Detroit makes too many cars - half the nation's plants likely to close

    TORONTO, March 2 /CNW/ - CIBC (CM: TSX; NYSE) - U.S. auto sales, which
are already at a 34-year low, will likely drop another 30-40 per cent and may
never recover to previous levels, finds a new report from CIBC World Markets.
    The report projects that American consumers will only buy about 8-9
million vehicles a year over the next five years, roughly half of what we've
seen in the last half-decade. As a result, it also projects roughly half of
the U.S.'s 51 light vehicle plants will be permanently closed in the coming
years. This will see the loss of another 200,000 jobs in the sector, on top of
the 560,000 jobs already lost this decade.
    "Detroit's biggest problem isn't that it's producing the wrong type of
vehicles but rather, that it's producing too many vehicles-far too many," says
Jeff Rubin, chief economist at CIBC World Markets. "Just as two million
housing starts proved to be a bubble, so was the average 16 million unit auto
sales of the last five years. That was a product of a world of cheap oil and
cheap credit, neither of which are likely to figure in the future.
    "Easy credit is already gone. The credit bubble wasn't just about
sub-prime mortgages. It was just as much about car sales. Some two-thirds of
vehicle sales in America over the last decade were debt financed. The leasing
market has all but dried up and the securitization market for car loans isn't
far behind. If you buy a car these days, try paying cash, which of course
isn't superabundant, particularly for the over three-and-a-half million
Americans who have already lost their jobs."
    The report finds that there will be 25 million fewer cars on the road in
the U.S. in five years. With the vast majority of sales purchased on credit,
buying a new vehicle simply won't be an option for many Americans as they
struggle to service record household debt levels and find financing
increasingly difficult to access. This alone will take 15 million Americans to
the exit lanes in the next half-decade.
    But Mr. Rubin believes Detroit's problems are a lot bigger than the
current recession.
    "Recessions, no matter how deep, are finite affairs that rarely last more
than four to six quarters. It's the recovery that poses even bigger problems.
The only reason gasoline is cheap, is because no one can afford to drive. When
the recession is finally over, and Americans start filling up their SUVs, pump
prices will go right back up to the $4 per gallon price they were last
Memorial Day."
    He expects that rising energy prices will force more Americans to adopt
European driving habits. Europeans, who pay much higher (tax-boosted) gasoline
prices, own fewer cars, drive less and take more public transit. The report
does not forecast that all Americans will be able to give up their cars, but
by applying European ownership rates to the 57 million U.S. households that
currently own a vehicle and have reasonable access to public transit, it
projects that high gasoline prices will force an additional 10 million
Americans off the road in the next five years.
    This trend has already begun as not only are Americans staying away from
showrooms, they are also staying off the freeways. Americans drove over 100
billion fewer miles in 2008 while transit ridership rose five per cent over
the first three quarters of the year.
    "Between consumer deleveraging, further job losses and ultimately soaring
gasoline prices, tomorrow's auto vehicle market in the U.S. is likely to
shrink to something half its former size," says Mr. Rubin. "A market of eight
to nine million in annual vehicle sales is a much smaller market than Detroit
is presently built for, particularly when imports continue to account for a
growing share of new auto sales every year."
    Stripping out imports, including North American cars made in Mexico and
Canada, U.S. domestic production will likely shrink to between six and seven
million units a year. Compared to the production peak of nearly 13 million
units back in 1999, it implies as dramatic a drop in production as the
industry experienced around the second OPEC oil shock.
    "All told, just like U.S. housing sales and starts have fallen to levels
with no modern precedent, the drop in U.S. vehicle sales and production should
be just as dramatic," adds Mr. Rubin. "Except in this case, long-term changes
in the way Americans drive will mean that the good times for the auto industry
are never coming back."
    The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/sfeb09.pdf

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