I think it was George Bernard Shaw who said "If you take all the economists in the world and lay them end to end, they will never reach a conclusion".
However, he has been proved wrong! Only one year after it started, economists have now confirmed that the Great Recession commenced one year ago on December 1, 2007.
The economists now have a new challenge. To determine whether they can pick the end of the Great Recession, before the next Sharemarket Bubble goes bang.
The Auto Industry
December 2, 2008
Today the North America vehicle sales for November have been released. Sales tracker Autodata said that its preliminary total showed industry wide sales at only 746,789 vehicles for November, the first time sales have been below the 750,000 mark since January 1982. YTD sales for 2008 are 12.35m with only December to go.
The Big Three have also returned to Congress this week to sell their "Boy, Have I got a Deal for You!" cost/benefit analysis, which explains what a great investment opportunity there is for the taxpayer, via a government injection of over $25b.
Readers of Part 5, will recollect that total light vehicle sales in October 2008 were 838,000 compared to 1,232,000 in October 2007, with the ten month YTD drop being from 13.58m in 2007 to 11.60m in 2008.
Last month I said; "It seems likely that with the worsening economic situation, and assuming say, 800,000 per month for November and December, total sales for 2008 may be a little over 13 million. That would be a reduction of 20% on 2007."
A week later, I saw that expert opinion for the month of November was predicting 850,000 see Edmunds.com Forecasts November Auto Sales: Gas Prices and Heavy ...
Now a further week has passed and as it happens, although due to the economic implications there is no cause for celebration, my prediction of 800,000 was closer to actual total sales of 747,000.
My personal pick is that December sales will be no better than November. However, the total sales for 2008 may still just scrape over 13.00m.
The important thing to note however, is that sales for October and November 2008 combined were 1.585m vehicles, which is an annual rate of only 9.51m. If an optimistic figure is taken for December 2008 of say, 815,000, it means that sales for the December 2008 quarter would be only 2.4m or 800,000 per month.
Last month I speculated 2009 sales at 900,000 per month, or 10.80m for the 2009 year, but acknowledged this might be too pessimistic. But note that a 2009 total of 10.80m vehicle sales represents a 13.6% improvement over average sales for October and November 2008.
If I raise the average monthly rate for 2009 to 1,000,000 per month, the annual target for 2009 becomes 12.00m, which is 26.2% above average sales for October and November 2008.
At this stage, my feeling is that 2009 average monthly sales will be closer to 900,000 rather than 1m per month, that is 10.8m for 2009.
As part of the Ford Plan accompanying their second visit to Congress, they have predicted US industry sales for 2009 of 12.5m, for 2010 of 14.5m, and for 2011 of 15.5m. The Ford worse case scenario projects US sales for 2009 of 10.5m, 2010 of 11.0m, and 2011 of 12.0m. See Ford submits business plan to Congress: May be profitable by 2011 ...
At the same date, GM has predicted 2009 industry sales of 12.0m, although it also wishes to seek extra back-up assistance in case adverse conditions continue and sales only reach 10.5m in 2009. For 2010 industry baseline sales are projected at 13.5m, 2010 at 14.5m, and 2012 at 15.0m. GM says that after its restructuring, it will be able to operate profitably in a market of 13m to 14m total vehicle sales. See GM asks Congress to kickstart its heart with ambitious plan - Autoblog
Chrysler has projected North America industry sales for 2009 as 11.1m, 2010 as 12.1m, 2011 as 13.7, and 2012 as 13.7m. It also comments; "U.S. sales are down from a 17 million unit selling rate in early 2007, to an estimated 11 million unit selling rate for the fourth quarter of 2008 - a 38 percent decline." See Chrysler submits plan to Congress, asks for $7 billion in 2008
The 2008 Automotive Crash Test Dummies
Both opening and closing auto plants requires long lead times, say a minimum three years to open a new plant, and probably one year to plan and implement a closure. Thus, like the proverbial super-tanker it takes a long time to change course when an iceberg is seen ahead.
As shown below when compared to previous production forecasts for 2008 - 2010, the North American auto industry is in the process of conducting the largest crash test in history and has hit an iceberg at full speed.
The Big Three auto companies know a lot about crash testing, but this time their managements have been flung forward as if they were crash test dummies without seat belts. Apparently being brought to a shocked halt only by the verbal vitriol cast in their direction at their first congressional appearance.
Based upon the published summary plans, GM seems to be the one of the three most ready to grasp the nettle. Probably that is a sign of how desperate their position is.
Predictably all three contain an element of "Motherhood and the Flag" type platitudes one would expect. However, of the three plans, GM is the one that seems the best put together and from that point of view gives me most confidence that they know what they have to do to survive.
To give an an indication of the industry's previously projected super tanker course and thus how hard the 2008 automotive "crash test" impact is, it is worth looking back two years to see what productive capacity was announced as planned for 2007 to 2010.
On November 1, 2006, only 25 months ago, an authoritative report by WardsAuto.com was published which projected auto factory capacity for 2007 and 2008. It can be seen at North American Capacity to Peak in 2008The chart shows North America factories rated at 18.82 million units for 2006 and also predicted 2007 capacity of 18.95 million vehicles, based upon average annual straight-time capacity levels and assuming normal schedules each year at each plant.
The report predicted capacity in 2008 would rise to 19.23 million in 2008 before shut-downs at Ford and GM took effect, which would "slice" capacity in 2009 to 18.76 million and in 2010 to 18.70.
The capacity figures do include heavy trucks, whereas the sales figures do not, but that is not a major problem as the trend in over capacity is the important factor. Some capacity adjustments have already been made by the Big Three since the date of the 2006 report, but the table below indicates the magnitude of the task collectively facing them.
North American auto capacity as projected in 2006, compared to sales
Year ----- Capacity ------ Sales --------- Over Capacity ---- Proj -- CHRY ---- GM ---- Ford
2006 ----- 18.82m ----- 16.55m ----- 2.27m --- 13.7%
2007 ----- 18.95m ----- 16.14m ----- 2.81m --- 17.4%
2008 ----- 19.23m ----- 13.00m ----- 7.23m --- 47.9%
2009 ----- 18.76m ----- 11.87m ----- 6.16m --- 58.0% --------- 11.1m - 12.0m - 12.5m
2010 ----- 18.70m ----- 13.37m ----- 4.20m --- 39.9% --------- 12.1m - 13.7m - 14.5m
2011 ------- n/a --------- 14.57m ------- n/a -------- n/a ------------ 13.7m - 14.5m - 15.5m
2012-------- n/a --------- 14.35m -------- n/a -------- n/a ----------- 13.7m - 15.0m -- n/a
For the purpose of the table, I have averaged their projections to predict total industry sales for 2009, 2010, and 2011. However, I think that Ford is being overly optimistic. The over capacity is calamitous. For example, my view is that 2009 sales will be closer to 11.0m, than to Ford's 12.5m.
One thing that does not seem to have been observed by many commentators is that Big Three are effectively already trading in bankruptcy, when considered from a marketing and selling point of view.
Think for a moment, if you absolutely had to buy a car in the next month or three, how confident would you be at buying from GM, Ford, or Chrysler? - Or would you play it more safely and buy a different brand?
They are currently facing very great downward sales pressure due to the public's perception of likely bankruptcy in 2008 or 2009. This is making making potential buyers fearful about future servicing and warranty claims.
Some buyers will just be holding off buying until the situation is clearer, but others will be switching to vehicles made by other manufacturers. Chances are many of these "switchers" will be permanently lost to the Big Three, as they will only return to the Big Three if they become dissatisfied with their replacement vehicles.
The severity of the cuts proposed will compound the Great Recession. GM says it would reduce the number of hourly and salaried employees to between 65,000 and 75,000 by 2012, compared with 96,500 now and 167,500 in 2004. GM expects to reduce the number of dealer locations by 1,750 to 4,700 by 2012. It would also reduce the number of U.S. powertrain, stamping, and assembly plants from 47 to about 38 by 2012.
If Ford and Chrysler also cut in a similar proportion, and this is followed through by their suppliers, it seems that the combined Big Tree section of the auto industry is going to contract by about 25% from current staffing levels and dealer levels.
The other manufacturers will also have to reduce capacity if 2009 sales are 12.0m or lower. Compared to the 16m in 2007, that is a 25% reduction. Over the past fortnight proponents of government support have claimed that 2,000,000 jobs are dependent on the auto industry. This figure may be inflated but for the purpose of these comments is assumed to still be in the ball-park.
If so, an industry wide reduction of 25% would imply the loss of a further 500,000 jobs from manufacturing, sales, dealers, and suppliers connected to the auto industry over the next three years. Also consequent reductions in Federal, state, and city tax revenues that will compound the current financial crisis. That is some iceberg!
The adverse risk factors working against a successful outcome for such a monumental task seem to imply that, unless management, government, and the taxpayer are incredibly lucky, it is perhaps already too late for two of the three to survive, even with a government cash injection.
Why Gold Prices have not risen to $2000 an ounce
I commented in Part 1 why gold prices have not risen, but some commentators still express surprise that gold has not reached $2000 per ounce during 2008.
The reason is threefold, firstly because the financial crisis is affecting consumers across the whole world, rather than people connected to a war in a localised region, or a crisis adversely affecting just one geographic financial sector.
Secondly because two-thirds of gold production is used for jewellery, which is a luxury retail product and so now affected by declining demand.
Thirdly, because of the major moves in international currency exchange rates. Relative increases in the price of gold are much more apparent in currencies which have lost significant strength compared to USD.
Economists like to simplify their analyses by using the term "ceteris paribus", which means other things being equal.
Thus, using a ceteris paribus analysis to discuss the crisis, one would expect "fear" investment money to flee to gold and the price of gold to rise. Such an analysis assumes constant gold jewellery sales and stable currency exchange rates.
But in the current financial crisis, the "fear" investment money is flowing into gold, at the same time as retail jewellery sales are falling due to reduced consumer demand and while currencies are gyrating.
As a consequence the price of gold is fluctuating around variations in demand and exchange rate movements, with investment gold rising and jewellery gold demand falling.
Given the nature of the current crisis, it seems likely that "investment gold fear" will abate at a rate not dissimilar to the rate that worldwide consumer confidence recovers.
In that event the price of gold is likely to continue with significant fluctuations, but without really major moves to the upside or to the downside.
No comments:
Post a Comment