2008 sure to be 'a crummy year' for automakers

In a year when much seems uncertain, including whether the USA will have a recession, there's no question that 2008 is going to be tough for the auto industry.

It's going to be tough on sales, which could hit a decade low. It'll be tough on production, which hasn't been this weak since the recession of 1992.

And Paul McCarthy, a director at PricewaterhouseCoopers' Detroit group, thinks it'll be particularly tough on domestic automakers, because in tough times buyers are likely to choose brands they perceive as having the best reputations for quality — typically, Asian brands.

"It's going to be a crummy year," says Michael Robinet, vice president of global vehicle forecasts for CSM Worldwide. The only question, he says, is "how crummy it's going to be."

Light vehicle sales — almost anything smaller than a commercial delivery van — hit 16.1 million in 2007. Sales have been creeping down since a high of 17.4 million in 2000, and are expected to be somewhere in the mid-15-million range this year.

Part of the decline can be blamed on the economy. Consumers, shaken by falling home values and the credit crunch, aren't feeling confident enough to add another large payment into their monthly bills.

Add gasoline prices, which have been around $3 a gallon the past year, and consumers are feeling less than rosy about buying new cars.

But the other factor affecting sales is the domestic automakers' relatively new strategy to slash production when sales drop, rather than to keep producing and prop up sales by pumping in rebates and low-interest loans.

In the past few years, automakers have dealt with sales dips by piling on incentives. Immediately after the Sept. 11 terrorist attacks, General Motors gm pre-empted a drop in sales by offering $3,000 rebates and 0% financing. It worked. Industry sales jumped 14.4% that October, and through continued use of incentives, sales never bottomed out. Until now.

And this time, automakers have decided it's better to forgo sales than to lure huge numbers of buyers with rebates and special deals, analysts say.

"The time we could trade volume for price is over," says McCarthy. "In the last 10 years, we haven't had to think about that. Every company is looking at recession and figuring out what it could look like for their company."

Mike Jackson, CEO of AutoNation an, the country's largest dealership operator, says he is watching the 2008 economy "very closely." Declines in housing always end up affecting the car market, he says.

Right now, "We have a housing depression and an automotive recession," Jackson says.

"A lot of people have missed the level of downturn in the auto industry," he says. That's because the overall sales number, which includes sales to rental, corporate and government fleets, masks the weakness. Retail sales to individual buyers, he says, are down 11% in the past two years, while sales to multi-vehicle fleet buyers soared 17%.

Fleets are much less profitable than retail sales.

In two major automotive declines in the early 1990s and early 1980s, production dropped 23% and 32%, respectively, from the peak of the market to the trough, McCarthy says. If similar patterns held, North American auto production could fall to 12 million to 13 million this year, down from 17.2 million during the sales peak of 2000.

Some are more optimistic. General Motors CEO Rick Wagoner says he expects 2008 will be about the same as last year. The first half will be worse than the second half, he says.

"It's been interesting. With the steady bad news, sales have held up pretty well," Wagoner said in an interview at the North American International Auto Show. And as the Fed talks more about lowering interest rates, Wagoner says, sales could perk up.

For the past five years, sales have been below GM's predicted trend line. Now GM economists are debating whether their predictions were off and whether sales will "snap back," Wagoner says.

Still, underscoring industry ills, Wagoner on Thursday gave details of previously announced cutbacks. He said that GM will offer buyout packages to another 42,000 workers this year, which will help reduce labor costs by an additional $1 billion by 2011.

Luxury automakers seem unconcerned.

Johan de Nysschen, head of Audi's U.S. unit, says the brand won't founder because wealthy people are less affected by economic downturns. And Daimler dai CEO Dieter Zetsche says that he agrees with current assessments of where the market is heading, but that Mercedes-Benz customers will continue to buy.

"We are confident that we can add to our sales number," he says.