Economy will trouble Detroit in 2008

Roland Jones • Profile • E-mail

Sometimes it seems Detroit just can’t catch a break.

Just as the automotive industry is about to reap the savings from a new cost-saving labor contract, and just as some of Detroit’s newest products are starting to sell well, turmoil in the housing market will likely slow U.S.  car sales in 2008.

“It started over the summer, and we expect it to continue in 2008, hitting hard in the first half of the year,” said George Magliano, director of automotive industry research at Global Insight, who recently wrote a report on the outlook for next year called “The Long, Cold Winter Descends Upon the Auto Market.”

Magliano and other industry analysts expect auto sales to be hit hard as the housing downturn continues to drag the economy down.

“It’s going to be a rough year,” Magliano said. “The issue is we are getting battered by a really bad economy right now, so the consumer will pull back and get more cautious ... All that means interest in buying [vehicles] will drop through the floor."

Amid dwindling sales and continued fierce competition from overseas rivals, the Big Three U.S.  manufacturers — General Motors, Ford and Chrysler — each secured a landmark, four-year labor agreement with the United Auto Workers union this year, despite brief strikes against two of the manufacturers.

The deals are significant because they free the automakers from the shackles of their past, giving them the ability to hire new workers at lower wages and shift their expensive health care liabilities to a union-run trust fund, potentially saving billions of dollars.

GM, Ford and Chrysler also started to execute massive restructurings. All three closed plants and laid off tens of thousands of workers in an effort to return to profitability. Chrysler, which was considered such a drag on earnings at Germany’s Daimler AG that it was sold this year to a private equity firm, announced up to 25,000 layoffs in 2007 alone.

The outlook might be uninviting, but there are some bright spots. Sales of small cars and crossovers — scaled-down versions of SUVs built on car platforms and the industry's fastest-growing segment — are expected to rise, according to Dave Terebessy, auto-market analyst for research company CSM Worldwide.

“A desire for greater fuel economy plays a role here, but on the other hand small cars have really improved in terms of style and quality,” Terebessy said. “You’re seeing nicer and better-equipped [small car] interiors, and they’re actually offering a more reliable driving experience. It’s a segment that has vastly improved, and the rise in fuel prices over the last few years has certainly been a positive for that segment.”

But even with rising sales expected in these segments, automakers are predicting tough times in 2008. GM said recently it will cut scheduled first-quarter production by 11 percent, while Ford said it would cut production by 7 percent as sales fall to their lowest pace in a decade, according to George Pipas, Ford’s top U.S. sales analyst.

Magliano expects U.S. vehicle sales to total 15.5 million in 2008, down from 16.1 million in 2007 — a decline of 3 percent that would make it the worst year since 1998. The Big Three U.S. makers will be hardest hit, and their Japanese rivals are unlikely to be spared, Magliano said.

“Until now the Detroit Big Three has struggled, and we’ve seen better times for Asian carmakers, but we’re telling [clients] not to expect that situation to continue next year,” he said. “Honda, Nissan and Toyota will take a beating like everyone else because this is the type of economic environment that hurts everyone. So we’ll see a dogfight next year as automakers try to maintain market share and sales volume.”

Toyota, in particular, is expected to face a tougher 2008 as it challenges General Motors for the top automaker spot. Toyota has seen an unusual wave of product recalls and has suffered from criticism that its once-unassailable quality control has slipped. Toyota’s effort to penetrate the lucrative truck market with the launch of the full-size Tundra last year could falter as the housing downturn and high gas prices threaten to slow sales.

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