No matter which way the price of oil goes, Americans will probably never buy millions of SUVs again, and that has hurt the global car market. I was in Michigan last week and I can tell you that folks there are deeply concerned about the Big 3's woes, but car company problems go far beyond the Big 3. Most global vehicle manufacturers experienced double-digit sales declines in July. Chrysler's July sales fell a shocking 28.8%, as its car sales fell 25.5% and truck sales fell 29.9%. GM had even worse results, with a 34.7% July sales decline in trucks and a 26.1% sales decline in cars. Ford fared a bit better, but its overall July sales declined 14.9%, mostly due to a 22.1% decline in truck sales. Toyota suffered from a 27.1% decline in U.S. truck sales and an overall July sales decline of 11.9%, despite increasing sales for its small cars. Even Honda, which had posted sales gains in previous months, experienced a 1.6% sales decline in July, while Nissan shocked everyone with an 8.5% sales increase in July and an amazing 18.3% increase in truck sales.
On Friday, it became very evident that the faltering economy is taking its toll on BMW, GM, Nissan and other manufacturers. BMW posted a 58% drop in operating earnings due to slumping U.S. sales, higher material costs and deep production cuts. GM posted a devastating $15.5 billion loss (or $27.33 per share), as sales slumped 18% in the second quarter. Nissan posted a 42% earnings decline due to a fall in value of leased vehicles and unfavorable exchange rates. All three companies were hurt by a glut of used SUVs and pick-up trucks in the U.S. Investors are now concerned about liquidity, since GM has been bleeding about $1 billion in cash each month this year. GM's cash reserves fell from $27.3 billion last December 31 to $21 billion on June 30.
One reason behind recent sales declines is that more companies are abandoning the leasing business, due to low resale values. On Friday, GMAC (owned by GM and Cerberus Capital Management LP) reported a $2.48 billion net loss for the second quarter. That dismal figure includes a write-down of $716 million related to unprofitable leases. GMAC said it recovered only 75% of the expected values from SUV leases in June. GMAC CFO Robert Hull suggested that ResCap, GMAC's home-mortgage unit, is likely to post further losses this year, adding that "I wouldn't hold your breath for (ResCap profitability in) 2008." At least, he was candid! Robert Hull probably won last week's candor award with his depressing report.
After GMAC released its weak second quarter earnings results, Standard & Poor's cut GMAC's credit rating. S&P also cut the ratings of GM, Ford and Chrysler, as well as Ford Motor Credit and Chrysler Financial. Additionally, S&P also said it would consider downgrading Ford and GM further if their cash levels dropped below $15 billion or total liquidity fell below $20 billion. Obviously, the automotive industry is following the housing industry into a very serious tailspin.
