There are good reasons to be positive
By SARAH A. WEBSTER
FREE PRESS AUTOMOTIVE EDITOR
Recovery is on the horizon.
I know you might be pessimistic, given these epically bad times in Michigan — the state’s unemployment rate hit a heart-stopping 14.1% last month.
I also know this upbeat outlook is likely to give little comfort to those who have lost their homes, jobs and dignity during this crushing global recession.
But there are legitimate reasons to think the worst may truly, finally be behind us.
What’s more, there is plenty of mounting data to suggest that a recovery might come on faster and stronger than anyone living in the doldrums, as we all have been, might believe.
First of all, two of Detroit’s automakers have already hit rock bottom, which means there’s nowhere to go but up.
The new Chrysler emerged from bankruptcy on June 10 and is already restarting its factories.
Despite legal challenges, the whole process took just 41 days, easing the way for GM to swiftly exit bankruptcy by summer’s end, too.
But the real signs of hope are there in consumer confidence levels, which has been rebounding dramatically for the past three months now. After hitting an all-time low of 25.3 in February, the Conference Board Consumer Confidence Index (1985=100) has been going up, up, up: 26.9 in March, 40.8 in April and 54.9 in May.
V-shaped recovery ahead
That positive jump has led to one of the most promising — and credible — forecasts I have seen to date, from the global consultancy A.T. Kearney.
During a breakfast seminar at the Townsend in May, I was mesmerized by page 14 of a report entitled, “Crisis in the North American Automotive Industry: Weathering the Storm.”
That particular page forecasts auto sales for the next five years, and it doesn’t show a slow U-shaped recovery where we linger at the bottom for a while before crawling out of the barrel.
No, the best minds at A.T. Kearney — who base their findings on rigorous studies of consumer confidence, vehicle affordability, credit availability and economic growth — envision a sharp V-shaped recovery for the U.S. auto industry.
After plummeting from 16.2 million new car and truck sales to an estimated 9.8 million this year, A.T. Kearney predicts that a rapid recovery back to 16 million could occur by 2011.
• PDF: Download a copy of the report here
Looking at the chart, I wondered if this sharp recovery was too good to be true, especially since it seems like it would take a while to bounce back from today’s high unemployment levels.
But Daniel Cheng, a vice president at A.T. Kearney assured me that the numbers had been stress-tested repeatedly, under a variety of scenarios.
Under A.T. Kearney’s baseline forecast, sales would still bounce back to 16.1 million vehicles by 2012, just a year later than the firm’s most rosy “Blue Chip” forecast.
The way A.T. Kearney sees it, uneasy consumers have been holding back on buying 8.4 million vehicles for the past two years and all that pent-up demand will turn up at dealership showrooms through 2015.
U.S. autos: “Attractive” again
Sixteen million vehicle sales isn’t cause for celebration alone, of course.
Automakers have sold more than 16 million vehicles in the United States before, and Detroit automakers bled billions of dollars through many of those high sales years.
The A.T. Kearney forecast also doesn’t detail whether those 16 million or so vehicle purchases will be of trucks, which have been more profitable, or cars, which haven’t been quite so financially rewarding.
But after the painful restructuring Detroit’s automakers have undergone — shedding debt, uncompetitive labor costs and unnecessary factories — GM, Ford and Chrysler should be reporting handsome profits at those kinds of sales levels in the future. That’s especially true since Detroit’s automakers have resituated their business models to not rely so much on profits from pickups, SUVs and vans.
In May, 53% of dealer inventories were passenger cars vs. just 38% in May 2008, according to Goldman Sachs analyst Patrick Archambault.
On Thursday, Archambault issued a report with a heartening title, “U.S. Autos: Raising coverage view to Attractive,” that shared many of the views of the A.T. Kearney report.
Archambault concluded that the domestic auto industry is “in the middle phase of a cyclical rebound … We see improved affordability, improving confidence and significant pent-up demand as likely to … deliver significantly more upside … as auto sales gain momentum.”
He went on to say that there are “excellent values” in shares of Ford Motor Co. and a variety of suppliers, such as Southfield-based Federal Mogul and Troy-based ArvinMeritor.
Consumer confidence, he noted, “has been a surprising strong predictor of auto sales cycles on a 6-month lagged basis.”
Volatile gas prices and distress in the auto parts industry, which continues to restructure, continue to be risks to a recovery, Archambault said. But, on the whole, he was positive about the future.
“While conditions are still precarious,” he wrote, “slowing job losses and the rally we have seen in equities bode well for a continuation of this trend, which in turn, points to an improving trend in auto