December Car Sales: The Achilles Heel Of The Auto Bailout (GM)(F)

The mathematics of the US car company bailout are simple. At least the car companies say that they are.

Expenses get cut. Labor costs go down to what they are for Japanese auto firms operating in the US. Creditor costs get chopped as debt is traded for equity. The failure of the GMAC debt swap program shows that not everyone will go along with that. The final piece is that suppliers take a haircut.

On the revenue side, things are even less complex.

The US car companies have given Congress a plan that assumes that they will keep their market shares in an industry that will produce at least 12.5 million vehicles sales each year. December sales numbers show that this forecast is flawed.

According to Edmunds, vehicles sales will fall below 13 million for 2008. That is down 17% from 2007. The rate of the drop-off is expected to be closer to 38% in December, which means the fall-off is accelerating. If last month’s numbers are the standard for next year, total vehicles sales could drop below 10 million. While no one wants to believe that is true, no one wanted to believe that the current recession is the worst since WWII. Ford recently told analysts that it expects sales for the industry to drop another 20% to 30% in the first quarter of this year.

The American car industry may be reshaping itself for a world based on wild optimism. If so, the government will be back into the bailout business for much more than the $37 billion the industry is seeking. If two million vehicle sales disappear next year, $50 billion in revenue could go out of the domestic market. US companies have about half of that.

Chrysler’s sales are expected to drop 46% for December. If that holds true for the first quarter of next year, the company is dead. GM (GM) and Ford (F) sales are expected to be off by between 30% and 40%.

The new administration needs to put another $25 billion or more in its auto industry rainy day fund. That is what Detroit will need after its spends the $37 billion it has already asked for. If 2009 shows no recovery, the figures gets even larger.

Douglas A. McIntyre