First Pain, Then Gain

Is the hammer getting ready to drop? Most people associated with the auto industry understood coming into 2008 that it would a rough year. Nobody really knew, though, just how rough.

We're about to find out over the next five months. The sharp decline in sales in May provided one of those “Oh my!” moments for many of us here in Detroit.

While many analysts publicly projected 2008 sales to be in the 15.5 million to 15.9 million unit range, privately they admitted it could be worse.

Worse really means worse. Some are speculating sales could drop below 14 million units this year. That would be a decline of more than 2 million deliveries in just one year.

I prefer to be more optimistic, but the numbers don't lie. In May, according to Ward's data, the seasonally adjusted annual rate is 14.25 million vehicle sales. One insider thinks June's SAAR could be as low as 13 million units.

The scary part is that May and June in past years have produced much stronger sales numbers and tend to be good predictors of what will happen the rest of the year.

There seems to be a growing realization in Detroit that what happens in coming months may dictate much of how the auto industry will look in the future.

For example, if the sales decline is as sharp as some fear, it is likely some brands won't survive. On the endangered list — pick any number of General Motors Corp. brands, Hummer, Saab, maybe GMC.

Ford Motor Co.'s Mercury division's demise seems to be a foregone conclusion for some people. My theory is that Ford is waiting to combine as many of its Lincoln Mercury stores with Ford dealerships as possible.

Once it gets to that magic number where the financial pain of shutting down a brand is manageable — meaning, it's payoff to dealers — Mercury will be history. The question is, can it hang long enough for that to happen.

Chrysler's future is really uncertain. Does it have the cash to survive? Several long-time observers tell me they believe Chrysler is gone in less than two years.

Some of you older dealers have seen tough times before. In 1980, when President Jimmy Carter authorized a multibillion-dollar financial aid package for manufacturers and a $400 million package for car dealers, nearly 1,000 dealerships went out of business.

Approximately 900 dealerships left the business in 1991. We'll probably see similar numbers in 2008 and 2009.

There is good news on the horizon, although, that horizon could be 18-24 months out.

Private equity groups are bullish on the auto industry's long-term future. Manufacturers and suppliers could see infusions of capital the next several months.

The industry appears to be on the cusp of significant technological advancements in vehicles. That alone will drive investment, create new business opportunities and generate excitement again in the showroom.

This year is proving to be one of the more severe corrections in the industry's history. But hang on, because this industry will come roaring back and the dealers still in business will be enjoying the good life once again.