The auto downturn is very serious

I was running out of vocabulary last month to describe just how bad October was for the domestic automakers. But whatever you want to say about October, November was significantly worse.

When I first saw the figure for November sales of cars manufactured in North America– 236,000 units– I thought maybe somebody had mistyped the first digit. Even 336,000 would have been a very bad month. But 236,000 is 17% below the dreadful October figure and 40% below the number sold in November of 2007.



Data source: Wardsauto.com
dom_cars_dec_08.gif



Sales of domestic light trucks were down 10% from October and down 37% from November 2007.


Data source: Wardsauto.com
dom_trucks_dec_08.gif



Remember that this volume decline is hitting an industry with huge fixed costs, and that these are decreases relative to 2007. GM, for example, reported a loss of $38.7 billion for 2007. That’s billion, with a “b”. Back when things were good.

I believe that lost income and jobs in the auto sector tipped the U.S. economy into recession this summer, and we may be on the cusp of much more dramatic adjustments in this sector than anything seen so far. The wrenching changes that might be immediately ahead could mark the beginning of a frightening new phase in the economic downturn.



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27 thoughts on “The auto downturn is very serious

  1. Ironman

    JDH: As a heads up, the U.S. production rate for autos is going to slow down even more in December. A number of Tier 1 suppliers for U.S. automakers are going to suspend production for the year as early as next week. Without the inflow of parts, the OEMs will follow shortly after.
    By contrast, “normal” would be to shut production down only for the last week of the year (from December 24 through January 1, coinciding with the holidays).
    Unprecedented would be the correct term.

  2. Buzzcut

    The interesting thing to me is that Honda and Toyota took a big hit as well. Combine this with the yen trading at 92 to the dollar as we speak, and they have to be taking an enourmous hit to earnings.
    Everybody is concerned with Detroit, but Detroit more than likely is getting bailed out. What are the prospects for the Japanese transplant operations? Like, for example, that big, new Toyota Tundra plant in Texas.
    OTOH, if the yen keeps dropping, maybe it makes sense to shift more operations over here. What would it take for Honda to become an American company? Move the corporate headquarters to Ohio and list on the NYSE?

  3. ReformerRay

    Declining market share for the big three has been a reality for years – regardles of who is the CEO.
    Legacy costs and hubris are part of the picture. Another part of the problem is the role of the U.S. stock market. Every quarter the stock market gives the CEO a grade, shares up or down, depending upon the profits reported that quarter. Ownership response dictates the short term focus of the CEO’s and the companies.
    Japan and Germany have a more complicated ownership structure. Is it better than ours?
    Another part of the big picture which should not be ignored is the role of the government of Japan and Germany in structuring their tax system and other governmental actions to support exports. Imports are discouraged by a tradition of excellent domestically produced products. Germany also has a tradition of refusal to lower interest rates, which discourages comsumption, which discourages imports.
    These issues (short term focus from the stock market, trade policy and policy to stimulate consumption) influence all U.S. manufacturing activities. The automobile industry is merely the most visible.

  4. PCguy

    It’s basic retail. If you have a sale people will buy. If you have a great sale you will get people who were going to buy, but not yet. If you have a really great sale and offer special financing, cash back and MEW $$, even people who where not going to buy, buy. At some point, now, you have no one left that needs to buy or can afford a new vehicle.
    If you look back over the last 3-5 years this has been going on, in some form, almost no stop. Add in the lack of leasing and fleet sales to rental companies this is what happens.
    I owned a small retail SCUBA business years ago and had to deal with this very very basic retail fact.
    PS
    It’s was interesting to me that the Mitusbushi did this but not the other foreign car makers, but they are trying now. I think it’s too late for any big moves, even for them.

  5. DickF

    As a followup to Buzzcut, why not just let the US manufacturers declare bankruptcy and be taken over by the Japanese. They are much better at producing and selling cars so the transition would be virtually seamless with minimal loss of jobs or production. It could be done without shutting anything down. All it would do is restructure their debt and bring in good management.

  6. jg

    Time to start looking at the parallels with the Lesser Depression, Professor.
    I’m in the middle of ‘Manias, Panics, and Crashes,’ and I read that in ’30, industrial production dropped 30% or so in six months or so.
    This drop in auto sales sounds a lot like that.
    Greater Depression, here we come.

  7. kafkatoo

    Outside of PCguy, I think all of you are missing the point. Car sales are down because debt is way up. Detroit, Japan and Germany sold 2008/2009 production in 2004/2007. High debt and no income growth is not sustainable and has to end consumption, PERIOD.

  8. Michael Green

    Just a note about the $38.7 billion that GM “lost” last year…
    They didn’t actually lose $38.7 billion, they simply lost that much in claims on future tax benefits. Kind of like when you invest in a stock and lose money, you get a capital loss, with which you can average with your actual gains to reduce your tax burden. Since the capital loss actually has a value equal to the tax savings rendered, those “tax deferrals” need to be added to the balance sheet.
    Due to accounting rules that stipulate how long you can carry over those tax shelters, GM had to write most of those tax shelters down since they didn’t have the hundreds of billions of dollars in profits to utilize those tax shelters.
    They actually only had a operating loss of $23 million.
    Of course, in 2008, they might actually lose $38 billion based on operations seeing as how things are going…

  9. Yancey Ward

    I am no GM booster, but that widely quote 37 billion dollar loss needs to be explained a little better by the people citing it.

  10. jpo

    Imports are discouraged by a tradition of excellent domestically produced products.

    Now, this is a strange sentence. Germany is a more open economy than the US, so what you write is basically: We can’t compete.

    Germany also has a tradition of refusal to lower interest rates, which discourages comsumption, which discourages imports.

    Higher interest rates increase the value of the DM/Euro and those make imports cheaper…

  11. George Kalogridis

    Assisting the Poor and Middle Class by Clearing the Air and Assisting Auto Companies
    The glut of cars in the U.S. provides an opportunity to remove old polluting cars from the roads and help the working poor and middle class. France recently bought old cars from owners to permanently remove them as a way to improve air quality. Unfortunately older cars are owned by people who cannot afford to replace their cars with newer models. So the impact of a government purchase program is limited, especially in suburban, exurban and rural regions of the country where mass transit is not available.
    The auto industry is overloaded with new and used cars that it needs to sell. Every day the value of these cars is falling and prospects for selling these vehicles are dim. What if people could trade their old (ten years or older) cars in for a used (5 to 7 years old) car? That would allow owners to continue to drive, but would take the polluting cars off the road. These polluting cars would have to be destroyed and materials recycled. Title transfer would be to owners or the financing company of the old car. Although the value of the car will go up, payments will not increase and interest rates will fall under federal guidance for financing companies that participate in the program.
    The federal government could also create a second tier subsidy for owners of cars 5 to 7 years old, allowing them to trade up for a new car much like a rebate. Government would pay the difference to the dealers. The auto industry would do its part in reducing the base cost of the cars to the dealers, who would have to operate on a lower margin to make the project successful. This program would have a 12 to 18 month lifespan depending on the state of the economy. This program would allow the auto industry the time to retool for green transportation.
    Auto companies and dealerships would receive tax credits on a portion of their lost margins that would not expire for several years, which would help them as the economy recovers in the future.
    Its apparent that this program will cause price distortions in the auto markets, but it would be temporary; the current auto inventory would disappear and the air quality would improve.

  12. GWG

    Professor,
    You said “I believe that lost income and jobs in the auto sector tipped the U.S. economy into recession this summer,…” But the recession is now said to have began in December of 2007, when sales were only moderately lower than the previous year. Isn’t it more likely that the plunge in auto sales this year is more of an effect than a cause?

  13. dryfly

    JDH wrote…
    As a heads up, the U.S. production rate for autos is going to slow down even more in December. A number of Tier 1 suppliers for U.S. automakers are going to suspend production for the year as early as next week. Without the inflow of parts, the OEMs will follow shortly after.
    By contrast, “normal” would be to shut production down only for the last week of the year (from December 24 through January 1, coinciding with the holidays).
    Unprecedented would be the correct term.

    I have sold parts into the automotive supply chain for close to 25 years and I can’t remember a time where the lower tier suppliers dictated to the upper tiers (in this case tier 1 to OEMs) when and how long there is a shutdown EXCEPT when there were strikes at key suppliers.
    Usually if a lower tier shuts you down – they pay stiff penalties… in some cases as high as ‘thousands of dollars per minute’.
    Dr. Hamilton – is there more to this story you can share with us? I am just stunned.

  14. GK

    I think this has a silver lining.
    1) The auto industry will be forced to improve its products dramatically.
    2) This keeps oil prices low.
    3) People are making older cars last longer, which is ultimately better.

  15. daveg

    Foreign automakers have a protected market at home. This is issue number one.
    They also have a state medical system that provides health care at a much lower cost (about 1/3 the cost, actually), making their corporations more competitive.
    Automobile companies are allow to cooperate with suppliers in ways that are forbidden here in the US.
    The unions overseas are strong, but seem to work with the companies more than here in the states to keep the corporation competitive. They have seats on the boards, for example.
    Also, the VAT tax system gives preference to exports.
    The cheap gas here in the US is a disadvantage in that US cars can’t be sold overseas due to heavy gas consumption. Fact is, Ford and GM sell OK in Europe, but they are not the same cars so there is no economy of scale.

  16. dryfly

    Dryfly: That comment was from Ironman, not me.
    Sorry – saw the lead (JDH) and thought it was you.
    Ironman – link please? If true that is a bigger story & more indicative of just how bad things are than the slow sales story alone.
    Anyone have more details?

  17. Ironman

    Buzzcut: That Toyota Tundra plant has resumed new production, but at a much lower rate than previously.
    Their plans are to consolidate their North American production of the Tundra/Sequoia at the Texas plant. That’s bad news for New Jersey, good news for Texas. Note the relative attitudes of the respective state governments toward business in general in both places.

  18. Chris Stankevitz

    I am no GM booster, but that widely quote 37 billion dollar loss needs to be explained a little better by the people citing it.

    I thought the same as I read it. I was short GM at the time so I’m no booster either. In fall 2007, GM lost $39B, taking a ~$40B charge for taxes. From GM:

    Special items included a net non-cash charge of $38.6 billion due to a valuation allowance against deferred tax assets related to operations in the U.S., Canada and Germany as required under SFAS No. 109, Accounting for Income Taxes.

  19. Dan Weber

    Fixed costs and an inflexible labor force leads to overproduction. Overproductions leads to overfinancing. Overfinancing leads to bankruptcy.
    Long form:
    Pretend you have a company with 100 employees, each of them making 1 car a day. You put out 100 cars a day and they sell.
    Now, someone new moves into town and starts selling 4 cars a day. Your market doesn’t really need 104 cars a day, they only need 100. But you can’t fire your bottom 4 employees without paying them 90% of their salary, so you might as well keep them on and have them make cars. Even though the market only needed 100 cars, you still find a way of pushing those extra 4 cars out every day. Fleet sales, giveaway, contest prizes, what-have-you.
    Gradually the market becomes saturated with your cars from all the extras you were giving out. The resale price of your cars totally sucks because of all the extras dragging down the value. So you need to cut back a little bit more, to 94 cars a day. But you still don’t because of the same issues. Oh, and the new person in town is now selling 6 cars a day, so you really need to cut your production rate down to 92, but you stick at 100.
    So you stuff your channels more and more. As PCguy said, you borrow sales from the future by having awesome bargains today. And when the future gets here… um, now what?
    Well, now you give financing to anyone with a pulse. And when they come back into the office three years later and are $6,000 upside-down on their existing car? Hey, you just roll that into a brand new car loan.
    Then one day you cannot sell on credit.

  20. Bob_in_MA

    I would assume the jump in light truck sales each December over the last several years was tax motivated: any small business person can expense the cost of a commercial vehicle (truck, which due to contrivance includes SUVs.)
    Because of falling income and greater anxiety, it’s probably reasonable to expect the tax effect to be negligible this year, so the yoy numbers for December could actually be much worse.

  21. JDH

    JP: Actually, they’re not quite the identical number, just look that way on the graph. Here’s what Wardsauto reported for Dec 2005, 2006, and 2007 respectively: 436.7, 436.8, 437.6.

  22. JP

    Thanks JDH. I’m still suspicious though. Dec is higher than either Nov or Jan, and is spread by +/- 0.1 % or so.
    I would suspect that somebody’s bonus structure or securities are tied to increasing sales in that month. But maybe I’m just too suspicious.

  23. donna

    Where’s my hybrid minivan? I’ll buy it right away…
    Oh, they don’t have them in the U.S., do they?
    And they wonder why they can’t sell anything right now… maybe they need to make what people really want, instead of trying to sell us whatever they happened to make.

  24. calmo

    “The wrenching changes that might be immediately ahead could mark the beginning of a frightening new phase in the economic downturn.” from the ordinarily careful, conservative and understated JDH…don’t expect me to leap in here with the details of that new phase.
    I know a vacancy when I see one.
    No, I feel compelled to go back over the bar graphs and look for any upward signals…any less downward signs then…
    This B it: the unstated return to public transport and social interaction that comes from riding the bus (even if it is a seat battle), that is the intimacy, however harsh, needed to break though the encapsulation and irresponsibility and insanity you get from bouncing down the road in your F150.
    Sometimes a wrenching change is a good change.

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