2009 Car Sales: Detroit Can’t Cut Costs Enough

As domestic January vehicle figures begin to come in, one of the facts that is going to become clear is that the US market may only only produce ten million unit sales this year.

That number will be a shocking drop. In 2006, 16.56 million vehicles were sold in the US. That number dropped to 16.15 million in 2007 and 13.2 million last year.

According to The Detroit Free Press, some analysts expect another 21% decline in 2009. This drop could be even more significant in a deep or prolonged recession. If the market share of The Big Three continues to decline, the numbers will be even worse for the US car companies .

A year in which only 10 million vehicles are sold would completely undermine the restructuring plans that the companies will present to Congress before the end of the quarter. The plan that GM gave to Congress last month assumed that the car company could break-even in the US if the domestic market supported 12.5 million vehicle sales. GM is already starting to hint that its assumptions for revenue have been way off.

When the government provided GM and Chrysler with $13.4 billion to support their operations though the first quarter, a number of members of Congress objected to the bailout which has been estimated to carry a $34 billion price tag.

When The Big Three CEOs were making their initial pitch for federal funds in early December, the chief economist at Moody’s Economy.com said that the car companies were "low balling" their needs. He testified at a House hearing and said that the amount of the bailout would have to be $75 billion to $125 billion.

At this point it would be almost impossible to argue that US car companies will not need $100 billion. One million domestic car sales are worth about $25 billion in revenue. A drop of three million vehicles sold from 2008 to 2009 would pull nearly $75 billion out of the market.

GM and Chrysler are already running into trouble with the UAW, creditors,and suppliers as the two companies bargain to drop costs. The union says it gave plenty of concessions during the last set of contract negotiations. For cosmetic purposes, it may bend more but is probably willing to gamble that the government will not allow the two car companies to go into bankruptcy and force the loss of hundreds of thousand of jobs in an economy that is already battling rapidly rising unemployment.

Creditors may be willing to make the same bet about the government’s future. Since they are likely to get only a small part of the value of their debt in negotiations with GM and Chrysler, they may elect to wait the process out.

Auto suppliers are being asked to drop prices on components, but many of these firms are already close to bankruptcy on their own. Price concessions may simply create another set of companies that need government assistance.

The circumstances of the failing US auto market make it significantly more likely that GM and Chrysler will not get the funds they want to stay independent. The federal government may force them into Chapter 11 while providing funds to keep them operating indefinitely. Congress and the Administration may decide that supporting Detroit is necessary because closing the firms would put so many people onto the unemployment line. More job losses, of course, would in large part negate the goal of the stimulus plan to add three to four million new jobs to the economy over the next two years. From that standpoint, a $100 million investment is actually cheap.

Douglas A. McIntyre   -30-