The auto industry's magic number is tumbling.
The annual rate of U.S. vehicle sales is likely to fall short of some auto makers' forecasts next year, according to a new industry forecast. That casts doubt on the ability of Chrysler Group LLC and General Motors Co. to raise the equity necessary to fully repay tens of billions of dollars of taxpayer loans.
U.S. vehicle sales are expected to be as low as 11.1 million next year, signalling a weak bounce back from the depths of the automotive recession, and leaving much of the industry burning through cash, Fitch Ratings Ltd. said Monday.
While the forecast is an increase of about 8 per cent from the level of 10.3 million forecast for 2009, it's a far cry from industry levels of recent years and below the robust recovery some companies have anticipated.
Such a slow recovery has a domino effect on the industry, affecting the health of suppliers and the finances of the major auto makers.
But the key impact will be on Chrysler and GM and their anticipated initial public offerings, which are a critical part of the plan to recover the majority of about $75-billion (U.S.) that the U.S., Canadian and Ontario governments gave the companies earlier this year to keep them afloat after the financial crisis.
"A muted industry recovery indicates that in Fitch's view, neither General Motors nor Chrysler will be in a position to access the equity markets in 2010," Fitch said.
Repayments of direct government loans is scheduled to begin next month, but the vast bulk of the money that taxpayers provided GM is tied up in the three governments' 72-per-cent ownership stake in the company.
The Fitch report comes a week after GM chief executive officer Fritz Henderson said he hopes to take the company public again in 2010, allowing the U.S., Canadian and Ontario governments to sell their holdings and be fully repaid.
Fitch joins Merrill Lynch analyst John Murphy in casting doubt on GM's ability to do an IPO next year, even though Mr. Murphy is forecasting U.S. sales of 13.3 million vehicles in 2010.
"We believe it will be very difficult for the company to execute a successful IPO without generating sustainable profitability with at least a couple of consecutive quarters of operating profit," he said in a report.
GM's own forecast is for sales of between 11 million and 12 million. Sales between 10 million and 10.5 million will allow the auto maker to break even on an earnings before interest and taxes (EBIT) basis.
Chrysler is forecasting operating profit next year on U.S. sales of 11 million vehicles. It also plans an IPO, but chief executive officer Sergio Marchionne would not offer specific timing earlier this month, saying only that it will happen by 2014.
Few in the industry are expecting a snapback soon to the boom times of the past 10 years, when sales never fell below 16.4 million and topped 17 million six years out of seven.
Even at those levels, the Detroit auto makers lost billions of dollars, although they have cut costs dramatically and shed much of the excess capacity that led to several years of profitless prosperity.
But Fitch is worried that "much of the industry [would be]awash in negative cash flow in 2010," despite the rebound.
"A concern is that the industry, including suppliers, is caught in an 'airline-style' cycle where competitive industry conditions and weak margins result in 'boom and bust' cycles without the boom," the ratings agency added.
In the automotive supply chain, the U.S. government's Cash For Clunkers incentive program and moves by auto makers to replenish inventories have helped steel maker ArcelorMittal Dofasco in the third and fourth quarters, spokesman Andrew Sloan said Monday.
"We're on the road to recovery," Mr. Sloan said. "We're not there yet."
No one is prepared to speculate about whether the recovery will continue into 2010, he said.