The first in a three-part series on the auto industry.

The future of the Detroit 3 automakers — General Motors Corp., Ford Motor Co. and Chyrsler LLC — hinges on two factors: a successful downsizing and the resumption of auto sales.

“Many believe the smaller and leaner companies can be very profitable,” says Tony Faria, professor at the Odette School of Business at the University of Windsor in Windsor, Ont.

If U.S. sales return to 13 million units a year by 2013-14, the downsized Detroit 3 — which have done a good job of cost cutting — could be very profitable, adds Faria. They just have to survive the short term and retain 50% of U.S. auto sales — no small challenges.

The North American auto industry has had a huge impact on the economies of the U.S. and central Canada. In good times, the sector accounts for about 25% of Ontario’s manufacturing and almost 5% of its gross domestic product. In the U.S., it amounts to 3% of GDP.

Now, that is shrinking by 15%, says Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. in Richmond Hill, Ont. And everything will be affected: car makers, auto parts manufacturers and car dealers.

“When we talk about a sustainable auto sector,” he says, “every company has to get smaller.”

At the heart of the problem is shrinking car sales, exacerbated by the credit crisis. For the period 2000-08, U.S. auto sales averaged 16.8 million units annually. But that dropped to only 13.4 million units in 2008 and is expected to sink further in 2009, to around 10 million units. Canadian auto sales haven’t been hit as hard; indeed, in 2008, sales were still the 1.6 million units they averaged in 2000-08. But that’s not enough to offset declining U.S. sales.

A major question, then, is what U.S. auto sales will be in the coming years. Is that 13 million units achievable?

Faria thinks it is, but only in years of strong economic growth; in down years, it will shrink to 10.5 million-11.5 million units.

Average sales of 13 million units implies U.S. vehicle ownership — the percentage of the driving age population that owns a car — will fall to about 95% by 2020. It was 101% in 2008, having climbed from 90.3% in 1990.

DesRosiers doesn’t think U.S. auto ownership needs to be so high, pointing out that Canadian ownership is around 75%. Why, he asks, do Americans need so many more vehicles than Canadians?

“I have a hard time identifying any groups of Canadians who are not getting where they need to go,” says DesRosiers. “Some teenagers and retired couples may lack the regular vehicle access that a great proportion of their American counterparts enjoy.”

Nor does DesRosiers think Americans can afford to buy as many cars as they have in the past. It was the easy access to credit that created the ramping up of vehicle demand in the U.S. in the past decade. Now easy credit has disappeared — and sales have plunged.

The aging of the baby boomers will also push auto ownership lower, adds Carlos Gomes, auto industry economist at Bank of Nova Scotia in Toronto. Seniors generally do not need to replace their vehicles as frequently as younger people — and they are expected to account for 15% of the U.S. population in 2015, vs 12% in 2008. Gomes points to the example of Japan where the proportion of seniors increased to 15% from 12% between 1990 and 1995, with a corresponding reduction in vehicle purchases per 1,000 population to 35 from 41.

Some moderation in Canadian auto ownership is also likely, says Gomes, but not to the same extent as in the U.S. because Canada already has lower ownership levels.

Richard Cooper, vice president Canada with U.S. auto consulting firm J.D. Power in Toronto, is more optimistic. He believes U.S. sales could return to the 15 million-16 million units range in the 2012-14 period. “Americans are very wedded to being mobile,” he says.

DesRosiers presents the following scenarios based on various assumptions about U.S. auto ownership in 2020.

• If U.S. car ownership rises to 105%, up from the current 101%, annual sales would average 12.8 million in 2009 through to 2020, down 13% from the 16.8 million averaged in 2000-2008.

@page_break@• If ownership declines to 95% — which would still be more than the 90.3% in 2000 — sales would average 12.8 million in 2009-20, down 24% from 2000-08 levels.

• If ownership drops to 85%, sales would average 11.1 million in 2009-20, a 34% drop from 2000-2008 levels.

• If ownership falls to the Canadian level of 75%, sales would average 9.4 million in 2009-2020, down 44% from earlier levels.

The sales level will determine the size of the Detroit 3 — and the future of the North American auto industry and its impact on the U.S. and Canadian economies.

Thursday: The auto industry’s shrinking footprint

Friday: Autoworkers feel anger, frustration and fear

IE:TV: Analyst sees profitable auto manufacturers in 2014



Tony Faria, co-director of automotive research at the Odette School of Business at the University of Windsor discusses historical auto sales, the outlook for the industry and the impact of plant closures in Windsor. He spoke in Windsor.

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