GLG News by Jack Sayer

Implications: The summer of 2008 with its monthly dose of double-digit sales declines is over. But will autumn be any better? Maybe.

Analysis:

U.S. auto sales fell by about 15% in August compared with a year ago, to approximately 1.25 million units from about 1.5 million units. And a chorus of OEM executives agreed that their forecast for the rest of 2008 looks just about as dismal.

But something else also appeared amid Wednesday's sales reports: reasons to hope the U.S. market has finally flattened out

It appears we may have hit the bottom in terms of consumer demand in July. Because of factors like lower gas prices and generous incentive spending, my dealer clients started seeing some improvement, particulary in floor traffic, in late August.

There was no sugar-coating the August results per se, nor the immediate outlook. Its going to be as tough for the rest of the '08 calendar year, with the domestic auto makers having to manage their way through a different challenge every month.

The main positive was simply that August represented a marked improvement over July, if not over August 2007. Industry-wide, August sales ran at a seasonally adjusted annual rate of 13.8 million to 13.9 million units, a significant improvement from the 12.6 million rate posted for July.

Talking last month about July, many industry executives seemed to recognize the nadir they had reached. The selling rate was lower than it had been since the recession of the early 1990's and the Detroit Three slumped to their lowest market share-43.4%-in history.

But speaking on Wednesday about August results, many of these same executives adopted a cautiously upbeat tone. They ticked off some budding reasons for at least glimmers of optimism, factors that included an accelerating retreat in gas prices, slight improvements in U.S. economic fundamentals, and even some health in certain aspects of the auto business.

One crucial assist in any second-half improvement, could be the fact that auto makers have so intensely adjusted to the sales decline and drastic shift in consumer demand to more fuel-efficient vehicles over the past several months. Something they did not do during previous downturns.

One question still left unanswered, is what effect the pullback from leasing, which accounted for 20% of sales, by lenders and OEMs will have on sales going forward.

The consensus seems to be that July was the bottom and we will start to see some small but steady improvement from now on.

Implications: Even with strings attached, any help the Federal Government gives to the Detroit Three, will usher in the most demanding, meddlesome period of U.S. federal involvement in the affairs of Detroit's automotive community in its history 

Analysis: The three big U.S. car makers are angling for government help to the tune of $50 billion. It is understandable: They are struggling, and policy makers have  thrown money at financial sector basket cases before. But Chrysler, Ford Motor and General Motors shouldn't get handouts.

Aside from the cost to taxpayers, a government safety net for companies discourages prudent management. It also potentially puts rivals at a disadvantage, making markets less efficient and ultimately hurting consumers. That doesn't mean policy makers should never, ever step in. But the test should be whether the alternative is disastrous enough to warrant intervention.

Take the blank check Congress recently wrote to backstop mortgage giants Freddie Mac and Fannie Mae. It is disheartening to see tax payers money put at risk. But the alternative was a near-seizure of the already beleaguered U.S. mortgage market- a horrendous outcome for millions of American homeowners.

As for GM and its rivals, Congress in last year's energy bill paved the way for $25 billion in cheap loans for developing and making fuel-efficient vehicles. There is an argument that this balances research and other spending by foreign governments whose costs would otherwise fall on Detroit's rivals. But with the Detroit Three short of cash, it is hard not to see it partly as a bailout. In any event the U.S. car makers now are hoping for more, perhaps with fewer strings attached.

It is true they are big employers. But foreign manufacturers such as Toyota also have tens of thousands of employees in the U.S. Financial support for the U.S. companies would undermine longstanding American criticism of countries that subsidize "national champions." It would also set a precedent for other industries' to raid taxpayers wallets.

Moreover, the U.S. auto companies problems are l;largely of their own making. They didn't invest enough in smaller, more fuel-efficient vehicles when they could have. Now that higher energy costs have finally caught up with them, it is unconvincing to say the government should help them meet  the tougher fuel-economy regulations they have long opposed.

On a historical note, even the Carter administration's bailout of Chrysler beginning in 1979-viewed by many as a success-bought only limited breathing space. The company was eventually sold to Daimler, in 1998, and, after costing the German company billions of dollars, then to investors including private-equity outfit Cerberus Capital management, last year.

In this election year, the Detroit car makers might get lucky. The possibility seems more characteristically French than American. The French, however, might force the three to merge, force out two sets of executives and pay the remaining group a lot less. That isn't quite what Detroit's bosses have in mind. 

Implications: Toyota Motor Corp. sees North American sales coming in at 2.70 million units in 2008 and languishing at the same level in 2009. By contrast, the Toyota group sold 2.83 million units in North America last year.

Analysis: Toyota Motor Corp, the world's second largest carmaker, lowered its forecast for 2009 auto sales growth to 2.1% from 5.6% as record fuel prices and sagging economies damp global demand.

The more modest ambitions highlight how even the worlds second biggest and most profitable carmaker has been stung by the U.S. meltdown. The carmaker's strong operating profits in North America nearly vanished in the April-June quarter, plunging 98.9%.

The company will reduce production in the UK and Poland, in response to a downturn in Europe, adding to cuts in the U.S. Toyota lowered the target for North America, its biggest market by 10% as drivers buy fewer SUVs and pickup trucks because of a slumping economy and high gasoline prices.

Toyota initially floated the 10.4 million sales target last year, before the subprime loan problem torpedoed demand in their biggest market. Hitting the goal would have made Toyota the first carmaker to pass 10 million units.

In Europe, Toyota is dropping one of two shifts at its Burmaston, England plant for five months, starting in the second half of September. The company also will suspend one of two shifts at an engine plant in Poland.

European sales are expected to fall 3.8% this year to 1.25 million units.

  

Implications: The automaker, last week in a last ditch attempt to salvage sales for the month of August, announced an "Employee Discount" for everyone, not just bona-fide employees.

Analysis: General Motors last week extended their "Employee Discount" program to everyone in a bid to boost sales and clear out inventory. Now we hear that the automaker is suing employees, retirees and widows for giving discounts to non-employees.

When I first read of the lawsuit in the Forbes article, I didn't believe it. Unfortunately its true. In a masterpiece of bad timing, GM has decided to crack down on a practice that has been going on for as long as I have been a dealer.

GM employees routinely extend the discount program to friends, distant family members, etc.

The timing of the lawsuits, three of which were filed on or after August 20, the day GM extended the employee discount to everyone, is coincidental according to the company. The crackdown comes at a time the company is suffering through its worst sales year in decades.

While not endorsing something that is at best unethical, one has to ask why GM waited until now to put the brakes on the practice.

The employee-pricing program, which could be extended beyond its announced end-date of September 2, is a perk offered to employees as part of their benefits package.. GM is accusing the employees of giving the discount to people they knew weren't eligible and for their own "financial gain."  PS....GM, its been going on forever.

GM routinely audits dealerships for violations, if one is found, an employee could lose their discount for five years for each violation. I can't recall a dealership ever being penalized.

Ford Motor Co. also monitors the use of employee discounts, but if anything, has encouraged employees to give away discounts to improve sales.

A year ago, Ford allowed its active and retired workers to extend the discounts to as many as 13 friends and family members, five more than p[previously allowed. 

Implications: Domestic auto sales are expected to drop over 14% when August sales results are announced on Wednesday. Last month industry observers marveled that Nissan was the only one of the Big 6 automakers that showed a sales increase. How did they do it? They bought and paid for it.

Analysis: Last month,  industry observers marveled that Nissan was the only one of the Big 6 automakers to post an overall sales increase. An increase that helped it garner record high market share.

So how did Nissan do that when the U.S. auto industry is in such a slump that even industry darling Honda, previously bucking the trend, went down with the market as well?

Simply put, Nissan's sales increase and higher market share were bought and paid for.

Nissan brand sales climbed 9.9% to 88,070 vehicles sold, led by its cars.

But those sales came at a price. Since incentive figures usually lag sales results by almost thirty days, it wasn't until today that we saw that Nissan spent more on incentives in July-an average of $2,329 per  vehicle sold-than it had since August 2007. Nissan also outspent other mainstream Japanese, Korean and German brands.

In addition, Nissan outspent import as well as domestic competitors in key car segments, specifically subcompact and compact, where its sales surged and in the midsize segment, where sales held strong.

Nissan is expected to buck the industry's downward sales trend again in August, when it reports sales Wednesday. Nissan is expected to sell 98,000 vehicles in August, up 2.3% from August 2007 and 2.5% from July. Nissan's market share is expected to be 7.8% in August, up from 6.5% in August 2007 but down from 8.4% in in July 2008.

The question will be: at what cost?

Implications: How GM and Ford were ever able to raise money through bond offerings over the years remains a mystery to me. Consider some recent announcements.   August 5, 2008: "Default Risk At Ford, GM, Chrysler hits 95%; Automakers Ask for Taxpayer Handout."   August 4: "Auto Sales Dismal At All Three Detroit Automakers."   April 10: "Ford Abandons Goal of Return To Profitability."

Analysis: Here's another example from General Motors. Let's call it: "GM reduces Carbon Footprint by: .0000001mm.

Call it the one gallon solution, and try not to laugh.

GM plans to release new versions of its full-size pickup trucks and SUVs later this fall. Both editions get an extra MPG in both highway and city driving.

The new models are designated XFE (for "extra fuel economy.) That should make Toyota and Honda sit up and take notice.

On the new XFE models GM extended the front lower air dam, lowered the suspension and revised the chassis to cut aerodynamic drag. GM also cut vehicle weight by using more aluminum parts. The engine is a 5.3 liter V-8 with aluminum cylinder block and heads that can run on ethanol fuel, surely one of the great boondoggles of our time.

All this comes to a net savings of 1 MPG-a great selling point for the math challenged.

Even with a an additional 1 MPG from the XFE models (the new models get 15 MPG in the city and 21 on the highway,) it looks like it's still long way back to GM profitability.

GM's clearly behind. What's the level needed to catch buyers attention? Maybe 20 MPG in the city and 25 on the highway? Maybe 25 and 30? We'll see.

GM reported a net loss of $15.5 billion for the second quarter. Sales of GM trucks and SUVs dropped 23% in the first seven months of this year.

Next up, the question of what with the feds do, if anything, to help Ford and GM in the coming months.
 
On August 13 I did a GLG News article entitled "Could The Detroit Three Become The Detroit Two?" There's my opinion. 

Implications: Automotive insiders are taking a "wait and see" attitude regarding Hyundai's attempt to market a luxury car in the U.S. Many remember the fate that befell VW's Phaeton. 

Analysis: Reading about Hyundai's plans to break into the luxury car market reminds me of the days when Acura first launched and the parts under the hood still said "Honda" on them. It was a mistake that slowed the Acura's initial progress towards being recognized as a legitimate luxury automaker.

I'm also reminded of the more recent launch of the VW Phaeton, which was a flailure despite it being a great car. The problem was never the car but the shoppers VW was pursuing did not shop at VW dealerships. The car probably would have been a success if it had been marketed as an Audi.

As a premium rear-wheel drive sedan, the Genesis faces some well- established competitors such as BMW's 5 Series. So far this year BMW has sold more than 27,000 5 Series.

When I first read about the Genesis I thought:

If VW can successfully sell the Passat (itself a $30-$40 K car) within the Premium/Near Luxury market and yet fail with the Phaeton, what does that say about Genesis' chances when Hyundai isn't in the same league as Honda, Nissan, Toyota or VW? Are consumers going to be especially keen on spending $40K at the same dealerships that are presenting themselves as low cost providers, offering financing to those with bad credit and where the customer experience will pale with what they're used to?

What Hyundai is missing is that luxury cars aren't commodities that are purchased based on how well a particular car company's branding message reached a particular customer. Instead it's a fiercely competitive field where dealers don't compete on price but by trying to sell their interpretation of the best luxury car on the road within a certain price range, class, etc. You build a luxury car business by selling people on the idea that your car is the best solution for their luxury car needs, because people are more concerned about the nature of the car than they are about price.

Implications: Most of the conversation about upcoming electric cars centers around the Chevy Volt and the Toyota Prius. However, a little known French-Indian company may surprise both of them.

Analysis: Like the sort of whisper quiet car it aspires to build, Argentum Motors has been operating in near total silence as it plots its course in the Indian automotive market, and finalizes plans to manufacture electric vehicles.

Some observers claim the company's electric car could be on sale in Europe and North America as early as next year and could debut at the upcoming Paris auto show.

If this happens, Argentum's electric car would beat range-extender Chevrolet Volt and next-generation Toyota Prius to the U.S. market by one year. The Indian company also would have a three year head start on the electric vehicle program being developed by Renault-Nissan, which promises global sales of an electric car by 2012.

Argentum Motors is still relatively unknown, but the company certainly wasn't subtle when it came time to choose its base of operations. In 2007 the company acquired the third-largest automobile factory in India, a sprawling ex-Daewoo plant that had been dormant since the Korean firm went belly-up in 2001.

Several manufacturers have been linked with Argentum Motors, including Peugeot and Malaysian car-builder Proton, a company in which GM has renewed its interest.

Low labor costs and the availability of skilled engineers - not to mention a populace hungry for new vehicles, despite India's recent cool-down -have sparked a wave of new car factories in India. GM will soon begin production of its Spark city-car at a new factory in Pune. Toyota has begun construction of a factory near Bangalore, devoted to building a small car tailored to the Indian market. Volkswagen, Fiat and Renault-Nissan are also rapidly expanding their manufacturing capability in India.

Implications: In July, GM outlined a plan for cutting expenses and selling assets in an effort to raise cash which it is burning through rapidly.

Analysis: General Motors' plan to sell assets to raise much-needed cash may be easier said than done.

In July, GM outlined a plan for cutting expenses and selling assets in an effort to conserve and raise cash, which it is burning through so quickly that one investment firm said Wednesday the automaker needed $7.3 billion in fresh capital to pay its bills through 2009.

But on Tuesday Navistar International backed out of a deal to buy GM's medium-duty-truck unit. And, while GM says it has received much interest in Hummer Division, a number of expected suitors have said no thank you in a variety of languages.

Terms of the proposed purchase were never disclosed so its not known how much GM would have raised from the sale. Some analysts had placed its value at $500 million. Meantime, GM said it would review strategic options for the business, including continued discussions with Navistar.

Also under strategic review for possible sale or restructuring is Hummer, which has seen sales plummet more than 40 percent this year. But of late, a number of parties that were expected or even rumored to interested in Hummer have said no they aren't. Among them are India's Mahrindra & Mahrindra, India's Tata Motors, Russian billionaire Oleg Deripanska and some Chinese automakers.

GM claims not to be concerned, but the need to raise more cash is growing. According to one report GM needs $7.3 billion in fresh capital to pay its bills through 2009. GM could burn through $6.9 billion in the second half of 2008 and another $4.4 billion next year. That amount could increase if the U.S. slowdown spills over to the rest of the world.

Implications: Retail sales in July fell 0.1%, the first overall decline in five months, with the 2.4% plunge in automobile sales the primary reason for the poor performance.

Analysis: The Commerce Department reported retail sales fell 0.1% in July, the first overall decline in five months, with the 2.4% plunge in automobile sales the primary reason for the poor performance.

Auto sales have now fallen 10.5% on a year-over-year basis, the steepest decline in almost six years as consumers weigh the impact of higher gasoline prices and tighter credit during a period of uncertainty for the economy. Last month was the weakest month for Detroit motor vehicle sales in 16 years.

Excluding autos, retail sales rose 0.4%, also the worst reading since February, with most of this increase coming from gasoline station sales.

On a year-over-year basis, retail sales have risen just 2.6%, a figure that is not adjusted for inflation, and here too, the bulk of the gain can be attributed to rising fuel costs. Stripping out gasoline station sales, up 24% over the last year, retail sales show annual gains of just 0.2%

Gasoline station sales rose 0.8% in July as the amount of fuel purchased (in volume terms) again declined, however, with prices now falling, this trend is likely to reverse next month.

The effect of $92 billion in government rebate checks, distributed mostly in May and June with a tiny portion sent out in July, have clearly worn off, though most believe that only about ten percent of this money went to discretionary purchases, the vast majority of the money going to service existing debt or into savings.

With little signs of the current stall in auto sales being over, it seems likely we will see further negative effects on retail numbers as we head into the Fall .

Implications: Whenever the B-word--bankruptcy--is uttered in conversation about the Detroit Three automakers, there is a quick and predictable retort. "Bankruptcy is not an option."

Analysis:

"Bankruptcy is not an option." is quickly followed by: "because we sell a consumer product, and people won't buy cars if they  don't think we'll be around to service them or supply replacement parts."

That's a legitimate concern. But a more persuasive reason to believe that GM, Ford and Chrysler will avert Chapter 11 bankruptcy is the fallout that would decimate its component suppliers and spread chaos throughout the U.S. industrial base.

Think of it as nuclear winter.

That may sound stark, but the prospect of of an auto industry meltdown is actually a fairly routine topic of conversation among automotive analysts. That kind of talk is what happens when Ford reports an $8.7 billion, second-quarter loss, only to be dwarfed by GM's $15.5 billion collapse in the same period.

Think about the catastrophic impact on Metro Detroit if GM, Ford, or even the smaller Chrysler stopped paying for steel, for tires, for toilet paper. We're talking billions and billions of dollars.

Within 90 or 120 days, vehicle output would grind to a halt. Auto suppliers are operating on a shoestring. They have no surplus cash, no safety net that would allow them to keep supplying a bankrupt automaker if they don't get paid.

The impact would spread like wildfire across the entire economy.

That's why, no matter how much Wall Street and Washington D.C. belittle Detroit's auto companies, they will bail Detroit out if they must-just as financial basket cases Bear Sterns, Fannie Mae and Freddie Mac have been recently propped up by government intervention.

Thus, Detroit's message to Washington that they need help with "access to capital." Translation: low cost loans, assisted by either rate subsidies or loan payback guarantees.

Yes, many lawmakers and free-market purists will yelp and squeal that Detroit's management and labor unions created this mess and don't deserve a rescue. But the fallout from a major auto company failure is too grim to contemplate.

Implications: With all of the bad news and dire predictions surrounding the Detroit Three, its good to occasionally find some good news to comment on.

Analysis: Some stock market investors like to follow the big money. See what the big boys are doing and do the same is the investment strategy. While the news is full of dealership closings and consolidations, it may be instructive to see what some of the large dealer groups (and I don't mean the public groups) are doing.

While I would love to write more happy news about the car business, this has not been a very happy year for most auto dealers. And a difficult year turned downright ugly when the buying public finally discovered the price at which gasoline would alter their car buying preferences. The collapse of the truck and SUV markets in the past three months was both disheartening and staggering.

That is why, when these two news items came to my attention, I just had to include them in a GLG News article.

The Van Tuyl Group, with 65  dealership, locations in ten states reported the purchase of a Lincoln Mercury and a Ford store in Scottsdale AZ, with plans to combine them under one roof. The Fred Beans Automotive group with 23 brands in and around Doylestown PA. received final approval for a $10 million GM sales and service facility in Doylestown.

To be sure, both the Van Tuyl Group and Ted Beans are invested in all kinds of brands. But in recent times the trend has been away from domestic makes for many of the larger dealer groups and toward high-volume imports and high-line luxury brands.

So it is significant when dealer groups who have a wide variety of brands make serious investments in domestic franchises that many see as tainted or at least shaky.

The Van Tuyl acquisition seems to be a classic consolidation move- bringing together two separate dealerships under one roof. For whatever reason, the two previous owners of these two points could not come to that end on their own.

Consolidation may also have played a role in the Fred beans expansion. The new GM center will service a Chevrolet dealership as well as a Buick-Pontiac-GMC franchise. The 38,000 square-foot facility will be right next door to an existing Fred beans Cadillac Saab point, making it a huge GM shopping center. Do you think GM is happy? 

 

Implications: As the U.S. auto industry continues to deteriorate, automakers and suppliers aren't getting along as well as they used to.

Analysis: Relations between the Detroit Three in the U.S. and their component suppliers have fallen to a five year low, as soaring raw materials prices heightened tensions and pressure on automakers.

A survey of parts suppliers shows that trust between suppliers and automakers is eroding, in part because automakers are showing less concern about suppliers profitability.

Japan's biggest automakers outscored the domestics, as they have in past years. Toyota Motor Corp. maintained its lead, even as its scores dropped. Suppliers said they felt more pressure from Toyota to cut prices.

But there were big changes in each group, with Chrysler LLC scoring the lowest among the top six automakers while Ford Motor Co. was the top rated U.S. automaker after gaining in the key area of supplier trust.
 
As mentioned earlier, Toyota retained the No. 1 spot after sustaining the biggest year-over-year drop in the study's eight year history. Honda Motor Co. came in second, while Nissan Motor Co.'s ratings fell sharply.

Ford was the only automaker whose scores improved. General Motors ratings slipped but have improved over prior years.

Coming in last is Chrysler LLC, a company that has been involved in high-profile legal disputes with Plastech Engineered Products Inc. and most recently Dana Holding Corp. In June, the company notified more than 2000 suppliers that it would delay its payments to them by 15 days.

Implications: Was there any good news in the past weeks automaker and auto retailers reports? Not much.

Analysis: Between the automakers and the auto retailers, the past week was one they would all like to forget. GM, Ford, Chrysler, and even Toyota, came in with quarterly reports that were even worse than expected.

The large public auto groups followed up with reports of declining sales, diminished profits, and CarMax reported that that the one segment some felt was immune to sales declines, used cars, was also down.

So, will the good times ever return in North America? Back to the halcyon days of record sales and profits?

Certainly, things are still climbing in growth markets like China, if flattening off: July passenger vehicle sales were up 6.79% year-on-year though down 17.02% from June. Passenger vehicle sales for the first seven months of this year grew 15.9% to 4.10m units. Honda China's sales rose 33.6% from a year earlier and were up 23.1% year-to-date.

Oh, for some good news from the West. Instead we had to see that U.S. sales tanked 20%last month. Though, as ever, there were bright spots in the form of volume hikes for well-made and relatively fuel-efficient domestics like the Chevy Malibu and Ford Focus and import fuel-sippers like Toyota's Corolla and Yaris and Honda's Fit, up an astounding 72.9% in its final model year.

Amongst individual automakers, only Nissan, at 0.1% and Daimler at 15.7% made gains in the U.S. last month. Chrysler led Detroit over the cliff, down 34.4% followed by GM -31.8% and Ford -21.3%.

So could we find better news on the other side of the Atlantic? Nope. Falling consumer confidence over there saw the UK new car market fall 13.0% in July-the steepest decline since December 2006. Western Europe didn't grow either.

Even Toyota's worldwide reach did not immunize it from the U.S. subprime crisis and leasing residual meltdown. Operating income was off 38.9%, net income off 28.1%. Analysts felt that though the mighty automaker was taking some knocks it was moving quicly to adjust its model mix.

Meanwhile Chrysler claimed a operating profit and a healthy cash surplus. And, in an authoritative business paper, said it was looking at outsourcing development and  production of mid-size cars to Nissan, where it is already doing small-car business.

The public auto retailers? All of them are down, a few of them, like Lithia, can't seem to figure out how to deal with the new auto environment. Others, like CarMax, are finding out that when you have a "no-hassle" selling model, it doesn't leave you a lot of options in closing deals.

Oh, did we mention, all of the captive lenders, and most of the major banks are getting out of the leasing business? it remains to be seen just what impact this will have on sales over the next several months. It certainly won't be good.

Implications: One would have to dig into the history books back to 1992 to find a worse month for car and truck sales in the U.S. than July.

Analysis: With July sales coming in at levels not seen since 1992, the Seasonally Adjusted Annual Rate (SAAR) fell under 13 million vehicles-12.55 million to be exact- the lowest rate since the recession of the early 1990's.

Of the big Six automakers, only Nissan noted an increase in sales. Even Honda, which analysts had predicted would see an uptick, reported lower July sales. Detroit's Three slumped to their lowest combined market share-43.4%-in history.

The issues causing the fall were similar to the recession of 1992.-high oil prices, fear of oil availability and distressed housing issues.

Economic indicators released during the week piled on to those, including economic growth numbers that were revised down for the first half and a jobless rate that climbed to its highest level in more than four years.

Here's how the Detroit Three did:

General Motors:

The Good: GM's car business was healthy. At Chevy, the Aveo, Colbalt and Malibu models all showed sales increases. At Pontiac, sales of the G5, G6 and Vibe were up in July. At Saturn, the Aura had its best month ever. The Sky and Astra both seemed to gathering momentum, with sales increases in July. Even the Buick Enclave saw sales climb 28%.

The Bad: In total, GM sales were down 26.7% in July. Pushing sales so far this year 18% lower. Sales of GM trucks of every size were abysmal. Truck sales were down 29% in total. Sales of mid-size SUVs plummeted a whopping 75%, with full size SUVs down another 40%.

The Ugly: Buick was down 39.9% in July, the brands worst month since January 2002. Cadillac down 24.2% in July, off 12% for the year. GMC down 37.7% in July, 21% for the year. Hummer, 61.7% in July, 44% for the year. Saab, fell 37.6%, 30.4 for the year.

Ford:

The Good: A positive gain of 5.9% on the passenger car side of the business, including a 13.5% jump for the Fusion and a 15.6% gain for the Focus. Even the sporty gas-guzzling Mustang held its own in a flagging market. Ford owned Volvo cars ran up a 27.4% increase for the C70.

The Bad: Every Ford unit was down in July and year-to-date. Ford Brand: off 14%, 14.3% YTD. Lincoln by 1.2%, 20.1% YTD. Mercury by 13%, 22.7YTD. And Volvo by 46.3%, 19.3%YTD.

The Ugly: Every Ford truck and SUV was down, led by Expedition and Explorer, both of which were saddlled with 50% plus losses. Ford officials are predicting that the second half of the year to be worse.

Chrysler:

The Good: Indeed, Chrysler July sales report, unlike past months, had some good news. Notably, every division had at least one vehicle that posted a sales increase. Chrysler's T & C posted a 24% sales increase in July, though its sales remain down 7% for the year. Jeep Patriot sales edged up 4%. Dodge Avenger sales eked out a 2% sales increase.

The Bad: Chrysler's total sales fell below 100,000 for the month, the lowest on record by at least 19,000 units

The Ugly: Chrysler Division sales were down 40% in July, and off 30% YTD. Jeep sales plummeted 39% in July and are down 21% for the year. Dodge sales dropped 17 in July and are off 20% YTD. 

Implications: Consumers are bailing out on Chrysler LLC--the sign of a company in crisis.

Analysis: One thing you can take to the bank, when consumers get a whiff of trouble associated with a company they're doing business with, trust their instincts, they're usually right.

Despite a four-day flurry of leasing business at the end of July to beat Chrysler Financial's exit from the sector, Chrysler still posted the biggest loss of any automaker in July U.S. sales.

The company's overall 28.8 % plunge to 98,109 light vehicles slightly exceeded General Motors' 26.1% decline.

But the July results exposed the weakness of Chrysler's car lineup in the glare of the U.S. market's abrupt shift from gas-guzzling pickups and SUVs to fuel efficient cars. Chrysler LLC truck sales fell 29.0% in July, close to the industry's 25.8% truck slide. But while industry sales of cars were flat in July, Chrysler LLC car volume fell 28.2%

More than GM or Ford, Chrysler let its cars go as everyone focused on trucks, so, as trucks are punished in the marketplace, Dodge is punished disproportionately.

The U.S. marketplace hammered most automakers in July, with Toyota joining Ford, GM and Mazda in posting double-digit losses, with Honda off 1.6%. Nissan fared best among the top six automakers with an 8.5% gain.

Chrysler has been trying to counter what they describe as a lot of false speculation about the health of the company. For the first time since it became a privately held company, the company disclosed financial results.

According to the company for the first six months of 2008, Chrysler had an operating profit of $1.1 billion and its cash on hand as of June 30 was $11.7 billion.

Because the company is privately owned, details on how they arrived at the $1.1 billion figure are not subject to public scrutiny.

Chrysler Financial announcement on July 25 that it was ending consumer vehicle leases triggered a rush of last-minute shopping that helped many dealers.

Going forward, Chryslers dealers as well as my domestic dealer clients are concerned about public perception of Chrysler as a "company in trouble"  and to a lesser degree all domestic automakers. The negative word on the street is keeping serious shoppers away.



 

Implications: It's instructive to compare what's currently happening in the auto sector and the U.S. economy with what we saw in the wake of the 1990 oil shock.

Analysis: A capsule look at auto sales for 2008 shows sales of light trucks manufactured in North America, which category includes the once mighty SUV, depressed, with July sales down 26% compared to last year.

Domestic car sales are down 6.4% from last year, and again, July of 2007 was unrepresentatively weak. Sales of imports are doing much better.

Looking back to 1990, we saw very much the same pattern: the oil shock saw an abrupt drop in the demand for Detroit's money makers, and a shift into more gas-stingy imports. The resultant hit to profits in the auto sector is one mechanism whereby an oil price increase can contribute to an overall U.S. recession.

It's interesting to compare what we have observed so far this year with what happened during the oil price shock and economic recession that followed Iraq's invasion of Kuwait in August 1990. With the loss of oil production from both Iraq and Kuwait, the price of oil shot up quickly, nearly doubling between July and October, after which it fell back down almost as dramatically.

By contrast, the oil shock of 2008 has been a more gradual affair, caused by booming demand from China confronting stagnating global oil production. Although he price increases have occurred more gradually, in percentage terms the cumulative change in oil prices over the last year is almost as big as we observed in the fall of 1990.

In terms of the consequences for auto sector employment, the number of U.S. workers employed in motor vehicles and parts fell by 62,000 workers in the month of November 1990, with a cumulative loss of 94,000 auto jobs before the recovery began in April 1991. By comparison, auto employment this past year fell by 83,000 workers, cumulatively about the same size disruption as in 1990, but spread out over a longer period, and , affecting a larger percentage of the diminished UAW workforce.

In terms of effect on GDP, the contribution of motor vehicles and parts to real GDP fell by $15 billion between 1990 Q4 and 1991 Q1. That corresponds to about 0.2% of GDP each quarter, or a hit to the annual growth rate of real GDP of about 0.8% each quarter.

Again, the overall magnitude of the response we've seen in autos this year is comparable to that in 1990, with the sector subtracting $12 billion (in 2000 dollars) from 2008 Q1 real GDP and an additional $22 billion from 2008 Q2.

Of course, autos are not the only sector where we see significant shifts in spending as a result of the sharp increase in the price of oil. Airlines and tourist dependant sectors are also hit hard. Even so, the oil price increase in 1990 was not enough by itself to cause the recession, but may have been the factor that tipped an otherwise wobbly economy into freefall.

As Yogi Berra might say, looks like deja vu all over again.

Implications: With Chrysler's announcement on Friday that it was going to stop offering leases through its lending facility, every domestic car dealer felt the tremors.

Analysis:  Leasing has been an important part of the North American auto dealers profit portfolio for decades. At times less profitable than others, but always an important option for many buyers and sellers

Domestic car dealers, already in the middle  of the worst sales years in decades, have seen a dramatic dropoff in sales of their most profitable models, floor traffic is off dramatically, lenders are tightening their policies on a daily basis.

When Chrysler announced last week that it will not accept leases from its dealers after August 1, many car dealers began the countdown for the other shoe(s) to fall. Most anticipate the other captive lenders to follow suit.

The move comes at a time when Chrysler and other car companies are seeing their borrowing cost rise (typically Libor plus a spread of 1% or more for Chrysler-with Libor around 2.8%). Higher borrowing costs make it more difficult for the captives to make money on low interest rate loans, or absorb write-offs for 0% loans that are used to increase sales of higher-margin or slow selling models.

The old joke of "we lose money on every sale, but make it up in volume" may not apply here. The first part holds true, but volume will not increase unless the car makers and their captive lenders can find ways to help customers purchase or lease their vehicles.

Leasing has always been a tricky part of the car business, going through cycles when it was every ones favorite flavor to others where the captives and the banks got burned badly with large losses on cars coming off lease. Some of the same customers who got easy home mortgages also found leasing to be easy way to get a new car every few years. In the case of vehicle leases, they simply walked away from the vehicle at lease end.

Lease payments are calculated according to how much of its value a vehicle is expected to lose during the length of the lease, and often have little correlation to the cars actual price. Until the past year, the lenders did ok, values on used cars continued to rise, so they could dispose of the trade-ins at a profit.

For the last eighteen months  resale values on the previously hot-selling pick-ups and large SUVs plummeted, leaving the lenders with residual losses in the billions.

Typically, buyers will utilize the dealer credit facilities if they are unable to get a better deal at a bank or credit union. Even with good credit they may they may still opt to use the dealers captive lender when it is tied in with incentives such as rebates or low APR financing.

Chrysler's losses from leasing are its own fault, not the consumer's, because Honda and Toyota aren't' having this problem even when consumers use leases to spend up. The key to profitability on a captive's leasing arm is to build vehicles with high resale value.

That criticism aside, I like this move by Chrysler because it indicates they're deciding to chose to make profitable sales over sales at any cost. It will be interesting to see how this shakes out as far as impact on profitability, if/when the other Detroit captives follow suit and if additional similar moves are made in the future. 

Implications: Faced with a $8.7 billion loss, a $2.1 billion write-down on its lease portfolio with Ford Motor Credit, Ford plans to bring some of its hot selling European products to the U.S. But that's not the only answer.

Analysis: Personally I think it's a good sign that Ford is going to start bringing over cars from its European operations to North America to help capture the public's increased interest in compact, fuel efficient cars: whether it will be enough or too little too late remains to be seen. At the very least it does show that Ford is beginning to wake up and smell the coffee, so at the very least it's a step in the right direction.

To give you an idea of how things are going with Ford right now, I have dealer clients offering Ford '08 pick-up trucks for less than their '08 Ford Focuses, and '07 and '08 Explorers for about the same price as a Focus. It's a sad state of affairs when your most profitable vehicles are being sold for similar prices as your least profitable ones.

However the fact that the company is profitable outside of North America provides insights in to what the company needs to do to turn things around, namely, it needs to focus on improving the product mix, fixing its cost structure, and making profitable sales, instead of trying to make sales at any cost. If you were ever a daler, you know what I mean.

When a struggling automaker is selling vehicles with a MSRP of $30K for $16K just to keep sales volume "strong" and avoid costs incurred when plants are shut down, etc. it's not on the path to recovery. Ford, (in addition to Chrysler and GM) needs to let go of some of the old ideas about managing their workforces, maintaining their sales volume, etc, and note how companies like Honda are able to out-earn them despite selling significantly fewer cars.

In the end it's not just about changing the product mix to suit consumers shifting tastes, it's about a wholesale change to Detroit's overall operating model.   

Implications: AutoNation, the country's largest auto retailer, said Thursday its bottom line took a beating after a 15% drop in new-vehicle sales caused second quarter profits to drop by a third. This on the heels of Bill gates buying a chunk of the company.

Analysis: It is official! Bill Gates has to be the most charitable man alive. Now, he is providing a chunk of his assets to help out ailing AutoNation.. Sure he gets a nice piece of the company and if you look at the history of this once darling/rollup king, you realize they may be actually approaching a bottom.

Whether it is a brilliant move or a plan for a tax write-off is still not known, but it does appear that AutoNation's CEO Michael Jackson seems to have a plan for cost cutting and working within this difficult economic environment. The company says it saved $25 million in the first half of the year as part of a cost reduction plan that included a $30 million cut in ad spending and shedding underperforming stores, some of which AN acquired during their buying frenzy several years ago.

The questions are; does Gates know something about AutoNation that we don't? Did Eddie Lambert make a mistake with his buying over 40% of the company? Another issue, the lenders, particulary the captives such as GMAC, Ford Motor Credit, etc, are all facing tough times, so consumers who do want to buy a new vehicle are seeing much tighter credit policies at the dealers.

Whatever you think about the fate of the auto industry, this happens to be a well run company that is caught in a very bad situation. It is at a relative low, oil prices seem to be turning and auto makers are waking up to the fact they need to change their ways. This could give AutoNation a boost.

The biggest concern is still the consumer and his or her ability to buy or borrow to buy a new car.