FEATURE: Auto industry faces age of austerity (2)
In the second instalment of our exclusive report from JD Power's Automotive Forecasting conference held in London last week, Dave Leggett hears JD Power's latest assessment of prospects for vehicle sales and production in North America.
The news from America has not been good lately. There may be a new broom in the White House, but that broom has got rather a lot to contend with. The economic mess that began in Wall Street has quickly spread to Main Street. If there are signs that we're nearing an economic bottom, that bottom is still a long way from where we were just a year ago. And there will be more grief ahead in the form of rising unemployment and failed businesses.
The automotive business in the US has been hit harder than most. Chrysler has filed for Chapter 11. That's a Big Deal. And concerns are mounting over the health of the US supplier industry. And there's a very real chance that General Motors could also be going for a quick dip in the bankruptcy plunge pool sometime soon. The automotive industry map is apparently being redrawn, and rapidly.
Bottom may have been in Q1
According to JD Power's Jeff Schuster, 2009 should prove to be the worst year of this volume downturn in North America's automotive market. The market will hit rock bottom this year and there will be a recovery going forward. The recovery is based on a gradually improving economy and some industry related factors that should support an upswing.
Looking at North America as a whole (US, Canada and Mexico) light vehicle sales in 2009 are forecast at 12.6m units - around a fifth down on the 2008 level. Much of that decline is taking place in the US, but Schuster says things have recently got worse in Canada and Mexico. Canada's market forecast for '09 has just been revised down to under 1.4m units which is a 'pretty substantial revision' and Mexico's market forecast has been taken down to just over 800,000 units (subject to further downward revision if the swine flu outbreak gets worse, especially in the near-term outlook).
Schuster points out that in the US, retail sales have been declining since 2000 and that fleet sales have been growing as a share of the total light vehicle market. Fleet sales grew from 2.6m in 2000 to a peak of 3.8m in 2005, when they accounted for around a 22% share of the market, the manufacturers pushing fleet sales to keep factories running at high rates of capacity utilisation. The fleet share has since turned down and manufacturers have pulled back from chasing unprofitable fleet sales.
In the US, Schuster maintains that it is 'very possible' Q1 of this year will be the precise bottom of the market. The first quarter came in with a seasonally adjusted annualised running rate (SAAR) of 9.5m units, which was actually slightly ahead of expectations, he told delegates. A gradual recovery in the SAAR is seen in subsequent quarters (Q2:10.1m; Q3: 10.8m; Q4: 11.0m) to give a full year market of 10.4m units (of which 8.5m units are retail).
Schuster says April sales were in line with March, meaning that the 'decline has stopped' [confirmed by the month-end numbers that emerged earlier this week]. Vehicle price reductions and stepped up manufacturer incentives are among the positive factors that will help to lift the market this year.
Upside down and hanging on for longer
JD Power's database of US sales transactions suggests that buyers of new cars are hanging on to their vehicles for longer. The average age of a trade-in has risen steadily in recent years to 72 months (64 months in March '06). That will act as a negative on retail sales, but pent-up demand could be building from car owners overdue to replace their vehicles. And Schuster also estimates (though he acknowledges it's a 'fuzzy calculation') that some six million car owners are trapped in negative equity or 'upside down' - their car being worth less than the outstanding element of the finance loan - and therefore not purchasing. These buyers will come into the market as they gain an equity position in their vehicle again over the next year, he says.
Leasing shift under way
There is also a dramatic shift in leasing activity in the US that could have a longer term impact on the market. It has gone down from 20% of the market two years ago to around 13% this year as leasing from some manufacturers became unavailable. Lease penetration for Chrysler and GM transactions has gone down to around 2%. Schuster points out that many leases taken out prior to the downturn will be maturing over the next year.
This raises an interesting question. There's a gap between what's available for leasing now at the 13% penetration level for the whole market and what's potentially coming back onto the market through maturity (taken out before leasing volume crashed). That gap is estimated at around 1.4m units in 2009. Those buyers need to go somewhere - to the used market, exit the market, or to purchase new or lease again. If leasing isn't available from the manufacturer they purchased from before - eg Chrysler or GM - they may move to a new OEM. This could have long-term ramifications for manufacturer shares and also ownership cycles, Schuster says.
Are incentives high? Schuster says that they are at record levels and that without incentives spend at the average $3,500 per unit level currently, the annual selling rate for the market would be much lower than it is - possibly in the 'low 8s', he says. Scary thought. Clearly, the market is being heavily supported to even attain current levels.
In terms of projected market segmentation shifts, there are no big surprises in JD Power's assessment. On current assumptions on the oil price (no significant increase, though above current levels, but less than last year's spike), small cars and crossovers are expected to take share from bigger trucks over the 2008-2012 period.
The Detroit Three combined are projected to lose market leadership to Asians (Japanese and Korean brands) this year. As recently as 2002 they had a 62% share of the light vehicle market. That's projected to be under 45% this year, with the Asians taking a share nearer to 50% (32% in 2002). European brands grow to 10% by 2011 from around 7% in 2002.
US light vehicle sales (millions) 2005-2012
Source: JD Power Automotive Forecasting
From a steady 15.7m unit annual production level in the mid-2000s, North American vehicle production declined to 12.6m units in 2008 and is heading for a level between 8m and 9m units this year (8.6m is the JD Power forecast that comes with '300,000 units of risk').
Schuster explains that the forecast increase to North America production in the medium term is based on a number of assumptions. For example, the planned capacity increases for brands like Toyota, Nissan and Honda need to continue to take place and some Fiat production starts in North America through its relationship with Chrysler is built in. He also mentions 'small numbers' from Chinese OEMs starting to manufacture in Mexico, but adds that it is something JD Power sees happening over the next 5-7 years.
So that relatively robust looking recovery to production reflects some substitution of local production for imports - eg by the Asians - rather than a pure volume recovery.
Overall, Mexico and the southern states of the US are expected to see most of any new production activity and to benefit most from the production pick up.
The Detroit Three share of North American production is projected at 55% in 2010, down 11 points from 66% in 2005, but there is still a volume gain from around 5m units this year to 7m in 2012. Schuster does point out however, that even the Asians are being adversely impacted by current market conditions and having to make substantial production cuts versus a few years ago. No-one has been immune from being damaged by this recession.
Schuster concludes by saying that we are seeing, to some extent, a permanent correction in North America. There will not, he says, be a return to the high growth environment of a few years ago when the market lapped up pushed out vehicles that could be absorbed on ever faster replacement cycles. Future growth will be based on natural replacement rather than pushed fleet sales and smaller cars will continue to grow as large trucks decline, he says.
North American vehicle production (million units), 2007-2012
Source: JD Power Automotive Forecasting
And while the word 'risk' was used a lot, a substantial volume recovery in North America is nevertheless forecast. It may not quite be a return to the 'good old days' and there is more restructuring and uncertainty ahead, but it is a recovery. People will buy new cars in bigger numbers again in America. It's just that the industry that delivers them will be changed.