February 13, 2009 / 7:52 PM / 10 years ago

State of the U.S. auto industry: bleak

CHICAGO (Reuters) - U.S. auto companies face a wall of problems these days as they scramble to meet terms of federal bailouts, cut thousands of jobs and struggle under mountains of debt.

Twenty-three-year GM employee Bob Pohlman performs an electrical component installation for the last time on a truck at the GM plant in Janesville, Wisconin December 23, 2008. REUTERS/Bill Olmstead/The Janesville Gazette/Pool

But their main problem looks set to elude any quick fix.

Loans from the federal government in December enabled General Motors Corp (GM.N) and Chrysler LLC to keep their factories operating a few more months.

But the core problem they faced in December — too few buyers — has only worsened, making their prospects look even dimmer in coming months. U.S. auto sales plunged 37 percent in January to the slowest pace since 1982.

Independent auto analyst Erich Merkle expects sales to pick up in the second half of 2009, partly because the bar set by last year’s dismal second half was so low. But soaring U.S. unemployment rates in recent months have him worried.

“I’m concerned about the job losses. The acceleration is pretty alarming, and that has to stabilize,” Merkle said.

“If we don’t beat the second half of 2008 this year, then it could be all over. We’re all going to be peeling bark off trees and go back to being an agrarian society.”

The plummeting auto sales that brought Detroit automakers to their knees, and begging for help from Congress, have now become a global epidemic.

Toyota Motor Corp (7203.T), which passed GM last year to become the world’s top automaker, last week forecast a loss of $4.95 billion for the year to end-March.

That was sharply higher than the loss Toyota had forecast just six weeks earlier when it said it would post the first group-wide loss in its 70-year history.

Nissan Motor Co (7201.T) said on Monday it expects to lose nearly $2.9 billion and would seek financial help from the U.S. Department of Energy to develop more fuel-efficient cars.

“The whole industry is in serious trouble,” IHS Global Insight analyst Aaron Bragman said on the eve of the Chicago Auto Show, which opened on Friday. “The pain is starting to be shared across the board.”

GM and Chrysler are due back in Washington on February 17 to present progress reports to justify their $13.4 billion in federal aid awarded since December and to ask for more.

Ford Motor Co (F.N), which has yet to ask for federal aid due to a jumbo loan it took out in late 2006, may soon have to because it is in danger of running out of cash before auto sales recover.

But the chances of that recovery seem to dim by the day as layoffs jolt the economy, further eroding consumer confidence.

TOO LITTLE, TOO LATE?

The concern now is that domestic automakers may not be able to shrink enough to survive an even more severe downturn.

“You can restructure these companies all you want. But unless people start buying cars again you’ll have wonderfully restructured companies that are bankrupt,” Bragman said.

The federal stimulus package of more than $800 billion expected to become law this month includes provisions to allow consumers to deduct some loan interest and sales taxes on vehicle purchases. Ford says that could save buyers roughly $1,500 on a $25,000 car.

But if the $6,000 rebates that Chrysler is offering on top of zero-percent financing can’t sell cars, a $1,500 incentive won’t do much, said Jim Hossack, vice president of industry forecaster Auto Pacific.

“In 38 years in the auto industry, I’ve never seen it like this,” Hossack said. “Those who have the financial ability to buy cars aren’t going to until they feel wealthier. They’ve seen the value of their house and their 401(k) drop, and until they feel better about their own finances they aren’t going to take on any new commitments.”

That means some brands and even manufacturers are likely to retreat from the U.S. market or fold, Hossack said, even with a larger government autos bailout and a federal “car czar” to oversee the restructuring of the domestic automakers.

“I’m not sure the government knows what to do or how to do it. It’s hard to have confidence in anyone’s intentions or ability to solve these problems. A month ago I thought it was possible. Now I’m not so sure,” Hossack said.

WHO WILL BE FIRST TO FALL?

Chrysler, still regarded as the weakest of the domestic manufacturers because it is more dependent on the U.S. market than the others, remains in peril, analysts say.

When it goes back to Washington next week it will bolster its case from a deal struck to share products and distribution networks with Italian manufacturer Fiat FIA.MI.

The pact will give Chrysler access to Fiat’s fuel-efficient technology and vehicles and to foreign markets. Fiat would also be a potential customer to use some of Chrysler’s idle plant capacity to build cars for the North American market.

“Before Chrysler announced the Fiat deal, we weren’t terribly optimistic about their chances,” Bragman said. “Fiat provides about 90 percent of what they need, except for cash. Whether the stuff can arrive in time is the question.”

But Hossack said the Italian manufacturer failed in its previous attempts in the U.S. market and specializes in building small cars and diesel engines, neither of which are in demand in the United States or likely to generate much profit.

GM, meanwhile, said on Tuesday it will eliminate 10,000 salaried workers globally and cut pay for most white-collar workers by May 1. But it has yet to disclose what other restructuring steps it will present to Congress next week.

GM has been unable to sell its Hummer or Saab brands — key to a plan to focus on Chevrolet, Cadillac, Buick and GMC as core brands — and has not said what it will do with its struggling Saturn brand.

Editing by Kevin Krolicki, Peter Bohan and Matthew Lewis

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