Uncertain Future? … everywhere but here

If it’s beginning to sound like a broken record, at least it’s a tune we can stand to hear: As the nation falters economically, it’s a good thing we’re in Texas.

My professional reasons for saying that: As August ended, Classic Chevrolet again took the top spot nationally for new Chevy sales. This time Classic’s closest competitor was in New York, but the sales difference between first and second place exceeded 100 vehicles. Then Jim Hardick and his crew at Mortiz placed 13th nationally for Chevrolet, the highest ranking in their history. Meador Chrysler Dodge Jeep had its best month for sales in at least eight years, up 325 percent from April — and enough volume to place among the Top 10 U.S. Chrysler dealers. Mortiz Kia lost first place for the month by 9 sales, but maintained enough volume year to date to retain the No.1 spot for Kia nationwide. While this was going on, Ford F Series pickup sales in the Fort Worth zone nearly doubled the number sold in Dallas.

All in all, when the market came alive in the last week it gave local new car sales a remarkable finish for August. That’s good; at midmonth things were looking grim for many if not most dealerships. But then so much demand hit in the last week that Classic sold 172 vehicles in just the last two days of the month.

That’s Texas for you.

Ask an Authority, Not an "Expert"

This past Tuesday I spoke to the Automotive Market Research Council at its bi-annual convention in Sedona, Ariz. The Council’s mission is to bring together automobile manufacturers, parts suppliers and aftermarket providers to get a better grasp on where the automobile industry is headed in the near and long term. Needless to say, at this junction in the highway, few people have any clear idea where the future of the automobile industry lies; so they asked me to come and speak about current and future energy issues, financial problems facing the nation and how these might affect the automobile industry.

There’s little doubt that the auto industry is in trouble internationally. In fact, today car companies worry less about their negative financial statements than they do about their ability to recover if the energy markets and financial pressures on their primary consumers don’t subside, soon. The AMRC’s conference was aptly themed, "Looking for Our Oasis in the Economic Desert." That line neatly sums up the automotive industry’s pessimistic outlook.

But it’s not just the American automobile industry feeling its customers’ pain. Renault just announced 4,000 layoffs in Europe, while GM and Ford will both cut their workforce numbers in Spain. England just had the worst August for new car sales since 1966.

Now the business sections of foreign newspapers carry articles lamenting the fact that their economies aren’t doing as well as ours. That is a complete reversal from six months ago, when those same publications were discussing why their economies were becoming more dynamic than America’s, while blasting our bankers for selling them so many worthless mortgage-based CDOs.

There are, of course, problems. Certainly this year in many of my columns in both the Fort Worth Star-Telegram and at BusinessWeek online, I’ve written about the current hype in the energy market. First on how we were entering the summer driving season with the largest amount of refined gasoline on hand since late 1993, yet stories on the newswires warned that we could have problems with gasoline supplies. Then, upon investigating the oil market to determine why actual supply and demand weren’t dictating prices, it became clear that excessive speculation, with help from so-called oil analysts and "experts," was driving prices and not any tangible shortage of crude oil.

Many readers debated that proposition in my May and June articles, but today oil has collapsed in price by almost 33 percent from its July peak of $147 a barrel. Now virtually everyone agrees that speculators had been orchestrating and manipulating oil’s incessant rise since the first of the year. Although to their everlasting credit, the Commodities Futures Trading Commission took both sides of that issue last week.

Manufacturers’ Misery

Yet even while all Americans (including Texans) complained about gasoline prices that shot over $4 a gallon during the summer, it was also this energy bonanza that helped keep the Texas economy afloat and for the most part expanding: Energy monies flow into our state.

So, therefore, do workers: This past week an analysis of our state showed that Houston, Austin and Dallas Fort Worth held respectively the first, second and third positions nationwide in employment rankings. Another report a few weeks ago showed Dallas Fort Worth the overall winner, with Plano having the highest income per family in the nation.

On the other end Phoenix, which for years has held the top spot for employment and wealth, has fallen from first place in 2007 to 28th place in this year’s survey. Just two years ago Phoenix’s Midway Chevrolet was neck and neck with Classic for #1 in the nation and today Midway’s numbers seem to have fallen by over 50% monthly. Again, this shows how far down so many regions of the country are right now compared to ours.

Even luxury cars elsewhere haven’t dodged the bullet this time. JM Family Enterprises’ Lexus store in Fort Lauderdale is down by 1,200-plus sales for the first eight months of this year, while Longo Lexus outside Los Angeles has posted a 1,500-unit loss in 2008. But locally Sewell Lexus is down by only a handful of vehicles, while Park Place in Grapevine is up almost 200 new cars year to date. Ford F Series truck sales were dynamically better on the western end of the Metroplex, and one could cautiously credit that situation to the success of the Barnett Shale expansion.

Still, aside from our incredible success locally, on the national and international level those same automakers are not "just crying wolf" — they’re being eaten alive. Current rebate levels allow Meador to sell a remaining 2008 Ram Pickup for somewhere around a 40 percent discount from list; one gentleman wrote me, astonished, that he got one-third off (with rebates) on a GMC truck; the Mustang has a $4,000 rebate, and so on. But, while this is the ultimate buyer’s market ever for most new cars and trucks, it can’t last.

Even now car manufacturers are leaning on parts suppliers for ever-lower prices, even though many suppliers have long since been forced into bankruptcy. So everyone’s fortunes hinge next on the cost of raw materials — which the commodities markets often bid up as high as oil. This is why the financial system for building and selling automobiles is broken; it is unsustainable in its present form.

No, it wasn’t the high cost of health care and it wasn’t the high cost of labor; the blame rests squarely on the cost of extremely high rebates to entice buyers into new car showrooms. GM’s rebate costs per vehicle sold have been much higher than its costs for labor and health care combined. Even Toyota’s American profits fell by 85 percent in the second quarter. The manufacturers’ misery is widespread.

Here’s the Bad News

No one knows where we are headed next, but for whatever reason the AMRC thought I might have a clue. Here’s a short synopsis of my forecast.

For the car buyer, rebates will continue on older products until their next cycle for renewal. But if Detroit and others don’t get their incentive costs down to $1,000 a vehicle or less, their future is uncertain.

There will be many more small car offerings, but don’t expect to equate small cars with small prices. All of the manufacturers, domestic and import, want premium prices for their compact cars like customers pay in Europe and elsewhere. This issue has become more pressing than you’d think; six months ago all the European importers were questioning their U.S. business models, but now Europe’s economy is slowing down. You get the sense that America is their best hope for future profits.

I believe that internally the car companies understand that the world is approaching the year (likely 2015) in which the supply and demand equation for oil will turn decidedly negative. Barron’s magazine carried an interview with Charlie Maxwell two weeks ago, and the thrust of that discussion was how the world will cope with oil at $300 a barrel.

That’s what the car companies are most afraid of right now. Come to think of it, the future of oil keeps me awake at night, playing through all the possible scenarios. (Please, no e-mails from the Drill Here, Drill Now group. That will mitigate the problem, but won’t even come close to solving it.)

One thing I do know. When oil production against demand does go upside down, much of America is going to look back on today as the good old days. And just like we do now, we’ll complain about the high price of gas — and Texas will be rocking financially from those energy profits.

By the way: When that happens, don’t expect to find any $17,000 Honda Civics. Start thinking twenty-five grand.

© 2008 Ed Wallace

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Society. He reviews new cars every Friday morning at 7:15 on Fox Four’s Good Day, contributes articles to BusinessWeek Online and hosts the talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF. E-mail: wheels570@sbcglobal.net