Phil Biggs covers the automotive industry for NewsTalk 1340 WJRW
February 19, 2014 – 5:30 pm ET
DETROIT, Michigan. – With the dazzling excitement of the auto shows in Detroit and Chicago long behind us now, and the enthusiasm and promises of the NADA Convention just a speck in the rear-view mirror, now what? All the momentum the industry realized last year has ground to a halt during the first two months of 2014. What is causing the reversal of fortune, just as automakers were seeing double-digit volume growth consistently over the past few years?
Auto sales traditionally lag new home starts, and the housing market is gloomier than forecasted. Economists and analysts long have pointed to several factors that affect auto sales, the major one being the supply and sales of new U.S. homes. Consumer confidence in the U.S. housing market directly correlates to sales of new vehicles, particularly as they affect independent, truck-buying homebuilders. The hike in interest rates last quarter, as well as the scarcity of buildable lots along with tight labor markets in some regions, are causing potential new buyers to delay new home purchases, in turn causing housing starts to fall 9.8% in 2013.
According to the Wall Street Journal, consumer confidence in the housing market has dropped, at least in part due to complicated regulations and the greater degree of difficulty facing average homebuyers trying to secure new home mortgage loans. That unnecessary red tape has weakened consumer demand as buyers saw mortgage rates inching up last year.
Inventories have crept back to the highest levels since the recession. The Detroit automakers now have more than a 100-day supply of vehicles on the dealer lots, and that number continues to spike. This growing number of unsold vehicles, coupled with U.S. sales volumes that have slowed dramatically, adds up to a deadly combination that could mean a return of bigger discounts and lower profit margins throughout 2014.
The effects of mounting inventories and slower sales…
| General Motors As of February 1st, 114-day supply, up from 81 days in mid-December |
| Ford Motor As of February 1st, 107-day supply, up from 73 days in mid-December |
| Chrysler As of February 1st, 105-day supply, up from 79 days in mid-December |
That’s the elephant in the room of course: the rising use of incentives to push product out. Incentives are the old industry tonic that ruined domestic carmaker profits the past twenty years and now threaten to make its untimely return. Morgan Stanley analyst Adam Jonas says rebates appear to be back in play…“Auto executives agree there are some warning signs brewing as industry sales momentum and discipline with incentives wane.” In what might be the first volley, GM began a nearly month-long Presidents Day promotion on Chevrolet, Buick and GMC vehicles, offering some of GM’s biggest incentives in months, according to Automotive News.
Unprecedented bad weather hasn’t helped much. Automakers and dealers hope cars begin to roll off the lots in the coming months as spring approaches and customers feel more like shopping as this ugly winter dissipates. U.S. light vehicle sales have risen just 2% year-over-year since Labor Day, compared with a 10% gain in the prior twelve months. In January, sales declined 3% and the seasonally adjusted annualized selling rate fell to 15.2 million, the lowest since April 2013, as relentless snowstorms and subzero temperatures deterred buyers in much of the country.
“When the weather breaks, we figure we’re going to get very busy very quickly,” said Don Griffin, general manager of Kayser Ford-Lincoln in Madison, WI, where subzero temperatures were recorded on 14 days last month. “Out of the 27 years that I’ve been doing this, I don’t ever recall a winter quite like this,” he said. “We can deal with the snow, and I think the consumer can deal with the snow, but the bitter, frigid cold has definitely had an effect.
Better weather will certainly help but many industry experts say it’s more than that. Most believe that the industry’s replacement cycle that started in 2009 is over. Now it’s up to the industry to sustain itself on the merit of new vehicle sales, not pent-up demand solely. Toyota’s North American chief Jim Lentz agrees, and said recently that the pent-up demand has driven the industry to strong growth the last few years but will slow in 2014.
Despite all the rough sledding, Nissan posted a 12% increase in January sales, driven by its redesigned Rogue crossover, which was up 55% in January. Meanwhile, Suburu realized a 19% gain in January mostly based on the strength of its all-wheel drive fleet, an entirely necessary feature this winter. So the sales are there, but it will be a real push to get the double-digit momentum back. Given the tough cards they’ve been dealt, auto dealers must now more than ever sell on the strength of their product, and not succumb to the short-term temptation of profit-ruining incentives.
Phil Biggs is Partner, Automotive Markets, for the Bethesda, MD-based management consulting firm The Highland Group.
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