimulus package will go a long way toward answering it. The answer depends on whether you have a job, whether you will have a job in the future, and whether you have confidence that America is headed in the right direction.

Cars, trucks, vans and SUV’s are the vehicles we use to conduct business and transport our families to the places we want to go. The stimulus package is the government’s attempt to create new jobs and/or retain old ones. But instilling confidence in the future is a trickier proposition.

Buying a new car is an individual decision made by people who think they can use it to build a better future. It isn’t saying “Yes we can.” It’s saying, “Yes I can.” That’s when the car market will rebound.

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