Will 2009 Be Any Better for Car Companies?

by: Rick Newman

Now that the annual sales numbers are finally in, it’s clear that 2008 was a horrendous year for nearly every automaker. Annual car sales peaked at about 17 million in 2006. Industry analysts used to think that a one-time dip to 14 million would be a catastrophe. In 2008, total sales fell below that, to about 13 million.

We all know who took the hardest hit: Detroit. General Motors’s (NYSE:GM) 2008 sales fell 23 percent. Ford’s (NYSE:F) annual sales fell 21 percent. Chrysler, probably in the worst shape of all, endured a 30 percent plunge. To put all of that in perspective, consider that holiday retail sales – which were the worst in a generation – only fell by about 5 percent. And that’s expected to cause a flurry of retail bankruptcies in 2009. A Detroit-sized decline in retail would probably close half the malls in America.

[See the cars that drove Detroit's customers away.]

The strongest automakers – namely, the Japanese - got clobbered too. Toyota’s (NYSE:TM) 2008 sales in the U.S. fell by 17 percent. Honda (NYSE:HMC) started the year bucking the trend in falling sales, but ended 2008 with an 8 percent drop. Nissan’s (OTCPK:NSANY) U.S. sales fell 11 percent.

Okay, so we know 2008 was the equivalent of a multicar pileup. What about 2009? Here’s a preview:

Sales will be even worse than in 2008. J.D. Power & Associates predicts 2009 sales of 11.4 million, which would be a crushing 30 percent fall from the peak. Other forecasters think sales could be even lower. Sure, there’s a chance those predictions could be too bearish, but almost all of the factors that influence car sales are going in the wrong direction. The housing bust has reduced the net worth of many Americans. With layoffs mounting, the unemployment rate in 2009 will probably exceed 8 percent, compared to 6.7 percent now. That has trashed consumer confidence and shut down spending. Anybody who’s worried about losing their paycheck isn’t going to splurge on a new car.

[See how the feds will govern GM and Chrysler.]

The best deals will be in the first half of the year. For those comfortable spending, boy, have we got a deal for you. The auto industry is in the eye of the storm right now, with sales for the next 6 months likely to be the low point of the sales debacle. Automakers and dealers will eventually wind down unsold inventory and consolidate. But at the moment, a glut is on. Edmunds.com says that rebates and other incentives currently average nearly $3,000 per car, the highest level they’ve ever measured. On some trucks, SUVs and other slow sellers, totals giveaways approach $10,000. But those deals won’t last forever.

By later in 2009, automakers will have dramatically scaled back production, pumping far fewer cars to dealers. Eventually, sales will start to bounce back, and there could even be a temporary shortage of the hottest models. At that point, the deals will diminish.

[See who gains from Detroit's pain.]

Loans will continue to be scarce. While the deals are enticing, one catch for many interested buyers is that they can’t get a loan. Or they can only get a prohibitively high interest rate. It may be awhile before the credit crunch eases, no matter what the big lenders say. After getting $6 billion in federal bailout money in late December, for instance, GMAC (NYSE:GKM) (NYSE:GMA), GM’s financing arm, said it would lower credit standards it had raised in October – theoretically making loans available to more potential buyers. But banks across the board are still reluctant to risk their money, especially with a worsening recession that practically guarantees that default rates will go higher, not lower. And with so few buyers to start with, it’s logical – though not laudable – for banks to cherry pick the safest borrowers, and hoard the rest of their cash for a better day. Which is exactly what they’ve been doing.

[See why some get a bailout, others get bluster.]

Dealers will disappear. The sales crunch has already driven some dealers into bankruptcy or liquidation, and there’s no doubt the pain will intensify in 2009. The Detroit 3 in particular suffer from bloated dealer networks with too much overlap. As dealers consolidate, some consumers will barely notice, but others will find that the local showroom isn’t so local anymore.

The import brands will get even stronger. Sales fell for virtually every automaker in 2008 - except for Subaru (OTC:SBUOF), which enjoyed a tiny increase thanks to new versions of its Forester and Impreza. But the importers fared better than the domestics, which means they’ll gain market share. Toyota, Honda, Nissan, Volkswagen (OTCPK:VLKAY), BMW and Mercedes are also in much better financial shape, which means they can offer better financing terms to more people. By the end of 2009, Toyota could be the American sales leader, with GM No. 2. Honda could challenge Ford for the No. 3 spot. And Nissan, a perennial No. 6, could outpace Chrysler to become No. 5.

[See 6 myths about the Detroit automakers.]

This time next year, there may be fewer automakers. All three Detroit automakers need to get smaller, but the biggest question mark is Chrysler. Detroit’s No. 3 car company nearly ran out of money in 2008 and had the worst sales performance of any big automaker. There’s little sign that the company is turning itself around, or that $4 billion in emergency federal aid will do much more than keep the automaker on life support for a few extra months. Most telling may be Chrysler’s new-product portfolio, which is thin and getting thinner as the automaker cancels plans.

Within a year, Chrysler could end up as a rump organization, with competitors snapping up its Jeep division, its Ram truck, and its minivans. The rest of Chrysler’s lineup is barely fit for the rental fleets – and those are much smaller these days, too. So buy one now if you really crave a Chrysler. But you probably don't - and that's the problem.

Disclosure: no positions.