For Carmakers, Just How Bad Can It Get?

For the auto industry, the biggest question going into 2009 may surround just how low vehicle sales will fall.

Whatever the number, it almost unquestionably will be the lowest in at least 27 years. The specifics will be key to determining the automakers' fate, because that will directly impact how much Washington will be asked to do to save them.

While President-elect Barack Obama has made it clear that he plans to try, the sales numbers will go a long way toward defining the difficulty of the task.

In the end, the rescue methodology doesn't matter all that much. Sure, the industry detests the concept of bankruptcy. But it desperately needs to restructure, whether through bankruptcy or virtual bankruptcy, and whether it's overseen by a czar, a bankruptcy judge or a panel that resembles the Air Transportation Stabilization Board that helped to rebuild the airline industry after the 2001 terrorist attacks.

If sales are as bad as they are expected to be, the commitment to save privately held Chrysler -- by the government and its owner -- could lessen, and Ford ( F) could be sucked into the morass along with Chrysler and General Motors ( GM).

To summarize the outlook for each, GM will fight to avoid bankruptcy, and its sheer size -- it sells one of every five cars sold in the U.S. -- will ensure that the government battles to save it. Chrysler will probably look for a merger, and Ford will continue to seek to distinguish itself from the other two.

So how far will sales fall? "It's hard to lock in on a number these days," says Jeff Schuster, executive director of forecasting for JD Power & Associates. "We are looking at 11.4 million units, down substantially from this year and prior years, but we think there's enough risk out there that suggests volumes could be below 11 million without too much difficulty. All that has to happen is that we continue to trend at the levels we are at now."

Those levels are certainly a far cry from the not-too-distant past. In 2000 and 2001, more than 17 million cars and trucks were sold each year. In every year thereafter through 2007, manufacturers moved more than 16 million vehicles off lots. But 2008 has been horrid for the group, and the pain has extended to foreign makers such as Toyota ( TM) and Honda ( HMC) .

John Wolkonowicz, senior market analyst at Global Insight, projects 2009 sales of around 10 million, a number he calls "horrendous." He says, "The fourth quarter is going to be awful. We are continually lowering our forecasts as we get more information. We have lost consumer confidence, and credit is hard to get."

Announcing a four-week Christmas shutdown, Chrysler said its dealers have lost an estimated 20% to 25% of their volume because "willing buyers for Chrysler, Jeep and Dodge vehicles are unable to close the deals due to lack of financing."

Ford analyst George Pippas says the annualized sales rate declined sequentially through the year, from the low-15 millions in the first quarter to the low-14 millions in the second quarter, to the high-12 millions in the third quarter to the mid- to low-10 millions in the fourth quarter.

"We believe these numbers are going to persist well into 2009," Pippas says. "But there is so much uncertainty about the state of the economy that putting a specific number out there is a pie-crust forecast. It is easily made and easily broken."

One immediate result of a sales volume around 10.5 million would be that Ford may need a higher line of credit than the $9 billion it sought from Congress earlier this month. Ford said that request was based on a forecast of auto sales at the then-current rates, equal to 11 million in 2009 and 12.5 million in 2010.

At "worse rates" of 10.5 million in 2009 and 2011, Ford says it would need $13 billion, a scenario under which "a prolonged economic slump persists into 2010 as significant monetary and fiscal policy easing does not provide any stimulus to consumer and business spending."

By contrast, the only variation in GM's request for $18 billion concerned how much of the money GM would actually use. However, under "the downside scenario," with sales at 10.5 million in 2009 and 11.5 million in 2010, the company said it "would make full use" of the money.

GM fully expects to come out on the other side. "You never wish this kind of crisis on anybody, on the country or our industry," said GM CEO Rick Wagoner, on a conference call after President Bush announced his bailout plan. "It has led all of us to look at everything we've done historically and say, 'what can we change to make the company viable for the future?'" Wagoner said.

"Difficult as it is, it's an opportunity to us once and for all to get the negative sides of 100 years of history leveled up," he said.

As to the timing of a recovery, Global Insight is targeting 2010, which Wolkonowicz says has the potential to be a good year for sales, understanding that the economy and employment have to recover.

"There's nothing structurally there to make it come back," he says. "But it will probably start to come back in second half of 2009 because of the economic stimulus by the new administration. So we believe it's another 12 months, possibly 18 months before we start to pull out of this."

At that point, pent-up demand for automobiles may come into play, even if drivers don't really need new vehicles. "Cars are so much better today," Wolkonowicz says. "The worst thing that could happen would be for consumers to figure out how much longer they can keep cars. So far, that hasn't happened."