2008 IN Review

What happened to the U.S. automotive industry this year? The “Big 3” does not build undesirable cars. They still outsell everyone else in the market with more than 8 million sales last year. Their customer loyalty is unparalleled and according to J.D. Power and Associates, the Big 3 builds some of the most dependable vehicles on the road – better than Toyota, Lexus, Infiniti and Volvo. Further, in an apples-to-apples comparison, American manufacturers match or beat their competitors in fuel economy on models with the same footprint and powertrain.

Every manufacturer is hurting in this economy. Sales in every car and light truck segment are down compared to last year. Country of origin had no influence. Vehicles from the U.S., Japan, Europe and North Korea all fell 32-38% in November. Both cars (-36.5%) and trucks (-36.8%) fell. The Honda Civic fell 66%, Toyota Carolla 59%, and the Ford Focus 74%. So what happened?

A combination of high oil prices, the banking/mortgage debacle, and a slowing economy worldwide all contributed to the cause. In late spring, oil prices rose to unprecedented levels. In June, prices per barrel were at $145 with speculation that prices could rise to $200 a barrel. Consumers shifted to small cars and values of trucks and SUV’s plummeted. Because of the falling values, auto lenders took a bath on leases when residual values fell on the vehicles they were taking on lease returns. For instance, an SUV may have had a residual value of $20,000 but when it was turned in the market price was only $12,000. The finance company had to absorb the $8,000 loss. This loss was absorbed along with all of the home mortgage losses in their portfolios. The result was that auto lenders quit leasing, essentially cutting off low payment options to millions of buyers.

In the beginning of the third quarter, banks tightened credit standards essentially denying credit to millions of consumers. Most car buyers need credit to purchase a vehicle. Without financing options available to the majority of buyers retail sales fell. When credit is available rates are unfavorable compared to the glory days of 0%. Add to this the negative press surrounding the economy and the Big 3 and consumer confidence started to fall. That lack of confidence translated directly into the showrooms of all manufacturers.

The Big 3 CEO’s, unions and the federal government all share the blame for the sector’s woes. Without giving any one of them a pass, it is hard to image that any companie's business model could have predicted this perfect storm. Where the industry ends up is now in the hands of the congress. However, one thing is for sure – the loss of any one of the American manufacturers will reverberate throughout the economy to suppliers, consumers, charities, municipalities and more in the form of lost jobs, revenues, charitable contributions and sales tax revenue.