Despite telling us almost from the start that Chrysler was in the catbird seat under Cerberus ownership, now word comes that CEO Bob Nardelli is telling the troops out in Auburn Hills that things are worse than expected. How could they not be? The combination of a devalued dollar, declining refinery capacity (China is not only hoarding diesel fuel, it is reportedly keeping its refineries off line until after the Olympics to help with the country’s disastrous air quality), a Federal Reserve that isn’t sure day-to-day whether is should raise or lower interest rates, soaring gas prices, and the hot air that comes from a major election has temporarily conspired to take the wind out of the economy’s sales.

What I want to know, however, is how an industry that just over 10 years ago was bragging it could make money in a down year – 12-million to 14-million annual sales – due to its new-found lean strategies could throw it all away so quickly. Between 1990 and 2000, the population of the United States increased 13.2%. With live births averaging 4-million per year – or 32-million over the past eight years – that means the current population, estimated by the Census Bureau at more than 304-million, should be approximately 280.8-million people. Or, to put it another way, there are 24-million people in the United States who were not born here and can be assumed to be somewhat older than the children born here over the past eight years. (The oldest of those would turn eight this year, about a decade short of when they would begin to consider new car ownership.)

If we assume an average sales year of 15-million units prior to this decade, the recent 17-million plateau represents a nearly 12% growth in sales. It is safe to assume that 12% of the immigrants are of car-buying age. Thus this 2.9-million would neatly account for the increase in sales. However, the increase in vehicle sales did not increase in a step fashion, but rose dramatically on good economic news, tax cuts, and stable gasoline prices. This suggests that many of the new vehicle purchases were discretionary, and would not have taken place had conditions not been so favorable. Let’s not forget that Detroit, as well as a number of the import makers, had incentives on their vehicles during this period that had the effect of lowering not only the transaction price, but the monthly payment as well. In addition, the "9/11 effect," wherein incentives were increased to "Keep America Rolling," created a distortion that has carried forward as buyers bargain hunted and OEMs did everything they could from a small bag of tricks to keep the sales momentum up. The combination of these economic incentives pulled forward purchases (i.e., caused buyers to trade their current vehicle in sooner), encouraged buyers at the upper levels of the used car market to make a new vehicle purchase, and increased the number of new owners (e.g., adding a vehicle for high school-age children) and discretionary buyers. Though not a classical "bubble," the increase moved like a wave through the market carrying the day of reckoning forward with it.

The effect is magnified by a media that trumpets a recession that still has not arrived. (We have not seen two quarters of GDP decline as of yet, though it would be safe to say there are areas of the country in trouble.) This causes even those whose situation has not been altered to reconsider new purchases, especially those of big-ticket items like cars and trucks. In the short term, this perception will not only cause great pain to companies like Chrysler that were weakened to begin with, it will also drive the wave mentioned earlier out of the system and return annual sales back to a more normal level while also establishing a revised sales floor much more quickly and painfully.

In the short run Chrysler, like the rest of the Big Three, suffers from a product portfolio overly reliant on trucks and is paying for its inattentiveness to the car market. Chrysler also has the added burden of former owners so arrogant that they believed they could cruise to victory in the bread-and-butter portion of the North American market with underperforming product, and nearly destroyed the company in the process.

Welcome to the auto industry, Mr. Nardelli. Next time you and the ex-GE brain trust at Cerberus might want to expand your definition of "diligence."