Parts for car recovery and other

In 2005, in my waning days as an analyst, I wrote a report called “The Recapitalization of Detroit,” which said that the legacy U.S. auto industry was at a tipping point, about to run out of time and money. The result, I argued, would be a massive restructuring culminating in a transfer of ownership to new investors.

I envisioned confrontation with labor, weaker U.S. demand reflecting payback for big incentives, higher energy prices and higher interest rates, accelerated consolidation of the supply base, downsizing of Detroit and more market share gains for Asian auto makers.

All of this, I wrote, would be “risky for shareholders.”

How’s that for understatement?

Nonetheless, I believed that plentiful new capital would facilitate a lengthy, but methodical restructuring, resulting in a “healthier, rationalized industry.”

That’s where I was wrong.

Private capital disappeared in the global credit crunch. As a result, the industry’s restructuring has been rapid and anything but methodical. Instead, chaos ensued amid panic-induced bankruptcies, liquidations, government bailouts, grants, loans, subsidies, and even cash for clunkers.

So now, as the dust settles, we and our clients are asking: What is the future of the auto business?

We see three distinct themes for the foreseeable future:

(1) Continued restructuring of the legacy industry.

(2) Rapid growth of the emerging industry.

(3) The development of new business models.

Notwithstanding the extraordinary effort of world governments to engineer a softer landing for a crashing industry, we do not think order will soon emerge from chaos. The restructuring of the legacy industry will continue for years. After all, the world is still awash in assembly capacity, and young companies like Tata Motors, Geely and BYD Auto are chomping at the bit to add theirs.

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