Daunting hurdles

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"We're still seeing economic headwinds and reduced consumer demand for new vehicles, making it a tough marketplace.” –Gary Dilts, senior vice president of global automotive operations, J.D. Power and Associates

For an automotive industry on the ropes, trying to right a wallowing ship, the U.S. retail sales figures for cars and light trucks compiled by J.D. Power and Associates over the last few months don’t offer much of a lighthouse in a storm.

That being said, though, other data points to some potential rays of light that might break through to help lessen the economic typhoon we’re in. How those trend lines play out is what may help car makers finally get back on the road towards fiscal health.

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First, however, there’s the grim news. Based on data gather from 10,000 dealerships across the U.S., retail new-vehicle sales during the first 17 selling days of March were down by 40% compared with the same period in 2008. J. D. Power projects new-vehicle retail sales for the entire month of March are projected to come in at 633,000 units, compared with 1.07 million units in 2008 – a dismal month, to be sure, but one hard on the heels of lower February sales figures of 557,000 retail units.

The consulting company said those numbers translate in to a seasonally adjusted annualized rate (SAAR) for retail sales in March of around 7.4 million units, down from 7.7 million units in February. However, when fleet sales are included in the March figures, total light-vehicle sales rise to a projected 798,000 units, which translates to a SAAR of 9.2 million units.

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Note, however, that as late as mid-2008, annualized demand hovered between 16 million and 17 million light-vehicle units – and witnessing worldwide market sales projections fall by more than half in less than 12 months is enough to give anyone in the automotive industry heartburn.

“While the automotive market is down 40 percent year over year through the first quarter of 2009, the remainder of the year continues to be an open question,” said Gary Dilts, senior vice president of global automotive operations at J.D. Power – not exactly a soothing balm for what’s occurring in the market right now.

If there is any silver to be found in these dark clouds, it’s where the crossover utility vehicle (CUV) segment is concerned. These models generating the greatest year-over-year segment share growth, up by three percentage points since March 2008, with a total of nine new models have been introduced since February 2008 to capitalize on this shift in consumer demand, noted Dilts.

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In contrast, though, the traditional utility vehicle, compact car and midsize car segments are generating the greatest year-over-year declines in segment share, he said.

All this, of course, is a direct result of the economic upheavals the world is undergoing at the moment, said Chris Kuehl, Ph.D., chief economist for the National Association of Credit Management (NACM) as well as co-founder and managing director of Armada Corporate Intelligence.

“What we’ve seen over the last year or so is a dramatic change in the U.S. economy as well as the world economy,” he explained. Yet there are positive signs out there – ones that give Kuehl room to be encouraged.

“Getting back to an expansionary position will be not be simple and may take a few more months, but there are more and more signs that the recession may have reached its low point. The key issue from this point is how fast the rebound may be,” he said. “Given that the most important issue in this recession has been access to credit, it is encouraging to note that the index is showing a pretty significant increase in credit extension, the best numbers since December 2008.”

Kuehl pointed to improving data as a basis for a more positive outlook, such as the seasonally adjusted Credit Managers’ Index (CMI), which rose another 0.5% in March after rising by 2.5% in February. This two-month increase broke a lengthy string of negative readings and matches up well with some of the other data that has been emerging, he said – a slight reversal of the downward trend in manufacturing, a small boost in retail sales and a sharp spike in durable goods orders. A number of the components in the index are still below the 50 level, but they are starting to trend in a positive direction for the first time since July 2008.

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“The key will be the favorable factors as they will likely show progress of the recovery more quickly than the unfavorable factors,” Kuehl stressed. “ It is not uncommon for business to feel the most threat as the economy starts to come out of a recession – bankruptcies often surge as stronger competitors begin to put pressure on weaker companies. But if new credit applications and the amount of credit extended show signs of progress, the economy will respond relatively quickly,”

NACM Chairman Dave Beckel, also manager-sales service & credit for MiTek Industries, stressed something very important – that even if the storm clouds start to life and the economic hurdles begin to be surmounted, businesses must deign never to repeat the bad habits that got them in this mess to start with.

“There seems to have been basic practices that were lost -- at least on Wall Street -- that we as credit professionals deal with on a day-to-day basis,” Beckel said. “That’s the basic acknowledgement that we need to evaluate customers not only on their ability to pay, but also on their willingness to pay -- and the recognition that everybody should be kept within a certain credit limit to ensure that they can pay their bills.”

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