Analyst Predicts Downturn to Last Through 2012

DETROIT – Those eagerly awaiting incoming President Obama’s $750 billion-$1 trillion stimulus package in the hope it will create car sales might want to lower their expectations.

That’s according to Sean McAlinden, chief economist for the Center for Automotive Research, who offers a bleak prognosis for the U.S. auto industry.

Speaking at a seminar for journalists here, McAlinden, director-economics research for the Center for Automotive Research, predicts auto makers will sell 11.5 million units in 2009, down from 13.2 million last year and 16.2 million in 2007.

The U.S. will not see 14 million new-vehicle sales again until 2012 and 16 million in 2013. “The downturn will last a long time,” he says.

The big problems for the industry are gasoline prices, which no one trusts because of the continued volatility, and the economy, which is the real reason for the sales decline, he says.

For Detroit auto makers, the problem is not burdensome costs but a lack of revenue created by the inability to sell cars, says McAlinden. More than $6 trillion of household wealth has been wiped out in the last 12 months. Add to that, people are holding on to their vehicles longer, which likely will lead to record-low levels of vehicle scrappage rates.

Sean McAlinden, chief economist-Center for Automotive Research.

The economic stimulus package promised by Obama probably won’t help vehicle sales, because it will be offset by declines in state spending, he adds. Instead, a tax cut for the professional workforce, middle management and small-business owners who earn $100,000 to $350,000 a year is needed to help jump-start vehicle sales.

The main question for Detroit is whether federal bridge loans will rescue General Motors Corp. and Chrysler LLC, or will both auto makers be passed into legal bankruptcy? “GM and Chrysler are bankrupt, but I don’t think that has sunk in yet,” McAlinden says. “They are insolvent. Without the federal money, they are bankrupt.”

Whether the two auto makers can meet the loan requirements set by the Bush Admin. remains to be seen. However he does not believe GM can meet the obligations as they are written now, adding, the “conditions will be changed so GM can keep them.”

McAlinden also argues GM’s restructuring plan submitted to Congress in December does not go far enough, assuming a worst-case scenario of 12.5 million units annually. In addition to dropping the Saab, Hummer, Pontiac and possibly Saturn brands, GM needs to kill Buick. That will get the auto maker down to 20 nameplates by 2012, not the 40 called for in its strategic plan.

While GM says it will reduce its dealer count from 6,450 to 4,700 by 2012, McAlinden says the auto maker only needs 1,500 dealerships selling 1,500 vehicles per location by 2012, far more than the average 440 vehicles GM dealers are selling today.

Additionally, GM only needs to cut its employee ranks to 60,000, rather than the 65,000-75,000 announced in the plan.

Chrysler, meanwhile, does not have many options, says McAlinden, predicting the privately owned auto maker will “go away somehow, but where?”

Chrysler’s one-month shutdown of its 30 plants is scheduled to end Jan. 19, but McAlinden suggests the company might threaten to keep the facilities shuttered unless the government gives it the full $7 billion in federal funds requested. Chrysler has received only $4 billion, so far.

GM and Chrysler are not alone in their challenges. McAlinden predicts Toyota Motor Corp. may begin laying-off permanent workers in Japan early in 2009, something it has not done since 1952.

Layoffs may extend to workers in the U.S., as well, he says. The auto maker already has laid off much of its temporary workforce, including nearly 500 people at its Georgetown, KY, plant, and is delaying finishing its plant in Tupelo, MS, which was slated to build the ’10 Prius.

Toyota also is studying layoff and transfer policies of the Detroit auto makers, McAlinden says. But transfers aren’t likely, because the Japanese auto maker’s plants are too far apart in the U.S.

“Toyota is slipping fast,” he says. “It’s a real stunning blow to the company, as it learns to lay people off.”

McAlinden also speculates the United Auto Workers union might be able to gain a foothold into Toyota plants if layoffs become a reality.

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