Auto sales outlook gloomier
The storm clouds over next year's auto sales are getting thicker by the
day -- and more than just automakers are preparing for a dampened 2008.
From auto suppliers to car dealers to Michigan's economy, if auto sales
fall 500,000 or more units, as many forecast, the impact will be wide
and deep, including likely consolidation of automotive suppliers, fewer
dealerships and lower state tax revenue.
And the impact will be felt beyond the auto industry. Fewer people will
eat out or travel to northern Michigan, and they'll curtail their
spending at local retailers to try and weather the downturn.
Last week, Global Insight Inc. lowered its 2008 U.S. light vehicle sales
projection to 15.5 million units -- among the lowest forecasts to date
among numerous analysts who see sales sliding. Ford Motor Co. has
predicted sales as low as 15.2 million based on market conditions
expected for the first six months of the year. Some in the industry say
the number will drop further than that.
Three major suppliers told The Detroit News they project U.S. vehicles
sales ranging from 14.5 million to 15 million units. Officials at the
companies asked not to be named because such information is considered
proprietary, but those in the industry are buzzing about how deep
production cuts will go.
"The present conditions are very uncertain," said Ford sales analyst
George Pipas. "Will there be a recession or not? When does housing
rebound? What will gas prices be? Uncertainty in the economic situation
is reflected in (the) stock market, and the same can be said for consumers."
Most in the industry agree auto sales will dip below the 16 million mark
in this country for the first time since 1998.
Such a decline in sales would ripple through the economy of Michigan --
and the nation, says Harry Veryser, an economist at the University of
"The auto industry is such a big part of the economy that if things go
right, they make profits like crazy, but when things go wrong, it
multiplies," said Veryser, who once owned a Fraser auto supply company.
"The effect will be across the country if those forecasts are correct."
A struggling housing industry, continued difficulties in the credit
market and high oil prices will make it more difficult to sell cars,
especially in the first half of 2008, said George Magliano, director of
automotive research for Global Insight. He predicts economic growth will
"Things have changed drastically for the worst," he said. "There will be
nearly no growth (in the economy) next year. We haven't seen the worst
of the credit crisis or the housing market."
More layoffs hit factories
The impact of fewer car sales is already becoming apparent to some in
Michigan as Chrysler and Ford workers learned recently that they'll be
on extended layoffs early next year as the automakers bring production
in line with demand.
In addition, Chrysler is eliminating shifts at two Metro Detroit plants,
and thousands of area employees are expected to depart from the Auburn
Hills automaker. This month, General Motors laid off workers at its
Hamtramck plant due to decreasing demand for products built there.
Those losses could result in falling sales for restaurants, retailers
and other businesses seemingly removed from the auto industry, said
Charles Ballard, an economist at Michigan State University.
"There's a multiplier effect if workers have less money in their
pockets; they might not get their hair cut as often, go to the movies
less or cut back on going out to eat," he said.
A definite loser is the state government, Ballard said. Already the
state House Fiscal Agency predicts that next year's budget shortfall
could reach $500 million. Ballard said declining sales, income and
business tax revenue related to automotive struggles threaten to further
strain the state's ability to provide health care and other services.
Also affected are television networks, magazines, newspapers and other
media outlets that depend on the $9.6 billion spent on automotive
advertising in 2006. Merrill Lynch is forecasting a 5.3 percent decline
in 2008 automotive advertising.
Supplier demand may fall
As demand for new vehicles declines, so does the demand for auto
Automakers' cost-cutting efforts in recent years led to lower margins
for suppliers. To stay profitable, many suppliers have tried to increase
the volume of parts they produce, to spread costs over more parts. If
volumes drop, but costs remain constant, suppliers could lose money on
every part they sell, said John Henke, a supplier analyst and professor
at Oakland University.
The pain will not be spread equally, he said. Suppliers tied closely to
SUV and truck components, where sales are dropping most steeply, are
likely to be harder hit than those that supply parts to popular
crossovers and other hot-selling models.
The most likely to suffer are smaller suppliers that don't have foreign
sales and diverse products to get them through tough times.
"You could see layoffs or them closing their doors altogether if they
can't make money in this market," Henke said.
David Cole, chairman of the Center for Automotive Research, said several
suppliers he spoke with are forecasting sales below what most automakers
Uncertainty in the industry makes it difficult for small suppliers, such
as T & W Tool and Die Corp. in Oak Park, said President Herb Trute.
Small shops, like Trute's, typically work on only one or two vehicle
programs at a time, but commit 20 to 40 weeks to the projects.
"If one of those programs is canceled or delayed, you have the potential
to lose your backlog for a half of a year," he said, which could affect
staffing and require canceling equipment purchases.
Low sales hurt dealers first
But it is the auto dealers who get hit first.
If sales drop significantly, "a lot of dealerships won't be in as good
shape to carry their overhead, and you'll see a few exiting the market,"
said Alan Helfman, owner of River Oaks Chrysler Jeep in Houston.
As new car sales decline, dealers will have to focus on areas of their
business that are profitable -- particularly maintenance, repair and
used car operations that could increase as drivers look for cheaper
vehicles or want to keep their cars longer, said Paul Melville, an
automotive corporate recovery specialist with Grant Thornton LLP.
The silver lining is that continued difficulty in the auto industry
hastens Michigan's movement toward a state less dependent on
manufacturing vehicles and more tied to technology, said Ilhan Geckil,
senior economist at the Anderson Economic Group in Lansing.
"2009 will be better for the state because Michigan's economy is
transforming," he said. "We are getting more R&D jobs, Toyota's
engineering facility is growing, Google is here. It takes three or four
years to see that impact, but it will result in growth."