Auto Industry Analyst: "current market for light vehicles in the U.S. is about as bad as I have seen it in the past decade."
April 03, 2008
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While I love writing about stocks and learning about investing, it is not my main aka day job. During the day I work as an analyst for the auto industry. The above quote is something that I wrote about the U.S. auto market back in January. Here's the full quote:
"The focus of my work is mainly the U.S. auto market, with some attention paid to Canada. The current market for light vehicles in the U.S. is about as bad as I have seen it in the past decade. Things started to slow down after September 11th, but manufacturers pulled a rabbit out of a hat and spurred sales by introducing 0% financing on new vehicles, which had never been done before. Unfortunately, the magic of such offers in the U.S. market has worn off. Not only that, but consumers have become addicted to a high level of incentives that automakers have been unable to wean them off of, hurting margins. Manufacturers have been unable to come up with a new special, compelling incentive offer like 0% or "Employee Pricing" to bail them out lately and sales in the U.S. are beginning to slip as consumer confidence wanes, credit tightens, and the overall economy slows. Furthermore, high gas prices have steered consumer buying trends back towards smaller vehicles and away from large trucks and SUVs which are much more profitable. I personally wouldn't touch a domestic automaker, like GM or Ford with a ten foot pole. I've done quite well with my shorts of them in CAPS (I have no position in them in real life)."
I believe that much of the weakness that I spoke of back in January was caused by a lack of consumer confidence. Now it seems as though another roadblock is popping up for the auto industry, banks tightening their standards on auto loans. Not that long ago, getting a loan for a new car or truck was a piece of cake. However, as the credit crunch spreads banks are losing their appetite for risk and they are becoming much more picky about who they approve loans for. GMAC Financial Services raised its lending standards three times in 2007. It is obvious that this is beginning to have an impact on auto sales.
During its monthly sales call General Motors' VP of sales and marketing Mark LaNeve complained that the captive finance companies of the big three Japanese automakers were loosening their lending standards to make up for the drop in demand caused by a tightening of credit by independent banks. If this is indeed the case, the fact that the Japanese manufacturers' captive finance companies, which has traditionally been much more picky about who they approve for loans than the traditional "Big 3" domestic companies have been, are loosening their standards is a definite sign that the credit crunch is beginning to trickle down to the auto industry. It makes sense that auto loans would be the next thing to fall after home loans. After all, new vehicles are usually consumers' second most expensive purchase after their homes.
All of this is bad news for auto manufacturers that have large exposure to the U.S. market. Things have been bad for GM, Ford, and Chrysler for a while but they may be spreading to Toyota, Honda, Nissan, and the Europeans. Slowing U.S. demand, rising raw material prices, and a falling dollar are going to take a toll on all of the foreign automakers. With weak new vehicle sales in Europe and Japan as well, these companies' only hope to boost sales exposure to emerging markets like Russia, Brazil, India, and China.
The one automaker that is probably in the worst shape right now is Chrysler. It it absolutely shoveling money at its vehicles in the U.S. right now through higher incentives and it doesn't have any plans for outstanding new products that I am aware of. New products are the lifeblood of automakers. Without them, it is difficult to succeed in this market. Compounding the lack of new products in the pipeline is the fact that the quality of Chrysler's current products is significantly below that of its competitors, especially the Japanese.
I need to find out what percentage of the U.S. GDP is made up of auto sales. Does anyone know? Whatever it is, I suspect that it is substantial. And at least in this analysts' opinion auto sales are going to be a substantial drag upon it. If the government does not distort the GDP too much, expect it to be very weak in the coming quarters.
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Deej
No position in any automaker
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