Phil Biggs covers the automotive industry for NewsTalk 1340 WJRW
July 11, 2013 – 8:30 am ET
DETROIT, Mich. – Strong sales performance in 2012 and good year-over-year results so far in 2013 have restored profitability to most sectors in the auto space. Since the economic crash in 2009, it was difficult to imagine sales coming back to pre-recession levels, let alone the return of real profit growth in the industry. Here are some reasons for the good news, and what may happen next…
At the OEM level, profits provide greater stability and room for new investment. Controlled capacity the past several years, fewer incentives offered by dealers, the market creeping back from 2009 replacement level volumes coupled with pent-up consumer demand, have caused a fundamental and drastic lowering of OEM operating costs, and thus a return to good profitability. As Sean McAlinden of the Center for Automotive Research points out, “All three domestic automakers have operated at profitable levels since 2010 and Ford, in particular, has earned record margins of close to 11% in 2012.”
Restored profitability has enabled General Motors and Chrysler-Fiat to repay a significant portion of their government loans in full and ahead of schedule. And just this week, GM and Honda made a bold announcement that they will form a joint venture to explore hydrogen fuel cell technology together. This type of shared development alliance is becoming commonplace among the OEMs, but it would not be possible without a solid foundation of positive cash flow and profits.
Most suppliers are experiencing better profits but remain cautiously optimistic looking forward. Like the OEMs, the key integrators and Tier I suppliers are seeing profit growth as vehicle programs have provided decent margins on contracts over the past few years. However, each global region frequently has its own unique platform variants that force the major integrators and Tier 1 suppliers into sizable investment of plant, people and materials in order to maintain preferred status with their OEMs. Therefore the cost and overall financial pressure on those suppliers is dramatic. Meanwhile, many of the Tier II suppliers have fared better as they have not had to face the complex and excruciating global requirements needed to support OEM customers around the world.
Exponential growth of on-board technology and powertrain options throws yet another huge investment requirement into the mix. Coupled with materials cost and availability, regulatory impact, and competitive intensity (especially in the BRIC regions), it makes life challenging for even the most successful in the supply chain. Selecting the right OEM platforms will be a strategic necessity in order to insure supplier viability let alone survival into the next decade.
The near term for the dealer base is rosy but they must avoid historic pitfalls. “Last year was the best ever for auto dealership profits, and all the signs point to 2013 being even better,” said Jamie LaReau of Automotive News this week. Dealers benefited in 2012 from low interest rates and factory floorplan assistance programs, with an average increase of 50% in OEM floorplan credits over 2011. Overall net profit on a per vehicle basis rose from $23 to $111, an increase of nearly five-fold. Contrasting that with a record five straight years of net losses, it is not surprising that most car dealers are jubilant so far this year.
However, there are historic causes for concern: allowing the return of consumer incentives to push new car transactions is always a worry, along with whether funds for new vehicle purchases remain flush for dealers to attract new car buyers. And NADA Chairman David Westcott told Automotive News this week he sees “two major clouds on the horizon. The first is the uncertainty surrounding the impact of the Affordable Care Act; the second is possible new regulation of small business lenders, which could hurt profits in dealerships’ finance and insurance departments.” The announcement by the White House that the implementation of changes to the new health care law is delayed until 2015 sets aside one of those worries, but interest rate hikes and more banking regulations could stifle dealer growth later in 2013.
In the meantime, despite never-ending market change, cost pressures, regulatory burdens, and the arrival of new technology almost daily, the industry as a whole is momentarily enjoying a good feeling as profits are back. And that’s a good sign for many of us in the towns and cities across America that support the automobile business.
The Return of Profitability…
| Snapshot of the average U.S. franchised dealership’s financial results in 2012 | ||||||
|
2012 |
% change vs. 2011 |
|||||
| Total sales |
$38.4 million |
+9% |
||||
| Pretax profits |
$843,697 |
+6% |
||||
Source: NADA / Automotive News
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