American Auto Earnings Show Signs of Beating Best of 90sKeith Naughton and Craig Trudell
The 17 percent surge in U.S. auto sales last month pushed the annual rate to a pre-recession, boom-time level. Even more significant, Detroit automakers are reaping profits not seen since the turn of the century.
Sales totaled 1.5 million in August, the most in one month since May 2007. What’s more, the automotive comeback crossed an important milestone as the industry’s annual selling rate reached 16.1 million, the fastest since October 2007 and a volume that signifies a robust car market.
As the fifth anniversary of the collapse of Lehman Brothers approaches, Detroit has come full circle, from bankruptcy to boom. General Motors Co., Ford Motor Co. and Chrysler Group LLC combined to earn $13.5 billion last year, even as industry sales were 17 percent below the peak of 17.4 million set in 2000. Those fatter profits come from trimmer companies that radically restructured operations, shed debts and overhauled their lineups to field their most competitive cars in a generation.
“Any question that the industry is back should be put to rest,” said Jeff Schuster, auto analyst for researcher LMC Automotive. “In 2007, there was no margin on cars; the Detroit Three were giving them away. Now we’re seeing a much different environment, where they’re much more competitive.”
GM rose 1.3 percent to $36.33 and Ford gained 2.3 percent to $17.30 at the close in New York. So far this year, Ford has soared 34 percent and GM jumped 26 percent, outpacing the 16 percent gain of the Standard & Poor’s 500 Index.
In the first half of this year, the Detroit Three made more than $6 billion before the industrywide sales rate breached 16 million from last year’s 14.5 million. They’re making money from models that once were loss leaders, such as small cars like GM’s Chevrolet Cruze and family sedans like Ford’s Fusion, which jumped 14 percent last month.
GM’s total sales rose 15 percent last month, making August its best month since September 2008, the month that Lehman Brothers Holdings Inc. collapsed. Ford was up 12 percent and said it had its best month of retail sales since 2006. Deliveries for Chrysler, majority-owned by Fiat SpA, climbed 12 percent in August, the automaker’s 41st straight month of gains.
Asian automakers combined for their best U.S. sales month ever. Toyota Motor Corp. deliveries surged 23 percent, while Honda Motor Co. and Nissan Motor Co. each had their best August.
“We see the market continuing at this pace, going as high as the mid-16s,” Bob Carter, senior vice president of Toyota’s U.S. sales unit, told the Automotive Press Association in Detroit today. “We certainly don’t see 10 percent growth year-over-year like we’ve just experienced. But we see very moderate growth.”
“The new 16 is better than the old 17,” Kevin Tynan, auto analyst for Bloomberg Industries, said in an interview yesterday. “It’s different now because the products across the portfolio are so much better. Everything is just better, from the cost structure on down the line.”
Consumers are willing to pay higher prices for these new models, which are stuffed with technology that keeps drivers more connected and going farther on a gallon of gasoline. The average price a consumer paid for a Chrysler model rose 3.9 percent from last year to $32,447, according to researcher Kelley Blue Book. Ford commands an average price of $34,455, up 1.5 percent from last year, and GM gets $34,527, up 0.7 percent.
Now Detroit’s greatest challenge is building enough cars, Schuster said. Ford said yesterday it plans to boost North American production in the fourth quarter by 6.8 percent to 785,000 vehicles. Ford just added a shift of 1,400 workers at a Michigan factory to build more Fusions.
GM is running its Cruze factory in Ohio around-the-clock on three shifts to keep up with demand for the small car that is up 18 percent this year. Consumer demand for the Cruze “is unprecedented in Chevrolet for decades,” Alan Batey, head of Chevrolet, said on a conference call yesterday.
“I don’t know when we’ve been in a situation where we don’t have enough inventory because things are good,” said Schuster, 45. “It’s been a very long time. It’s out of my memory bank, for sure.”
Factory capacity constraints could be the biggest roadblock to reaching and surpassing the 2000 sales record, Schuster said. Tynan and LMC each forecast industrywide sales will top 17 million in three years.
“While demand appears strong enough to sustain continued growth, supply could get in the way as many manufacturers already are facing tight inventory for many popular models,” said Alec Gutierrez, auto analyst for Kelley Blue Book. “Assuming that the economy remains on stable footing, we should see demand remain strong enough to support annual sales of 16 million units or more moving forward.”
Schuster said LMC projects the industry adding 3.4 million vehicles of capacity from 2010 through 2020 in North America, 2 million of which come from new factories in Mexico.
There remain “yellow flags” in the sluggish economy, such as anemic job and income growth, Tynan said.
“There’s probably more broad economic weakness than the auto numbers would suggest,” Tynan said. “If you just look at the auto sales, you would think we are in full-on recovery and the new boom period. But that’s not the case.”
Fewer Americans filed applications for unemployment benefits last week, the U.S. Labor Department reported today. The jobless claims report showed the four-week moving average, a less volatile measure than the weekly figures, declined to 328,500 last week, the lowest since October 2007, from 331,500.
Spending on cars and housing helped maintain “modest to moderate” economic expansion even as borrowing costs increased, the Federal Reserve said yesterday.
The last time the auto industry had 16 million in annual sales, there were excess assembly plants pumping out models consumers didn’t want. U.S. automakers dumped cars into rental fleets to keep factories running because labor contracts at the time required them to pay workers even if they were idled. The result was high sales and low or no profits, which drove GM and Chrysler into government-funded bankruptcies in 2009.
“In 2007, we were achieving that sales level by giving cars away because the auto companies had too many factories,” John Casesa, senior managing director at Guggenheim Partners LLC, said yesterday on Bloomberg Radio. “Today, there’s real demand for that product. It’s a fundamentally different industry.”
Unlike the previous auto boom, demand for Detroit’s models is no longer concentrated on sport-utility vehicles and pickups. Car buyers are coming to showrooms to kick the tires of cars such as the redesigned Chevy Impala and the Ford Fiesta, which saw sales rise 61 percent last month. GM said it sold 18,982 Cadillacs at retail for its best August on that basis since 1989.
“This is a new environment for Detroit, which is balanced growth,” Schuster said. Previously, “the concentration had been so heavy on the truck side. Now they’re participating in the market gains on both sides of the business, which goes right to their bottom lines.”
And while total economic growth “has been uneven and slow,” auto sales are a primary driver, Ellen Hughes-Cromwick, Ford’s chief economist, told analysts and reporters on a conference call yesterday. Auto output has contributed more than 15 percent to the U.S. gross domestic product since the second quarter of 2009, she said.
“The sales pace appears to be galloping ahead as it compares to some of the consumer fundamentals,” she said. Job growth, the recovery in the housing market and the oldest vehicles ever on U.S. roads “should give us some good support going forward.”
The new models on the showroom floor also are convincing consumers it’s time to trade in the old jalopy. The average age of cars on the road has reached a record 11.4 years, auto researcher R.L. Polk & Co. said last month.
“We expect that more and more people that delayed the decision to buy will keep coming into the market,” Mustafa Mohatarem, GM’s chief economist, said on a conference call yesterday. The 16-million annual sales rate is “here to stay.”
Technology that improves fuel economy and enables buyers to connect their smartphones to the car stereo are also enticing buyers to upgrade, said Jim Farley, Ford’s senior vice president of sales and marketing.
“The fuel economy gain compared to a five- or six-year-old car now is probably the highest gap it’s been in my career,” Farley, 51, said in an Aug. 21 interview. “So when you do the math, the rational side of buying a car is very compelling.”