Chrysler LLC announced Wednesday a 30-day halt in production, preserving cash and giving itself some time to adjust to the bewildering economic crosscurrents that are buffeting the U.S. auto industry.
All three Detroit automakers are struggling for answers as plunging fuel prices and the deepening recession make it more difficult to know what kind of cars will sell. Oil Wednesday dipped below $40 a barrel, pulling down pump prices and suddenly making the rush from SUVs to fuel-efficient cars less of a sure bet.
Chrysler blamed tighter credit markets for its decision to extend its normal two-week shutdown to a full month. Customers’ difficulties in securing financing was responsible for about half of a 47 percent drop in sales last month, the company said.
The sales slump has left the company dangerously low on cash heading into the traditionally slow January sales period. It is already seeking $7 billion in government loans - about what it must pay to suppliers every 45 days.
Even without the cash crunch, automakers are struggling to figure out what kind of cars to make. The companies are under intense political pressure to shift to more fuel-efficient cars, but as credit tightens and jobless rates rise around the country, even popular gas-electric hybrids are sitting unsold on dealership lots.
The collapse of gas prices to $1.66 a gallon from more than $4 in July, meanwhile, has made Detroit’s gas-guzzling sport utility vehicles and heavy trucks more appealing once again to drivers. Oil prices continued to plunge to a four-year low Wednesday even after the Organization of the Petroleum Exporting Countries oil cartel announced a record cut in production.
“Households are facing the worst consumer recession since the early ’50s” because of the sudden loss of credit, jobs and household wealth as markets imploded this fall, said Harm Bandholz, economist at UniCredit Markets. “The auto sector is hit particularly hard, as cars are the largest deferrable good, so that these purchases can be postponed easily in times of financial distress.”
Detroit’s problems are hard to exaggerate. Last month, the auto industry led industrial production on its fastest decline in nearly 30 years, the Federal Reserve reported, and automakers have announced an additional 30 percent cut in production in the first quarter. Car sales by some measures are the lowest since World War II. Mr. Bandholz said that the slump in autos by itself will erase 2 percent of economic output in the final quarter of the year.
Any revival of America’s love affair with SUVs would go a long way toward resuscitating the fortunes of Detroit, but that has not yet occurred, despite the steep fall of gas prices.
Meanwhile, some cracks are appearing in America’s newfound enthusiasm for hybrids like Toyota’s Prius, which had given Detroit’s Japanese manufacturers an edge over their American counterparts in recent years.
Only a few months ago, manufacturers couldn’t build enough hybrids to satisfy demand in the United States. But by November, sales of hybrids had plummeted by 50 percent - even more than the 37 percent drop in overall auto sales in the past year, Autodata Corp. reported. Toyota announced this week that it was indefinitely postponing completion of a Prius assembly plant in Blue Springs, Miss.
The “fortuitous flip-flop” in gas prices has “had a rather chilling impact on the demand for hybrid vehicles,” Kelley Blue Book editors noted.
Meanwhile, the trend toward driving less that started last year is continuing. Americans drove 100 billion fewer miles in the year ending in November, in the largest continuous drop in driving in American history, according to the Federal Highway Administration.
“Despite the fact that gasoline prices have been in a free fall since mid-July, consumption is still declining,” said John B. Townsend II, AAA Mid-Atlantic´s public-affairs manager. “We stopped driving as much, something that hasn´t happened in more than two decades.”
Some of the drop in demand for gas is a result of the deepening global recession, economists say. Worldwide, demand for oil is dropping for the first time in 25 years. Beyond that, many consumers got angry about sky-high gas prices and vowed they would curb their gas consumption for good.
While consumers have not yet signaled a return to buying heavy vehicles, a sustained period of low gas prices could send them flocking back to SUVs and pickup trucks. That, ironically, would pose a problem to political leaders who want to tie any bailout of the industry to mandates that they adhere to much more stringent fuel-efficiency and emissions standards.
The move by Democrats in Congress to force the industry to retool and produce more efficient cars will gain momentum next year under President-elect Barack Obama, who is promising an all-out effort to commercialize energy-saving technologies and alternative vehicles.
Mark Zandi, analyst with Moody’s Economy.com, said the trend toward buying more fuel-efficient cars is well-entrenched in any case, and the automakers should not count on the lure of low gas prices causing a significant reversal of buying habits.
“The damage has been done,” he said. “Vehicle buyers still expect pump prices to rise again, and will not quickly return to buying the Big Three’s less fuel-efficient vehicles.”
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