What does the rest of the year look like?
April 27, 2012
2012 has the markings of a transitional year for the automotive industry. If the sales and efficiency gains achieved by the industry, which began in 2009, can be sustained, there is ample reason to believe that salad days lie ahead of automakers, suppliers, and dealers alike.
2012 is almost halfway over, but it appears that it has the markings of a transitional year for the automotive industry. If the sales and efficiency gains achieved by the industry, which began in 2009, can be sustained, there is ample reason to believe that brighter days lie ahead for automakers, suppliers, and dealers alike.
There is reason for caution, however. Although it’s true that many positives are rumbling in the hallways of the industry’s stakeholders, these rumblings were echoed a year ago in 2011—before they were silenced by the tsunami crisis in Japan, flooding in Thailand, fiscal crisis in Europe, and budget crisis in the U.S.
Even though 2011 proved to be an improvement over 2010 in nearly every respect—from sales and production to earnings—it did not live up to the lofty forecasts industry observers were touting in the spring last year. Likewise, the increasingly optimistic forecasts that analysts have predicted for 2012 come with the caveat that the unexpected has a knack for happening at times least opportune for the automotive industry.
More than two years after the official end of the recent recession, economic indicators show slight improvement but not the robust growth necessary for a stronger recovery in automotive sales and production.
The gross domestic product (GDP) represents the total economic activity taking place in a given country and serves as the broadest of economic indicators. Economic analysis performed by the Center for Automotive Research (CAR) shows that, historically, the U.S.’s annual GDP growth rate must be more than 3 percent for the automotive market to be healthy. For 2011 the figure stood at an annual average of only 1.7 percent, though the fourth quarter provided a glimmer of optimism with a GDP growth rate of 2.8 percent. Most analysts expect a 2012 GDP growth rate of just more than 2 percent. As was the case in 2011, most analysts expect GDP growth rates to be lower in the first half of 2012 and to accelerate in the second half of the year.
Unemployment is another critical economic indicator. CAR’s economic analysis shows that to achieve robust vehicle sales and production, U.S. unemployment levels must be 6 percent or lower. In 2011 the overall figure stood at 9 percent—an improvement over the 9.7 percent average of 2010, but still far short. For the first two months of the year, the 2012 unemployment rate stood at 8.3 percent. Most forecasters expect the 2012 annual average unemployment rate to end up at 8 percent. Although this result would be the lowest unemployment level since 2008, it is still far above the 6 percent that serves as a target for robust automotive sales.
Because a new vehicle is usually the second-largest purchase consumers make (a home is the largest), consumer confidence plays a significant role in U.S. vehicle sales. The Thomson Reuters/University of Michigan Index of Consumer Sentiment, an indicator of consumer confidence, stood at 74.3 in March. Historically, this indicator needs to reach at least 90 to achieve robust vehicle sales. The March levels are, however, an improvement over the 2011 average for the index, which stood at 67. Rising fuel prices and concerns about the European financial crisis hurting the U.S. economy actually have caused the index to drop during certain weeks so far this year, providing a strong indication of the uncertainty consumers feel about the strength of the U.S. economic recovery.
Levels of both sales and production of light vehicles in the U.S. have improved so far this year. Through February, U.S sales and production of light vehicles had improved by 13.7 percent over the prior year. Sales of light trucks, which include minivans and crossover vehicles, improved by 7.9 percent, compared to 19.5 percent for passenger cars. GM remains the best-selling automaker in the U.S., holding 18.3 percent of the market, compared to 15.3 percent for runner-up Ford.
North American light-vehicle production for the year to date has improved by 17.5 percent over the year before. The biggest gains so far have been posted by Honda (32.2 percent), which finally has a sufficient supply of critical parts following the dual tsunami and flooding disasters last year. Chrysler (29.7 percent improvement) has also posted impressive production gains as a result of sales gains and fresh products. With the start of production of the new Dodge Dart® at Chrysler’s Belvidere, Ill., assembly plant in April, analysts forecast continued production gains for the company.
Through March vehicle inventories stood at a healthy 57 days for the industry as a whole, compared to a low of 49 days in June 2011, when the Japanese tsunami crisis affected production at most automaker plants around the world. By comparison, inventory levels stood at 118 days’ supply in February 2009.
Among the five largest automakers, Honda and Toyota have the lowest sales levels through March, with 36 and 50 days’ supply, respectively. The Detroit Three, which were much less severely affected by last year’s tsunami disaster in Japan and flooding in Thailand, have historically carried higher inventory levels. So far this year, GM’s inventory stands at 80 days’ supply, with Ford’s at 68 and Chrysler’s at 66.
For 2012 CAR forecasts sales to reach 13.8 million units, a 7.8 percent increase over 2011 (see Figure 1). Although this forecast is in line with the majority of automotive and investment analysts, many of these forecasters recently have been increasing their forecasts to levels above 14 million units. These moves have been driven partially by the 15.2-million-unit level reached by the seasonally adjust annual rate (SAAR) indicator in February, which was its highest point in over three years, even exceeding levels seen during the Cash for Clunkers campaigns during the summer of 2009.
One of the key statistics driving forecasters to more optimistic sales and production projections is the aging of the U.S. vehicle fleet. The average age of American cars has set a new record each year for at least the last 15 years. Through 2011, the average age of cars on America’s roads had increased to 10.8 years. By comparison, the statistic stood at 8.9 years in 2001.
While it’s true that today’s cars are more reliable and durable than ever before, they can hardly be expected to last indefinitely. Analysts expect that consumers, who have been holding back on purchases for years while waiting for the U.S. economy to recover, will start buying in higher volumes even if the economy is slow to recover. Evidence of this development is already at hand. Typically, following a recession, cars sales recover slowly, picking up pace only after noticeable increases in GDP growth. In 2011 automotive sales grew significantly faster than the overall economy, outpacing GDP growth. Traditionally, the automotive industry relied on the overall economy to achieve output improvements. Today the situation is reversed, and the automotive industry can accurately be described as helping to pull the rest of the national economy out of recession.
Although they are down from the peaks sustained during the summer of 2008, iron and steel prices generally have shown a gradual rise over the last three years. Hot-rolled steel has had the smallest appreciation. It sustained the biggest price drop following the peak levels of 2008 and has since had the least rapid price inflation. According to indices from the U.S. Bureau of Labor Statistics (BLS), hot-rolled steel peaked at 235 in August 2008 and stood at 159 in January 2012 (the BLS data is indexed to 1982 prices).
Iron and steel scrap prices, also as tracked by the BLS, likewise peaked during the summer of 2008, reaching an index of 802.8 that July. Since then prices have fallen and recovered, sustaining a level of 624.5 in February 2012. After bottoming out at 250.6 in April 2009, scrap prices generally have recovered much more quickly than those of iron and steel inputs.
Iron and steel prices show a remarkably close correlation with fuel prices. Laid on top of each other, the price graphs correlate nearly perfectly, apart from the fact that fuel prices tend to have more dramatic variation, while iron and steel prices fluctuate in the same direction at the same time, but not quite as much. Just as with fuel prices, analysts expect iron and steel prices to continue increasing in the foreseeable future. They both are commodities that are fundamental to driving the global economy. If economic crashes can be averted in Europe and China, both are likely to increase appreciably as the global economy grows and developing countries use more and more resources.
The U.S. federal government continues to play a significant role in the development of the automotive industry. Perhaps the most noteworthy development to date in 2012 has been the government’s pullback on the Section 136 loans provided by the U.S. Department of Energy to companies engaged in the production of environmentally friendly vehicles. Ford, GM, and Nissan were among the few companies to make beneficial use of these low-interest loans. Solyndra has become a prominent negative example. Chrysler has given up on its loan application, and the loans to Fisker, the rising builder of plug-in hybrid vehicles, have been delayed—a development that has led some to question the likelihood of the firm being successful long-term.
Several once-promising companies have been forced to close, partially because of the failure to complete negotiations of these loans. Prominent examples include electric vehicle manufacturer Aptera Motors; Bright Automotive; Carbon Motors; and Ener1. Given the scrutiny these loans have received and the additional pressures brought to bear by the upcoming presidential election, the government is likely to continue to be stingy with these loans, as well as any effort that can be perceived as unnecessarily generous to the automotive industry.
Although it is certainly much healthier in 2012 than it has been since the economic crisis began in 2008, the automotive industry continues to struggle. The recovery of sales and production volumes, as well as the overall economy’s, has come much slower than many analysts expected, forcing both automakers and suppliers to be increasingly resourceful in running their businesses.
One positive takeaway offers significant hope for the future: Despite disappointing economic, production, and sales trends, all of the Detroit Three—as well as a majority of suppliers—are now more profitable than they were in 2006, when the industry was experiencing a sales bubble while simultaneously going bankrupt because of overcapacity and other structural problems.
If these levels of financial success can be achieved in today’s economic conditions, the future for both automakers and suppliers appears bright indeed.