September 16, 2008 / 12:29 PM / 11 years ago

Credit crunch stalls U.S. auto industry

DETROIT (Reuters) - The stunning bankruptcy of Lehman Brothers Holdings Inc LEH.N will further rattle credit markets, making it harder for struggling U.S. carmakers to finance their future and leaving consumers all the more reluctant to spend, top auto-industry executives said on Monday.

General Motors Corp. President and COO Fritz Henderson attends the Reuters Autos Summit in Detroit, Michigan, September 15, 2008. REUTERS/Rebecca Cook

That’s a double blow for Detroit’s three big automakers, who are faced with consumers who cutting back on purchases — and opting for smaller, cheaper more fuel-efficient vehicles when they do buy. That means the carmakers need to find the money to retool their factories away from the trucks and sport-utility vehicles that had been their bread and butter for much of the past decade as well as investing in energy-efficient technologies like lighter materials and new batteries for hybrid electric vehicles.

“Capital markets have been quite difficult, and this is just going to make it more so,” said Fritz Henderson, president and chief operating officer of No. 1 U.S. automaker General Motors Corp (GM.N), told the Reuters Autos Summit in Detroit.

“We’re in for some rough waters here at least for this week if not the next couple of months,” Henderson said.

For auto retailers, who rely heavily on financing to drive sales on their lots, the credit crunch is a major concern.

“The No 1 issue for us as an industry is credit availability,” said Mike Jackson, chief executive of AutoNation Inc (AN.N), the largest U.S. auto dealership. “The consumer is spooked. They are struggling with the value of their house, they are struggling with credit availability.”

Buyers reached a breaking point once gasoline reached $4 per gallon, said Jackson, who added the American economy is “clearly” in a consumer recession. The shift in consumers’ mind-set after that tipping point was faster than any he has seen in 40 years in the auto business, he added.

“You tell me when the credit crisis passes and I’ll tell you when auto retail’s volume is going to recover.”

WALKING AWAY FROM LEASING

One dramatic sign of the way the crunch has hit the U.S. makers is the decision by Chrysler CBS.UL this year to cease offering leases. Rivals Ford and GM also sharply cut back their lease offers.

“The withdrawal from leasing is just a huge, huge step. If you talk to many people that lease, they don’t want to own. And so if they go into a Dodge dealership or a Chevy dealership or whatever it is and they can’t get a lease there is a very high probability that are going to turn to one of the foreign brands where they can get a lease,” said Jerry York, an adviser to Kirk Kerkorian, a longtime industry investor with a 6.5 percent stake in Ford.

The move to stop offering leases — which York estimated drove some 15 to 20 percent of Detroit’s sales — shows the companies had their backs to the wall.

“They have limited access to capital,” York said. “When you are in that situation you look at your total portfolio and you say, ‘OK, what is the least harmful way for me to cut back?’”

PURSUING GOVERNMENT LOANS

The credit crunch makes automakers all the more intent on securing $25 billion in low-cost government loans to finance their development of more energy-efficient vehicles. A 2007 law raising fuel-economy standards called for that financing, and Congress is currently debating how to fund the money.

“It’s just turning out that that’s a very important feature of the legislation they put in because with the credit markets tightening, everybody’s cost of capital is higher,” said Alan Mulally, chief executive of Ford Motor Co (F.N).

The government loan program will make it possible for automakers to improve fuel economy faster, Mulally said.

“We’ll continue on our plan, it’s just a matter of how fast you can do it,” he said.

The additional shock to the credit system of Lehman’s bankruptcy — which followed the collapse of Bear Stearns earlier this year — will only serve to prolong the downturn in auto sales, executives said.

“Even when the financial markets stabilize there is going to be some aftermath from all of this ... it’s going to be another year of turmoil,” said Tom Stallkamp, an industrial partner at New York private equity firm Ripplewood Holdings and former Chrysler president. “Next year will not be any worse, it will flatten out, but it will not rebound. It will be 2010 before the automobile business really comes back.”

(Additional reporting by Nick Zieminski, editing by Richard Chang)

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