Reversing Detroit’s Fortunes

These are bad times for the auto industry. Over the weekend, President Obama forced the resignation of General Motors CEO Rick Wagoner, while rejecting both GM's and Chrysler's restructuring plans, sending the automakers back to the drawing board if they want federal assistance. Meanwhile, U.S. auto sales have fallen 41 percent from last year. "We are in the midst of the worst economic storm of the last half century and it keeps getting worse," says John Wolkonowicz, an analyst with Global Insight in Lexington, Mass. How long will it be before Detroit reverses its fortunes? (Article continued below...)

Assuming that automakers can stay afloat until then, 2010 might be the turnaround year for the industry. According to some dealers and industry analysts, including Wolkonowicz, there are multiple reasons to be optimistic, including the easing of consumer credit and tax benefits embedded in Obama's economic-stimulus package. "When credit becomes available, there will be a 25 percent boost in sales," says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. But perhaps the biggest ray of hope is one key factor: as Americans hang onto their cars and those existing vehicles continue to age, there's likely to be a growing demand for new cars in the not-too-distant future.

A recent R. L. Polk & Co. study found that owners are keeping their cars longer than ever before, for an average of 9.4 years. Vehicles are increasingly being driven closer to the 100,000-mile mark, largely because consumers are worried about their jobs, the broader economy and the difficulty of obtaining credit. For now at least, drivers seem more willing to foot repair bills than new-car payments.

Then there's the increasingly lopsided "scrappage rate." That's the term the industry uses to estimate the number of cars sent to salvage or destroyed. "There's no question right now that we're selling fewer [new] cars than we're scrapping," says Bob Schnorbus, chief economist with J. D. Power & Associates. While 11 million to 13 million cars were scrapped in 2008, there were only 9 million new cars sold, so "it's a safe bet that we're wearing down the vehicle stock on the road," says Schnorbus.

Ultimately, old cars will die and consumers will have no choice but to buy new or used ones. And as more consumers opt for less-expensive used cars, there will be a dwindling supply of those vehicles and a smaller gap between the price of used and new cars, moving consumers toward new vehicles. Schnorbus predicts that by the end of 2009 and the beginning of 2010, "we'll have effectively turned the corner and the momentum will shift back to buying more vehicles." The market is already so depressed, he notes, that it won't take much from the stimulus package to invigorate sales. Add to that the fact that the population continues to grow, and you've got a recipe for hope.