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U.S. 2013 Sales Prospects Drive Higher As Fiscal Cliff Avoided

Detroit Show Stars New Chevrolet Corvette
U.S. Sales Could Hit 17 Million Again By 2015-2016

But Sales Exuberance Could Soon Lead To Price, Discount Wars

“The automobile industry is its own worst enemy. Automakers can’t resist squeezing the last vehicle out of a plant and pushing it onto a dealership lot”

Investment bankers were busily raising estimates for 2013 U.S. car sales as the Detroit Car Show was opening, buoyed by relief the dive over the fiscal cliff was avoided, the anaemic but still positive American economic recovery and buyers seeking to replace worn-out vehicles.

The fact that a different fiscal cliff in the form of the U.S. Federal government’s debt ceiling negotiations might rear up again in a couple of months, is on the backburner for the time being.

Investors worry though that the rally in car sales might lead to a return of heavy discounting, which pushed General Motors and Chrysler into bankruptcy. Piling ‘em high and selling’em at a loss would not please stock markets.

Morgan Stanley was a cheerleader for the U.S. market, although it conceded that competition might force the industry down the price-cutting cul-de-sac.

“We remain bullish and raise our 2013 estimate to 16.0 million units (from a previous estimate of 15.5 million). However, we believe that “value” of the sales could peak in 2013 and potentially deflate cyclical tailwinds,” said Morgan Stanley analyst Adam Jonas.

Last year U.S. sales rose to 14.5 million. Other estimates for 2013 range from Standard & Poors (S&P) and R.L. Polk & Co’s 15.3 million, AutoNation’s mid-15 million range, and LMC Automotive’s “volume above the 15 million mark”.

Automotive News editor-in-chief Keith Crane is also worried about the quality of sales.

“There are signs that certain companies are flooding the market with vehicles, incentives are skyrocketing on those vehicles as manufacturers try to keep inventories in line. It looks like a losing battle. Some dealers are seeing margins erode as they must move vehicles off their lots”, Crane said in an editorial headlined “Let’s not kill the golden goose”.

Record sales, falling profits?
“If every company raises production while trying to eke out a little more market share, it won’t be long before we see record sales and falling profits,” Crane said.

S&P prefaces its prediction of a six per cent rise in 2013 with the caveat of a steady economic recovery and no sudden rise in gas prices. S&P reckons 2014 sales will rise another three per cent, assuming a gradual economic recovery despite well-publicised uncertainties.

Morgan Stanley expects pressure on mix, with average prices falling and incentives rising, and buyers returning to the market after waiting  longer than usual to replaces vehicles.

“Value of (sales) is important for auto companies. A 70 basis point fall in pricing – $200 a unit – can offset a 500,000 improvement in sales for a manufacturer like GM,” Jonas said.

Things will get much better in sales terms before falling back.

“We expect sales to get back to and eventually surpass its prior peak level of 17 million units around 2015-2016, as significant amounts of pent up demand is unleashed before coming back down towards a normalized trend level of 15 to 16 million in the back half of the decade,” he said.

Automotive News’ Crane though believes it will all end in tears, again.

“The automobile industry is its own worst enemy. Automakers can’t resist squeezing the last vehicle out of a plant and pushing it onto a dealership lot. It was nice while it lasted,” Crane said.

Corvette VII
Meanwhile at the Detroit Show, the biggest crowds were gathering around the Chevrolet stand to see the seventh iteration of the Corvette sports car. This looks like the old one, but with much new light weight technology like carbon fibre and hydro-formed aluminium. In the serious end of the market, cars were smaller and with more impressive technology allowing drivers to do more tasks that they probably will never actually want to do. Ford was big on vans, with new versions of the Transit. New cars ready for production later this year included the Jeep Grand Cherokee, Acura MDX SUV, and Nissan Versa hatchback. Cadillac showed the ELR plug-hybrid sports coupe based on the Converj concept of 2009.

Neil Winton – January 15, 2013

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