Car Biz Driven to Despair

LOS ANGELES On billheard.com, above a 9/11 memorial eagle logo, the nation’s 13th-largest auto dealer posted a death notice: “Bill Heard Enterprises announced … that it has elected to discontinue all business operations in all of our markets effective September 24, 2008. Most of the company’s approximately 3,200 employees will be laid off at that time.”

The financial virus spreading from Wall Street to Detroit threatens to batter what in 2007 was a $5.4 billion advertising industry, per Nielsen Monitor-Plus (more than $20 billion if you include advertising for factory, dealer, automotive service, tires, parts stores and vehicle insurance). And that doesn’t include those late-night dealer ads featuring men in 10-gallon hats, as there’s no good read on local advertising.

Georgia-based BHE, which operated 14 mostly GM-brand dealerships in the Southeast before expanding to Scottsdale, Ariz., sold 40,781 vehicles in 2007, says Todd Turner, president and principal analyst at Car Concepts. The reasons Heard cites for shuttering his operation have become a familiar refrain in the troubled automotive industry.

“The declining automobile market, the high price of gasoline and its effects on sales of the dealerships’ core products, such as heavy trucks and SUVs, and the difficult financing conditions the automobile industry as a whole has faced because of the subprime lending industry collapse all contributed to the decision to close,” Heard’s site says.

Turner added that a number of alleged improprieties, including charges of false advertising, might have contributed to the Heard shutdown, but notes, “I’m sure that the pending trend of downward sales and difficulty of financing for customers made any light at the end of the tunnel dim.”

“Certainly we believe that a higher percentage of the budget will be online and that tier 2 [dealer, association, retail] advertising will, as a straight factor of wholesale, diminish,” said Ian Beavis, a former automotive marketer and now evp and executive client services director at Aegis Group’s Carat. “Automotive marketers will also be seeking better analytics and research to better understand the market dynamics. There will still be people out there buying cars, and the trick will be to identify them and what triggers them to purchase.”

Catherine Bension, CEO of search consultancy Select Resources International, while not hazarding a prediction of greater or lesser review activity, agreed that automakers might drive more resources online. “Digital is considered a tier 1 [brand] communications channel for automotive advertising,” Bension said.

Beavis added that market conditions would likely drive advertising toward mobile devices as well. Analysts predict things will get worse before they get better. Car Concepts’ 2008 forecast started as the industry’s “most pessimistic,” Turner said, projecting sales of 14.8 million.

Turner revised that forecast in March to 13.9 million, and now believes 12.8 million units is “optimistic.” If so, he said, the industry would be thrown back to 1993 levels of car sales. (In 2007, which was not considered a stellar year, 16.7 million units were sold.) His prediction for 2009 is “around 12 million.”

JD Power and Associates predicts slightly less gloomy sales of 13.2 million units for 2009. “In the short term, this year and next, it will be a tough environment to sell cars,” said Jeff Schuster, Power executive director of forecasting, Detroit. “We may see continual revisions downward as we search for the bottom. By all indications we’re not there yet.”

Schuster said that some variables “pointing to negative territory” include poor consumer confidence, a continuing credit crunch and a loss of equity in used vehicles already in the market. Still, Schuster predicted “a modest recovery” as early as 2010. In the meantime, he said, watch for a dynamic interplay between sales of new and used cars in 2009, as well as a “complete ripple through the general economy” as more dealers fail and the crisis reaches automotive suppliers being squeezed for better deals and given less credit by automakers while selling less volume.

Among automakers, Turner said the Japanese manufacturers, particular Toyota and Honda, are in the best position to sell cars next year. “The domestics will continue to erode, with sales of full-size trucks and SUVs going down further,” Turner said. “And I expect a hit on midsize trucks and SUVs and even midsize crossovers.” He said Ford is best positioned to come back among the domestics because of vehicles such as the newly imported small car, Fiesta.

GM, Turner said, is “the most vulnerable” because of poor management planning that has left it with uncompetitive vehicles at the entry level, where most car sales are going. “How did this market catch a company with such resources as GM as flatfooted as it did?” Turner asked.

Turner added that in 2009 “defining winning is all about not losing market share.” But, he cautioned, if the industry sees more months like September, “there might be an implosion.”

Such dour forecasts are driving down industry stock prices. After another brutal week, GM shares by last Thursday had dropped to $4.65 — the lowest level since March 1950. And bargain hunters still didn’t like it: Once a standard bearer of the American blue-chip corporation, investing in GM’s future had become, to paraphrase Ralph Nader, unsafe at any price.