These are extraordinary times for the global auto industry. The Big Three US automakers, GM, Ford and Chrysler are asking for US$ 34 billion from the US government after presenting their restructuring plans to the US Congress. Without this bailout money, GM and Chrysler say they will run out of cash and Ford’s financial position is only marginally better. The consequences of even one of the Detroit 3 going under would normally send shockwaves, but the bankruptcy of two and possibly all three in the same year would have been unimaginable in the past.

European manufacturers are faring only slightly better but their position will weaken considerably in 2009. European governments are only now beginning to announce support measures. The US slowdown together with the strong yen is also hitting the performance of Japanese automakers. Even the mighty Toyota faces major challenges; assuming no further downward revisions, its profits in the current fiscal year will be around a quarter of the level it enjoyed in the last fiscal. Honda has been weathering the downturn better than most but it too has pulled out of Formula 1. Overall, all automakers are rapidly cutting sales, production and profit forecasts. With a large majority of plants on extended shutdowns, global production levels in December 2008 and January 2009 will be at alarmingly low levels.

Tata Motors has had a roller coaster year with 2008 starting off with great fanfare as the groundbreaking Nano was unveiled in January at the Auto Expo in New Delhi. Tata then grabbed more headlines by acquiring Jaguar/Land Rover. However, it is now very much in a crisis mode. Not only did Tata’s plans to produce the Nano in West Bengal backfire badly but commercial vehicle demand remains in a deep slump while the credit squeeze is making it very expensive to finance the Jaguar/Land Rover acquisition.

Overall, these are difficult times across the industry. In normal circumstances, the assets of weaker players would be acquired by stronger companies. In recent years, Indian and Chinese companies together with private equity have been purchasing the assets of many of the troubled Western companies. However, now, tight credit and plunging profits mean that virtually every company is either cash-strapped or in a cash conservation mode. Hence, buyers of distressed assets are scarce, which means there is little in the way of M&A activity. Only government assistance now stands in the way of a 'bankruptcy contagion' in the industry.

Synchronised slowdown worldwide In the last five years, China has been propping up global sales at a time when demand growth in North America and Western Europe has been slowing. In recent years, growth also accelerated in resource-rich economies such as the Middle East, Russia and Brazil while India posted double-digit growth in 2006 and 2007. Although worries about problems associated with subprime lending had started to surface in August 2007, even at the beginning of 2008, there were few signs that the situation would escalate to the extent that it has and that the global economy and the auto industry would fall into a synchronised global slump.

While demand in the US and Western Europe was expected to be sluggish in 2008, demand in emerging markets such as India and China was expected to show healthy growth, while high oil and commodity prices were expected to underpin strong growth in Russia, the Middle East and Brazil.

During the first three quarters of 2008, high energy and commodity prices were the major cause for concern for countries that relied on oil and commodity imports while commodity producing countries enjoyed an unprecedented boom. In this environment, the US saw high fuel prices and an economic slowdown that triggered not only a slowdown in demand but also a shift in demand from large petrol-guzzling SUVs and pick-up trucks to more fuel efficient passenger cars. Initially, the major theme was segmentation shifts but as the year progressed, the bigger concern was the collapse in demand for all vehicles.

Seasonally adjusted annual light vehicle sales which were around 16 million units during the second half of 2007, dropped to 15.3 million in the first quarter of 2008, to 14.2 million units in the second quarter and then to under 13 million units in the third quarter. In October and November the rate slumped to below 11 million units as the fallout from the Lehman Brothers liquidation and escalation of the financial crisis, together with stock market falls, impacted credit availability and consumer confidence.

This amazing market contraction has not only pushed the Detroit 3 to the verge of bankruptcy but put intense pressure on the profitability of all automakers.

Of the major European markets, the Italian and Spanish markets have been in deep recession throughout 2008 while in the UK where demand was sluggish in the first half of 2008, the market has been slumping since July. German and French sales have been healthy during most of 2008 but the situation has deteriorated considerably since October.

Demand in emerging markets, particularly resource-rich economies, was growing at a very healthy rate during the first half of 2008. However the situation started to deteriorate rapidly in the second half. In the case of China, growth slowed sharply after July. In Russia, sales started to weaken rapidly after August while in Brazil falling commodity prices and escalation of the financial crisis triggered heavy falls in vehicle sales from October.

The fourth quarter of 2008 has been catastrophic for virtually every country. It is hard to think of any major vehicle market in the world which enjoyed year-over-year growth in sales during the fourth quarter. Indeed, it is now very common to see even mature and previously stable 'developed' markets suffering the levels of declines that were associated with volatile emerging markets during the Asian crisis in 1998.

Global sales will slump by 3.2m units in 2008 and by nearly 6.5m units in 2009, gradual recovery from 2010 Overall, I estimate that global light vehicle sales will slump by around 3.2 million units in 2008. Growth in China, Russia, Brazil and Middle East will have partially offset the declines in North America, Western Europe and Japan.

In 2009, tight credit, the virtual disappearance of leasing, rising unemployment levels and massive reduction in wealth will all combine to hit vehicle sales. It now appears very likely that the global sales slump will continue well into the first half of 2009 and in many countries also into the second half.

In the US, I now expect sales to drop to 11.4 million units in 2009, from around 13.3 million units in 2008 and nearly 16.2 million units in 2007. Demand will do well to recover to 13 million units by 2010 (I expect 12.6 million units) and it is highly unlikely that light vehicle demand will ever test the heady levels of over 17 million units reached in 2000 and 2001.

Remember that this 17 million unit market was supported by high level of fleet sales, aggressive incentives, loose credit and favourable lease packages. It currently appears inconceivable that such a favourable combination of factors will support vehicle sales in the foreseeable future.

Can Asia and the other emerging markets offer any respite? Until mid-2008, it was looking as though China and resource-rich economies like Russia, Brazil and the Middle East would help prop up global sales in 2009. However, the outlook for all these markets is rapidly worsening. All Asia light vehicle sales will post modest growth in 2008 with China once again being the main growth engine. Asian vehicle markets are already bracing themselves for a tough 2009. I expect sales to shrink by 7.3 percent in 2009 before recovering by 4.5 percent in 2010. 2009 will be the first year since 1998 that Asian demand will suffer a contraction.

However, Asian performance is so heavily dependent on China. Light vehicle sales in China rose from 2.1 million units to nearly eight million units in 2007 and demand will reach 8.6 million units in 2008 but I expect light vehicle sales to drop by over 10 percent in 2009. Exports are dropping sharply while many of the consumer confidence indicators are showing worrying signs. Inventory levels are also high and consumers will adopt a much more cautious attitude towards purchasing big ticket items such as cars. Government support will limit the downside while intense price competition will also support sales.

Light vehicle demand in 2010 will be only slightly above the levels of 2007, meaning three years of stagnation in the market which was growing by over a million units per annum. All vehicle manufacturers and suppliers are having to quickly adapt to this stagnant/low growth environment. In India, the only positive support was expected to come from the launch of the Nano (and transfer of some two-wheeler sales to the Nano) but following the West Bengal fiasco and relocation of production to Gujarat, production ramp up will be much slower than originally planned. It is currently difficult to be optimistic about the rest of the vehicle market during 2009.

Postponement of new manufacturing investment is inevitable, especially in the difficult credit environment. In 2010, the speed of the Nano ramp-up will have a major influence on the level of market growth. After a weak 2009, there should be a gradual pick-up in activity in the rest of the market. The slump in vehicle sales in Europe is set to accelerate in 2009 as German and French demand weakens sharply while sales in the UK, Spain and Italy are expected to suffer further declines.

During most of 2008, Russia was one of the world's booming auto markets but demand has collapsed since August and a combination of falling oil and commodity prices, heavy stock market falls and a currency crisis mean that vehicle sales will drop sharply in 2009. The outlook for 2010 is heavily dependent on the outlook for oil and commodity. It currently appears unlikely that sales in 2010 can return to 2008 levels.

Overall, European sales including Russia are expected to fall by nearly 10 percent or over two million units in 2009 before recouping nearly a million units in 2010.

Elsewhere, Brazil and Middle East enjoyed healthy performance until the oil and commodity bubble burst in the third and fourth quarter of 2008. Construction bubbles in places such as Dubai are now beginning to burst. The outlook for resource rich economies, especially in Middle East, Brazil and Russia is unlikely to improve until 2010.

Overall, after a decline of 3.2 million units in 2008, I expect global light vehicle sales to slump by 6.5 million units in 2009 before a rebound of nearly 4.3 million units in 2010, assuming that most global economies bottom out during the second half of 2009 and there is a significant improvement in the credit environment. Even then, the level of 2010 will be well below the levels achieved in 2008 and over 5 million units lower than 2007 levels.

This deep recession will lead to industry restructuring, consolidation and a shake-out. The contraction of five million units in the US light vehicle market between 2007 and 2009 means that companies with high exposure to the US market are facing the biggest challenges. Apart from the Detroit 3’s desperate situation, Japanese companies who also rely on the US market for the bulk of their profits are also suffering and their troubles are exacerbated by the strong yen.

European automakers fared better in the first half of 2008 thanks to their presence in the booming China, Russia and Brazilian markets. Most OEMs were reiterating their profit targets for 2008 and 2009 until mid 2008. For example, Volkswagen performed well thanks to strong performance in China, Brazil and Russia and limited exposure to USA. Fiat benefited from strong sales in Brazil as well as France and Germany while Peugeot-Citroen's performance was also boosted by strong growth in Russia and Brazil.

In 2009, weakness in Western Europe together with a sharp slowdown in Russia, Brazil and China will hit European manufacturers. The level and nature of support from individual European governments will become a crucial factor in allowing these companies to weather the downturn. With free market principles no longer in play and government intervention very widespread in all parts of the world, it is too early to speculate on how the different manufacturers will emerge from this recession.