American Auto Sales Seen at Annual 16 Million With ProfitCraig Trudell
The U.S. auto market is poised for a fifth straight year of growth for just the second time since World War II. The recovery from the recession has been so robust that the debate is now whether sales will reach 2000’s record levels -- and whether that would even be a good thing.
Deliveries of new cars and light trucks may rise to 16.1 million next year, the average estimate of 13 analysts in a survey by Bloomberg News. That’s about 500,000 more vehicles than automakers are on pace to sell this year and while it’s within reach of 2007’s 16.15 million, it’s well short of the 17.4 million peak.
Since the annualized pace of auto deliveries in August exceeded 16 million for the first time in six years, analysts have been looking back at the last time sales were so brisk. Six years ago, while sales were still above 16 million, Detroit was losing billions, saddled with high costs and poor cars.
“It’s not just the number 16 that’s amazing,” George Magliano, chief economist for IHS Automotive, said by telephone. “It’s the fact that it’s coming effortlessly. We’re not dumping cars and trucks into the fleets. We’re not using humungous incentives to move them. It’s a reflection of people’s willingness to buy and the strength of the product out there.”
The last time U.S. sales rose for five straight years was 1996 to 2000, when the Detroit Three profited from booming demand for pickups and SUVs and let their car lines atrophy. As gasoline prices rose, they were unprepared for shifting tastes. So even as annual sales remained in excess of 16 million, Detroit fell further behind.
This time, Detroit has competitive vehicles including small and mid-size cars, and automakers are commanding record-high prices. Brands such as Volkswagen and Audi, Kia and Hyundai have gotten into the mix following the footsteps of Toyota and BMW, and yet automakers are limiting deliveries to rental-car companies so that even those transactions are profitable.
The natural midpoint for U.S. sales is probably about 16 million per year, said Mark Wakefield, a managing partner for AlixPartners LLP, a consulting firm that advises on restructurings and has worked with auto companies including GM. He’s concerned about deliveries racing beyond that toward 17 million or more and the payback that will follow.
“I care less about the natural mid than about how far this cycle is going to go beyond that, and then when it will come back, because I know it will,” Wakefield said in an interview.
Driven by profitable sales growth, the North American auto industry is in the midst of the fastest expansion since 1950, according to Morgan Stanley. In the five years through 2015, automakers are adding 3.5 million vehicles worth of annual production capacity, the New York-based bank estimates.
“Part of why we expect volume to grow is because there’s a philosophy of if you build it, you kind of make people come and buy it,” Adam Jonas, a Morgan Stanley managing director and analyst, said in a telephone interview.
The additional capacity will test pricing discipline because the industry’s ability to produce vehicles is growing faster than demand is, Jonas wrote in a Sept. 10 report.
Industry analysts widely agree that demand will return to near 2007’s level next year. Only two of the analysts surveyed by Bloomberg predicted demand would fall short of 16 million, and both estimated 15.9 million.
Morgan Stanley estimates the market could exceed the 2000 record and eventually climb to 18 million before the next downturn. Jonas warns that it would most likely happen because automakers cut prices and lend money to people who may not be able to handle the debt, he said.
“It’s doable, but we’re going to have to do some dumpster diving for that,” Jonas said. Lenders tend to extend too much credit to car buyers at the top of an economic cycle and contract too severely in a downturn, he said. “When times are good, they’re really good. And when times are bad, they’re awful.”
The bad times were worst for General Motors Co., Chrysler Group LLC and Ford Motor Co. The first two filed for government-backed bankruptcies in 2009. The latter avoided that fate by borrowing $23.4 billion in late 2006 to fund a costly restructuring outside the courts.
Today, the three have overhauled their lineups and are fielding some of their best passenger cars in a generation. Consumer Reports lauded GM’s Chevrolet Impala as the best sedan on the market. Ford’s Fusion is taking market share from Toyota Motor Corp.’s Camry and selling at premium prices.
“It would be one thing if the domestics were going to get better in cars and pull back on trucks, but they aren’t,” Tom Libby, an analyst for R.L. Polk & Co., said by telephone. “You see a rising level of competitiveness for the domestics across the whole industry, which is forcing the Asians to be more aggressive just to maintain where they are.”
No car reflects the extent to which Asia-based automakers have been put on the defensive better than Toyota’s Camry, the No. 1-selling U.S. car for 11 consecutive years. The Toyota City, Japan-based company plans to protect that position, Bob Carter, senior vice president its U.S. sales unit, told the Automotive Press Association this month in Detroit.
“I know that you’ve read many of the articles out there that we’re piling on the incentives on Camry,” Carter said. “Well, versus historical Toyota averages, yes we are. Toyota has increased our support for Camry because it’s appropriate for this highly competitive and large segment.”
A total of 376 models will be introduced in the U.S. from this year through 2015, according to Polk.
Those new cars and trucks are likely to draw more buyers as Americans’ vehicles age to about 11.5 years old on average, Itay Michaeli, an auto analyst for Citigroup Inc., said by telephone.
Vehicles in the U.S. market historically have been scrapped at a much higher rate when they reach about 13 years old, Michaeli said. At that point, replacement increases significantly, according to Citigroup’s research, and since the top sales years were 1999 through 2006, that time is coming.
“No later than 2015 will that inflection occur,” he said. “It’s a pleasant surprise to think that maybe it’s starting to occur now, earlier than expected.”
For now, automakers can celebrate that they’re back to pre-recessionary levels even in the face of tepid economic growth and industry-specific challenges, including drawing younger buyers and urban dwellers who increasingly have access to alternatives like public transportation and car sharing.
“We spend a lot of time talking about what’s turning people off from buying cars and trucks,” IHS’s Magliano said. “Well, it seems that people are really predisposed to buying cars and trucks. We’ve got some legs from here.”
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