US vehicles sales to keep on falling: CIBC World Markets report

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

Mar 02, 2009, 10:01 ET from CIBC World Markets

NEW YORK, March 2 /PRNewswire-FirstCall/ - CIBC (CM: TSX; NYSE) - US auto sales, which are already at a 34-year low, will likely drop another 30-40 percent 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 US'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 US 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 US 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 percent 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 US 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, US 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 US housing sales and starts have fallen to levels with no modern precedent, the drop in US 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:

CIBC World Markets is the corporate and investment banking arm of CIBC. To deliver on its mandate as a premier client-focused and Canadian-based investment bank, World Markets provides a wide range of credit, capital markets, investment banking, merchant banking and research products and services to government, institutional, corporate and retail clients in Canada and in key markets around the world.

SOURCE CIBC World Markets