In the late hours leading into the holiday season, the activities throughout the halls of Congress were anything but lame duck. A plan to heal the hemorrhaging wounds of domestic automakers melted down in the presence of political theater of the most audacious sort.

And the fate of one of the country’s most vital industries hangs in the balance, and the prognosis: not too good. But for the aftermarket, 2009 should end up being a better year than some expect.

For now, people are keeping their vehicles longer, and many of these vehicles are reaching or have reached their “sweet spot,” the point at which it’s prime for replacement parts. Deferred maintenance also is leading to bigger-ticket items, estimate a number of industry leaders.

“This has certainly been a volatile year for the global economy,” says Steve Handschuh, president and COO of the Automotive Aftermarket Suppliers Association (AASA). However, “there are definitely bright spots in our industry and opportunities ahead.”

For one, Handschuh notes “vehicles eight years old or older fail at a rate double that of vehicles less than eight years old. At present, 56 percent of all vehicles on the road are more than eight years old. This bodes well for the future of our industry.”

Any kind of help from the government will lead to a more robust aftermarket in the long-term, say aftermarket executives.

A relief package will offer a “psychological advantage,” says Joe Catalano, chief operating officer for Autobacs Strauss. “While I don’t think the aftermarket will immediately be impacted by the result of the auto bailout, I do think that there’s a tremendous psychological effect on the whole economy, which will once again bring an increase in consumer confidence that will help the aftermarket in the short term,” he adds. “Long term, absolutely, it will have a positive effect.”

For OEMs and their suppliers, the road will be much more difficult. For long-term recovery, automakers will need to rethink the relationship between capitalism and union ideals, the push-pull of competing on a global stage and still keeping a decent middle class (if that notion even exists anymore).

Recovery will be arduous, but the carmakers will emerge from the rubble as better and likely leaner versions of their current selves, which can only boost the accompanying aftermarket. OEMs will be forced to rethink the way they go to market, their product lines and overall operations, while unions will need to retool salaries, job structures and their future with vehicle manufacturing. This retooling will likely involve adopting the business model witnessed in Asian carmakers that build vehicles and parts in the U.S.

What’s in store?
For the short-term future, expect more consolidations among suppliers, as well as disruptions in the supply chain, says Rebecca Lindland, a market researcher for Global Insight, in Lexington, Mass.

“Suppliers are all going to be impacted,” she says. “Once the supply chain is interrupted, it takes weeks and months to recover. When you think of all the people getting their cars serviced, it could be a week to 10 days before we can get a part, or even longer.”

Some may disagree with the assertion on parts availability, but Lindland expounds on what could be the suppliers’ future. 

“We are in an era of significant contraction,” she adds. “That could be really good for the aftermarket, but because they are dependent on many of the same suppliers that are in jeopardy now, that is an issue.”

Aftermarket parts distributors should also diversify their supplier base, say those we spoke with. And conversely, suppliers need to rethink their customer base.

Nonetheless, all surviving companies will rise up with a clean bill of health.

“There is always money to be made,” says consultant Angelo Onello. “The industry isn’t going away. It may expand, it may contract, it may twist or it may turn. There are a lot of fighters in this industry, who been around for two or three generations. The ones who are going to survive are the ones that have the ability to adapt.

“From a distributors’ point of view, it only proves to strengthen. You may have a glut of technicians flooding into the aftermarket, which we are in dire need of.”

But a domino effect is imminent for the aftermarket, so industry executives are keeping a close eye on the domestic automakers. Almost 4 percent of U.S. gross domestic product is auto-related, and the U.S.-based auto industry is second only to the semiconductor industry in R&D spending, according to the Engine of Democracy (www.TheEngineofDemocracy.com), a site created for advocacy of the auto relief package.

“The impact of the failure of even a single U.S. carmaker would be devastating, not only to AASA’s aftermarket supplier members, but to the whole U.S. economy,” says Handschuh. “More than two million jobs would be lost and more than $100 billion drained from our nation’s economy, according to a recently released study by the Center for Automotive Research (CAR).”

The study Handschuh cites looks at different bankruptcy scenarios. If all three domestic automakers rapidly terminate operations, personal income would be reduced by more than $151 billion in the first year, which would generate an income loss of $398 billion over three years, ending in a total government tax loss of more than $156 billion, the CAR study states.

A 50-percent cut in Big Three operations would likewise reduce personal income by $125 billion the first year, with a loss of $276 billion over three years and a tax loss of $108 billion, the study adds.

The auto industry supports one out of every 10 jobs in the U.S., says Michigan Gov. Jennifer Granholm.

ACDelco’s Nancy McLean says without financial assistance, the implications could be “devastating.” ACDelco, itself, is in a unique situation because of its close ties with GM. The automaker at press time was trying to sell ACDelco, which McLean says would provide greater opportunities for the aftermarket supplier and distributor.

What was the argument?
The arguments supporting and rebuking the relief package are equally compelling. The auto industry’s considered the backbone of many jobs in the United States, but many say the needs of the banking industry superceded any other industry: thus the $700 billion bailout that went through Congress last fall with little effort.

Some say let the companies bleed their way through Chapter 11 bankruptcy, because that’s the inevitable fate: at least for Chrysler and GM. Evan Newark, from the Wall Street Journal has described Detroit’s decline as “a slow-motion car wreck spanning four decades.”

Consultant Onello says these carmakers are badly mismanaged companies, and does not think the government should “muddy the waters.”

“The successful distributors and vendors that I see are not waiting for Congress to bail them out. Hope is not a strategy,” he adds.

Many of those we spoke with agree that bankruptcy is perhaps a viable option in more prosperous times. However, these are not prosperous times.

“It is true that many large and well-known corporations across all industry sectors have successfully entered Chapter 11 and emerged strong and healthy,” says AASA’s Handschuh. “But we believe this option would put suppliers at particular risk.” He notes that normal credit channels are not available, and the current credit crunch will impact dealers, suppliers and manufacturers.

McLean says a loan will help the auto industry weather a storm that’s not particularly of its own making. “The U.S. credit freeze and essentially closed capital markets have resulted in a liquidity squeeze at a time when manufacturers’ cash flow from operations are devastated by plummeting consumer demand,” she adds.

It is the Big Three’s failed business models that got them to this point, and they should go through bankruptcy as a result, writes David Fotouhi, a member of the Harvard Law School Federalist Society.

When United Airlines was plagued by September 11 travel slowdowns, the carrier cancelled its pension plan and shifted 120,000 pensions to the Federal Pension Benefit Guaranty Corporation (PBGC), resulting in a $5 billion taxpayer tab.

The shift of Big Three pensions to the PBGC would only be a one-time charge to taxpayers and would likely cost less than a bailout, Fotouhi adds.

“A managed bankruptcy may be the only path to the fundamental restructuring the industry needs,” writes Mitt Romney, former governor of Massachusetts. “It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.”

Where did it go wrong?
A number of factors were beyond the automakers’ control, but some big mistakes were made decades ago, which caught up to these companies at the very worst time possible.

At press time, overall industry sales were down 36 percent. And while the Big Three were possibly hit the hardest as the public began to sway against SUVs, sales are down across the board — even among Japanese automakers.

GM still holds global dominance with its automobiles, so maybe the tribulations of the Big Three here at home involve perception as much as performance.

Although at press time, the company announced it was slashing first-quarter North American production by 60, and cutting production by an additional 250,000 units during the first quarter due to the “ongoing and severe drop in industry sales,” the company notes.

Ford also announced it would produce 430,000 vehicles in North American in the first quarter of 2009, a significant drop from the 692,000 made a year previous.

But it’s probably the automakers’ reluctance to embrace hybrids and alternative fuel technology with the fervor of import marques such as Toyota and Honda. The Volt, however, stands as a testament to GM’s level of commitment, but a combination of low fuel prices and GM’s current woes are likely to delay its introduction into the U.S. marketplace.

“The catastrophic decline in new car sales this year will have repercussions throughout the automotive industry,” says Bruce Hartin, president of Allpart Supply and Haweka USA, companies that sell garage equipment repair parts. “One can only assume that this will ultimately increase repairs on existing cars since new cars are not replacing older vehicles. However, fears about the economy and recent job losses will probably slow repair and maintenance cycles.”

As the automakers seek to regain footing, they’ll also need to continue to innovate to survive. During the 2009-2012 period, GM will invest $2.9 billion in alternative fuels and advanced propulsion technologies, states McLean from ACDelco. “By 2012, more than half of GM vehicles will be flex-fuel capable, and the company will offer 15 hybrid models.”

The domestic auto industry and the automotive aftermarket will recover, but the current situation leaves one to wonder which industry will step up and ask for help next.