Markets

5 Things That Scare the Auto Industry in 2011

By Jim Henry

Updated on: January 10, 2011 / 1:51 PM EST / MoneyWatch

DETROIT -- In case you were thinking all is well again in Detroit, here are Five Things That Scare the Auto Industry in 2011, based on presentations on Jan. 9 for the Society of Automotive Analysts. The session was part of the run-up to this week's press preview of the Detroit auto show, formally known as the North American International Auto Show:

1. Shell-shocked consumers:
"Maybe we're underestimating the psychological impact (of the Great Recession). Maybe savings rates don't go down, maybe they even go higher," said William Strauss, senior economist and economic advisor, Federal Reserve Bank of Chicago.

Strauss said U.S. households are putting more money into savings. That's good news for household balance sheets, but bad news for automakers if people are paying off debt and putting money in the bank instead of buying cars on credit.

2. U.S. consumers still want big, powerful trucks.
To meet Corporate Average Fuel Economy Standards, the car companies are pushing small, fuel-efficient cars. "There are more than 30 new hybrid models on the market. It doesn't matter. We're not buying them," said Rebecca Lindland, director, IHS Global Insight.

That might not happen until today's kids born after 1995 are old enough to buy cars, she said. That so-called Generation Green will have grown up around hybrids and electric vehicles.

3. Younger drivers might not care as much about cars:
"We simply don't know how consumers will continue to behave," said Jeff Schuster, executive director automotive forecasting, J.D. Power and Associates. "Will they turn over cars as quickly? Where will leasing be? Obviously, that churns the vehicles and builds up a replacement demand there."

4. Big discounts could come back:
"Do consumers come to a realization that those incentives aren't going to come back? And then, do they come back? Does that discipline (on the part of the car companies) persist?" said Schuster of J.D. Power.

Operating on a "push" basis is a big reason Chrysler and GM went bankrupt in 2009, and Ford had a near-miss. That is, fixed costs were so high that the car companies consistently built more cars than they actually needed, just to keep their plants running. With too much supply and not enough demand, prices and margins fell past the point of no return.

Today, the car companies are operating on more of a "pull" basis, where they only build enough cars to meet demand, or maybe even a little less. That reduces the need for discounts. The trouble is, consumers have come to expect a deal and could opt simply to hang onto their cars longer.

5. The U.S. budget deficit:
"The risk for the U.S. is the deficit plan ... We don't have one right now," said Ellen Hughes-Cromwick, Ford chief economist. She said the deficit is a threat to the larger U.S. economy, and therefore an indirect threat to U.S. auto sales. [Of course, you have to draw some fairly abstract macroeconomic connections to jump from the budget deficit to an auto-sales crunch -- most scenarios involve the so-far nonexistent threat of runaway inflation, which could theoretically push up interest rates to the point that no one would finance auto purchases, I suppose. Would have been nice of Hughes-Cromwick to spell out her thoughts a bit more clearly. --Ed.]
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Photo: GM