Will New Car Prices Stifle an Industry Recovery?

Pop quiz: in what calendar year did the U.S. auto industry first sell more than 15 million cars and trucks? Time's up. It was 1965. A year later, the Center for Automotive Research (CAR) held its first Management Briefing Seminar, a collection of speeches and panel discussions featuring automaker and auto supplier executives, engineers and analysts and United Auto Worker chiefs. They're held in the resort town of Traverse City, in the northern lower peninsula of Michigan. The people running the event, including CAR Chairman David Cole, find the federal bailout of General Motors and Chrysler very distasteful. Yet they know that without the help, there very likely would not have been a 2010 Management Briefing Seminar.

CAR's post-mortem for the worst downturn in the auto industry since the 1930s provided some fresh insights. For one thing, scratching our way back to a 16-million-unit year, which was the norm from the late Clinton years through most of George W. Bush's two terms, will be very difficult.

CAR figures the Treasury department has handed out a total of $132 billion to automakers, and that includes Targeted Asset Relief Program money from late-'08/early '09, plus the current administration's program to encourage battery-electric car production. GM and Chrysler have paid back about $17 billion, total, to date. (This doesn't include $3.1 billion the Obama administration just pledged to Ford to help it export American-made vehicles to NAFTA neighbors Canada and Mexico.)

Meanwhile, the Detroit Three have announced more than $7.6 billion in new projects this year, and CAR says more than 50,000 auto industry jobs (including from suppliers) have been added since the bankruptcies. Most of those jobs are in Indiana, Ohio and Michigan (no wonder I'm bullish on the bailout), and CAR figures the multiplier effect could add a million or more new jobs to the economy.

Here's McAlinden's most startling statement. "The auto recession may have started before the economic recession." CAR figures that the industry was in a housing-related bubble from 1997 to 2007, when sales consistently tickled the 17-million level.

"Until we burn off that bubble, we're not going to get back to the trend, sales growth rate," McAlinden says. "Prices are high and the buyer is waiting."

The corrections made in the past two years have made the Detroit Three pretty healthy, from CAR's point of view. With their bankruptcies, GM and Chrysler were able to wipe out crippling debt, money that was borrowed at rates higher than either company's (or Ford's) margins. Market share for GM and Ford have stabilized and all three are running operating profits in a still-depressed market.

But there's still more than 15-million unit capacity in North America, plus imports. Ford, McAlinden notes, is cutting production in the next quarter to maintain profit.

The attitude of the Detroit Three takes these arguments head-on. It has been a long time since GM, Ford and Chrysler could claim to make money on small and midsize commodity cars. When it announced July sales numbers, GM proudly noted its incentive spending as a percentage of average transaction price is 10.6 percent, roughly equal to the industry average and four full points lower than its ratio last year.

After the concessions the UAW made in the 2007 labor agreement and then, again, in 2009, GM pays an average of $58.15 per hour to its factory workers. The days of GM's huge cost disadvantage per car are over. Toyota's non-union Kentucky plant pays $56.16. And the two-tier labor agreement with the UAW could lower GM's cost by up to $10 per hour.

It seemed less than a year ago when foreign and domestic companies were giving away cars just to move the metal; McAlinden says new car prices (adjusted for inflation) are at their highest point in seven years, bolstered by even higher used car prices and higher loan interest rates.