Auto analyst: 2008 to be 'tough year'

Auto analyst: 2008 to be 'tough year'
Saturday, January 12, 2008
Auto analyst: 2008 to be 'tough year' Sharon Terlep and Eric Morath / The Detroit News
U.S. auto production will drop below 10 million cars and trucks this year for the first time since the 1992 recession, a top auto industry economist said Saturday.
Sean McAlinden, vice president of research at the Center for Automotive Research in Ann Arbor, painted a grim picture of American manufacturing in the years to come during a presentation leading up to this week's North American International Auto Show.
He predicts the market share of Detroit's Big Three automakers will fall to about 45 percent of the U.S. market by 2011, down from just over half in 2007. Despite deep production cuts, he said, domestic carmakers continue to operate too far below production capacity.
"We're sort of turning into Mexico or Canada in terms of having foreign companies running our industry," McAlinden said.
The U.S. auto industry has seen employment levels drop to about 838,000 from 1.1 million in 1999, a 25 percent decline. The impact on Michigan has been far more dramatic. The state has lost 136,000 of 316,000 blue- and white-collar automotive jobs since 1999.
The drastic job reductions come even as foreign-based car makers ramp up production in the United States. McAlinden predicts companies based overseas will actually build more cars in the United States than the Big Three within the next five or so years. But for each job added by an international automaker, he said, 6.8 jobs on average are slashed by the Big Three.
A landmark new labor deal with the United Auto Workers will help Detroit's car companies compete with Toyota Motor Corp. and other Asian rivals. But even after massive employee buyout programs in 2006 and 2007, General Motors Corp., Ford Motor Co. and Chrysler LLC were still below plant operating capacity, he said. In 2007, he said, GM's U.S. factories operated at 85 percent of capacity, Ford at 78 percent and Chrysler at 81 percent.
"You don't make money in this business until you're operating at 90 percent," he said.
Shrinking production schedules will put intense pressure on auto parts suppliers this year, said Michael Robinet of CSM Worldwide, an automotive forecasting firm in Northville.
Robinet expects North American auto production, which includes Mexico and Canada, to drop to 14.4 million units in 2008 from 15.1 million in 2007. At least a slight rebound is likely in 2009, he said.
"It's going to be a tough year for everyone in '08," he said. "If a supplier can survive this coming year, there's a good chance they've got a long-term future."
The analysts spoke as part of a day-long seminar hosted in Detroit by the Foundation for American Communications.
In other news out of Saturday's presentations:
McAlinden weighed in on the impact of the 2007 labor deals with the UAW. He believes GM managed to win the best deal of the Big Three. GM, with the largest and oldest workforce of the domestic automakers, has the most to gain from a two-tier wage system that allows the companies to replace many senior workers with lower-paid new hires.
By 2011, McAlinden said, GM will have 20,000 lower-tier workers, while Ford will have 3,950 and Chrysler will have 4,580.
"GM won these negotiations," he said.
Sales of used cars are expected to fall in 2008, but at a lower volume than the 300,000 to 400,000 projected decline in new car sales, said Tom Kontos, executive vice president of ADESA Auctions, the nation's second largest used car wholesaler.
Even a 300,000 drop in used car sales, would reflect a less that 1 percent change in the market. In 2007, 41.4 million used cars were sold, he said. Slowing demand could result in used car prices falling by 1 or 2 percent.
The market, as typical, is relatively stable, but the type of used vehicle buyer is changing.
Economic headwinds and difficulty finding financing mean some new car shoppers are moving into used cars to meet their transportation needs. But at the same time, typical used car buyers are likely to stay in their vehicle longer -- especially if they owe more money on their auto loan than the vehicle is worth.
Ford and GM's decision to sharply curtail sales to rental fleets -- a major source of used cars -- is nearly being made up for with increasing rental sales from Asian automakers, Kontos said.
"While some cars, like the Ford Taurus, may have been too heavily in fleet, Asians, like Hyundai, see it as a way to introduce customers to their cars," he said.
The debate over fuel economy standards -- a central point of last year's energy bill -- may have only begun, said Brett Smith, assistant director of manufacturing and technology at the Center for Automotive Research.
While lawmakers have passed legislation to increase fleet-wide fuel economy standards to 35 miles per gallon by 2012, regulators are just now determining how the law will be enforced.
Smith said enforcement is likely to be a complicated formula that will allow automakers to trade credits, new rules based on a vehicle's size, and incentives to make cars and trucks ethanol-capable.
It's possible that Honda Motor Co.'s fleet standard could be close to 40 miles per gallon, while GM's could be closer to 32 miles per gallon. That because since Honda sells a higher percentage of smaller vehicles, it will be expected to have better overall fuel economy.
It is likely, Smith said, that per-model fuel economy will be tied to a vehicle's "footprint," or its width and length. Smaller vehicles will have to meet tougher standards.
"The Smart car may not be able to be sold here because it won't have high enough fuel economy for a car that small," he said. "There remains a lot of uncertainty and that's very difficult for automakers to plan around."
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