Autos: Could 2010 Be Detroit's Turnaround Year?

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.

Whether the economy and the automotive market have bottomed out "is the million-dollar question," says John McDonald, a GM spokesman. But he agrees with Schnorbus that there's "a significant overhang demand that is not being met" that will cause car sales to improve slightly by the end of 2009 and start to turn around by the beginning of 2010.

Until then, things may get worse before they improve. According to Wolkonowicz, the rest of 2009 will be "horrendous." But he said that other factors, like the stimulus package's provisions to spur construction, will eventually jump-start action in a key segment for domestic automakers: pickup trucks. As more people become employed in construction jobs, they'll have income and are likely to need new trucks. "There's nothing better for Detroit than pickup vehicles," which yield high profits, he says. He predicts that pickup trucks could lead the auto industry out of its doldrums sometime next year. And by the second and third quarters of 2010, a combination of pent-up demand and effects of the stimulus package "will cause auto sales to turn around," building momentum in 2011 and returning things to sustainable levels by 2012.

Jon Linkov, managing editor of autos for Consumer Reports, is more cautious, arguing that it's unclear whether the pent-up demand will outweigh the incredible fear in the market within the next six to 12 months. In particular, he points to the worry over the future of the domestic car companies, and whether consumers can bank on them sticking around. That's especially true for Chrysler. Chrysler products don't test well and aren't reliable, says Linkov. While GM has some promising cars, consumers are worried that the company is hemorrhaging money. "Everyone wants to know what happens if they go out of business," Linkov says. Consumers want assurance that if they get up the nerve to purchase a new vehicle, they "won't be left by the side of the road."

Despite the potential positive signs, some automakers are wary of painting a rosy future at this point. "There are simply too many variables in the marketplace to make an accurate prediction regarding when the market will turn around," says Chuck Schifsky, a Honda spokesman.
But Cole, of the Center for Automotive Research, remains upbeat. "The outlook for the industry is great," he says. Many automakers are banking on the hope that he ends up being right.

Autos: Could 2010 Be Detroit's Turnaround Year? | Business