2009: Out of chaos, a fresh start?

Gerry Malloy

SPECIAL TO THE STAR

Predicting the future at the best of times is a fool's errand. Predicting the future of the automotive industry, with circumstances changing not just daily but hourly, borders on madness.

Nevertheless, here are my predictions for the automotive world in 2009 and beyond.

Even in the chaos we are currently experiencing – or perhaps because of it – three things are all but certain:

News about the state of the industry itself will overshadow news about product, however significant that product may be, in the near term at least.

The automotive industry will look different at the end of 2009 – perhaps very different – from the way it looks at the beginning.

It will continue to be a buyer's market – perhaps the best time ever to buy a new car or truck – if you can pay cash or qualify for credit.

Greener, more fuel-efficient

There will be tonnes of new product arriving on the market in 2009. Among the most important will be the new Honda Insight, on sale in April, and the third-generation Toyota Prius, which will make its world debut next week at the Detroit auto show.

Those vehicles will be joined throughout the year by more hybrids, including the Ford Fusion hybrid, General Motors' hybrid pickup trucks, and hybrid entries from both BMW and Mercedes-Benz.

There will be more diesels, too, with passenger cars and SUVs from Acura, Audi and BMW joining those already offered by Mercedes and Volkswagen.

All those fuel-efficient vehicles play to the apparent mood of the public and, perhaps more importantly, of the politicians who hold the purse-strings so important to the viability of key industry players. But contrary to widespread opinion, they are not necessarily the keys to the recovery of the market or the ailing Detroit Three automakers.

While small, efficient cars and utility vehicles are the dominant players in the Canadian market, highly fuel-efficient vehicles such as hybrids still represent a very small part (well below 5 per cent) of the market.

Listening to some key political decision-makers, you might believe that the woes of the Detroit Three are wholly the result of their failure to anticipate the need for fuel-efficient vehicles. But that is an over-simplification at best.

All three have had hybrids on the market in various guises and many of their conventionally powered vehicles offer class-leading fuel economy. There is no shortage of fuel-efficient vehicles available to consumers from almost every manufacturer.

And with gas prices now way down from their spring and summer highs, sales of trucks rebounded in November to surpass those of cars for the first time this year.

So the problems facing the industry, including the Detroit Three, go beyond just the products on offer.

Reshaping of the industry

The global economic meltdown is the reason the world's auto market has collapsed.

Sales are off by one-third or more in the U.S. and almost to the same degree in Europe and much of the rest of the world, but it's not because people have stopped buying vehicles that are not fuel-efficient – they have stopped buying vehicles of all types.

The primary reason is the lack of credit availability. Manufacturers can't borrow money to finance their operations and product development, dealers can't borrow money to finance their operations and inventories, and consumers can't borrow money to finance the purchase of new cars and trucks.

Even sales of the iconic Prius, which were booming way beyond Toyota's ability to keep up with demand just a few months ago, have fallen dramatically in the United States. So much so that the company has put on indefinite hold its plans to produce the Prius at a plant now under construction in Mississippi.

Reeling under the impact of the sales downturn, both Toyota and Honda are expressing concern not just about reduced profits but unheard-of losses.

Almost every automaker worldwide is curtailing production and trimming costs.

The cost pressures on the automakers are reflected not only in production cutbacks but also in such actions as the withdrawals of Honda from Formula One, Audi from the American LeMans series, and Subaru and Suzuki from the World Rally Championship.

It promises to be a tough year for auto racing all around, as not only has Montreal's Canadian Grand Prix been cancelled (although the Toronto Indy Race will be back) but sponsorship dollars are also disappearing everywhere.

The International Monetary Fund forecasts it will be at least late in 2009 before the world economy begins to recover from the results of the financial meltdown we are in, which means it will probably take several months, even years, before it returns to what we have grown to accept as normal.

Will Detroit Three survive?

In the interim, the auto industry is in for some major changes.

With the recent announcement of short-term loans to Chrysler and General Motors from the Bush administration in the U.S., which have been echoed by the Canadian and Ontario governments, these two automakers have dodged the immediate bullet to survive into the new year.

The currently approved loan package has been aptly described as just "a bridge-to-a-bridge loan," which will be necessary for their ongoing viability. It buys them time until the Obama administration takes over.

Their longer-term fate is far from certain, even with the assistance of further government loans or loan guarantees expected to be approved by the new administration. And there will be strings attached to all those loans – big strings.

Among them will be accelerated restructuring of the companies that extends from the executive offices to the plant doors to the dealer showrooms. There will be casualties at every level – including the loss of some brands and, inevitably, some dealers.

GM has already indicated its intent to shop Saab, Saturn and Hummer, if buyers can be found for the brands, and to reduce Pontiac to a niche brand.

The latter decision could have much broader implications here in Canada, where Pontiac is a mainstream brand and the cornerstone of half of GM Canada's dealer network, than in the U.S., where it accounts for a much lower portion of the company's business.

Ford, which is in less dire financial straits than its rivals, has finally admitted that Volvo is for sale. And the blue-oval company has already reduced its investment in Mazda.

Chrysler hasn't yet revealed plans for specific product rationalization but seems to be pinning its hopes on "strategic alliances" with other automakers, such as an agreement with Nissan on pickup truck production. That said, its once ballyhooed plan to develop a new small car with the Chinese company Chery is now officially dead.

How it will all shake out remains guesswork at best.

My guess is that Ford will be okay, with some judicious cutbacks, GM will survive in an abbreviated form with fewer brands, and Chrysler won't make it through the year in its present form.

Expect Cerberus, Chrysler's owner, to engineer some form of sale, merger or other affiliation with another automaker, probably shedding some products, and maybe brands, along the way.

While all the uncertainty and market chaos tends to have a negative effect on consumer confidence, it also has some real benefits for consumers.

With dealers hungry for sales, vehicle prices at their lowest point in a generation in comparable dollars, and the probability that low interest rates and huge financing incentives will continue to be the norm, it's a great time to be a buyer. And that will continue to be the case through 2009.

If you can pay cash or qualify for credit – which may be the deciding factor – the chances of cutting a favourable deal on your vehicle of choice are better than good.

Looking further ahead

Once 2009 is behind us, the prospects for the future are exciting, particularly from a product perspective.

GM's Volt is scheduled to arrive in 2010, ushering in a new era of vehicles with electric drive – be they conventional or plug-in hybrids, pure electric vehicles or ultimately, perhaps, fuel-cell vehicles.

Most major automakers, as well as several companies new to the auto business, are working on some form of production vehicle with electric drive that will come to market within the next two to five years.

Those vehicles will represent a small part of the market initially and their market share will increase only gradually over the next decade. But they promise to equal and probably surpass the numbers of fossil-fuel powered vehicles sold.

That will be a good thing for our economy and for our environment, if – and it's a big if – we are able to match their growing popularity with a commensurate clean, green electrical infrastructure to supply their energy needs.

Wheels contributorGerry Malloycan be reached atmgmalloy@aol.com

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