Rapid Downsizing of the U.S. Auto Market

Automakers were in trouble even before the collapse of the credit market. Twenty-seven billion dollars worth of trouble for Ford and GM alone, just for the first six months of 2008. Projections are for two billion more from each company in third quarter losses.

While American automakers are the worst hit, the rapid downsizing of the U.S. auto market is touching everyone in the industry. Toyota, for instance, is cutting their annual sales forecast for 2008 by 26 percent. After posting their worst sales month in twenty-five years, BMW is slashing production and preparing for a price war, hoping they can get rid of current inventories.

Other stories differ in specifics, but not in basics. U.S. auto sales, down 32 percent across the board, are the lowest since 1983. European automakers are about the same, on average, and Japanese automakers are heading in that direction. To compensate, automakers are already cutting overtime, and will likely cut some jobs and suspend others.

There is a ray of good news in all this, in a backhanded sort of way. If you have the money, or can borrow it, prices are about to take a big drop on almost any car you want to own. Few people have the money in hand, of course, so the question is, can they borrow?

There is credit out there, but it is getting harder to find. The big banks - Bank of America, CitiBank, Wells Fargo and their ilk, are not really affected. They are so diversified in their loan portfolios that they can afford to keep lending on automobiles. But in the current economic situation they are not likely to loosen their requirements or add to their available loan capital, so the number of people they serve is expected to remain static.

On the other hand, smaller banks, savings and loans and the financial arms of various automakers, such as Chrysler Credit Corporation or GMAC (the so-called "captives"), are much more restricted. Captives are hurt not only by default on loans, but by other losses sustained by their parent companies. Local banks and savings and loans, which do a volume business in auto loans, are likely to be hurt by defaults and other results of job losses during the economic downturn.

All of them, including the "big boys," have to face the new credit restrictions brought on by government reforms. The end result is that there will be loan money for cars available, but not in the bulk buyers are used to. The result, according the National Automobile Dealers Association, may be the closing of as many as seven hundred car dealerships across the nation.

So much for the sellers and lenders. What about Joe Six-Pack, or as he is now renamed, Joe the Plumber?

Curt Beaudouin is vice president of Moody's Investors Service, a financial analysis and research company. Mr. Beaudouin suggests that for years buyers have been, with the blessing of lenders, buying more car than they could afford. He expects that to change. Buyers will now be more careful making sure they can fit new car financing into their budgets.

Those who are "upside down" in their cars, meaning they owe more than the value of the car, will be stuck driving what they have until they catch up. The same for those with bad credit. Others will be shopping for used cars, maybe even older models, to qualify for credit. Leasing will remain an option, but not to the extent it has been. Chrysler Credit has stopped all lease lending, and other lenders are cutting back. A substantial number of potential new car buyers will be hanging on to their current vehicles longer, especially since trade-in values have also plummeted.

Exact numbers are difficult to predict, but the rapid downsizing of the U.S. auto market is expected to last at least several months and maybe a few years. The short version is that automakers, autoworkers and auto dealers are likely to suffer, as are those with poor credit or who have made excessive use of their credit. In the short term, the only winners will be those with excellent credit or cash in hand.