Imagine what would happen if vehicle sales in the US dropped nearly 10% from one year to the next. Car sales did drop 11% in America during 1991 and hit a low of 14.5 million vehicles two years later. Some extremely smart industry observers believe that it may happen again next year, cause by a dreadful housing market and high gas costs. About 16 million vehicles will be sold in the US this year.
Jerry York, an adviser to billionaire investor Kirk Kerkorian; financier Wilbur Ross; and Thomas Stallkamp, a former Chrysler president all see a wreck coming in 2008.
Reuters reports "Stallkamp, a partner at private equity firm Ripplewood Holdings, which owns several auto parts makers, said the market could slump to 14.5 million."
The magnitude of a drop of that size is hard to fathom. The average retail price of a car bought in the US is about $25,000. A one-year drop of 1.5 million vehicles would cut sale in the US by about $37.5 billion. That is close to the entire quarterly automotive revenue at Ford (F).
Such a sharp downturn in sales would do real damage to Toyota’s (TM) earnings. It is now the No.2 car seller in the US with about 15% of the market. But, it has large sales outside America to act as something of a buffer.
For Ford and GM (GM), a loss of sales in a 14.5 million vehicle market could cut revenue between the two companies by over $15 billion. That would ruin their chances of becoming profitable in North America. Even with new UAW contract savings, GM could loss over $5 billion in the US and Ford at least $3 billion.
It would be nice to think that intelligent pundits are wrong, but the economy is pushing the car industry in an awful direction.
Douglas A. McIntyre
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