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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."

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April 03, 2008 – Comments (9) | RELATED TICKERS: GM , F , TM

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.

Lenders Ease Throttle on Car Loans

U.S. auto sales down 12% as Americans tighten wallets

Warry shoppers' confidence, car sales take dive 

Deej

No position in any automaker

9 Comments – Post Your Own

#1) On April 03, 2008 at 12:19 PM, finabuddy (95.59) wrote:

You are an analyst for the auto industry and you cant do your own research for statistics? Auto loans falling?  Cars have pretty specific detailed prices, if someone cant afford their loan anymore, the car gets sold, and the person probably will need a different cheaper car.  Plus, car loans are very small compared to housing, and finally, outside of the usual deadbeats, the only people that would have car payment problems might be those that took equity out of their home and lost all the value of their house.  Which isnt going to be more people than the used car market can handle.

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#2) On April 03, 2008 at 1:06 PM, TMFDeej (99.31) wrote:

Hi finabuddy.  Thanks for the comments.  I'm not sure that I see your point.  I wasn't talking about defaults on auto loans, though though many are saying that will be one of the next things to fall after mortgages.  I was merely implying that if banks are getting more selective about who they approve for new vehicle loans it could have an extremely detrimental impact on new vehicle sales.  If a consumer can't get a loan on the car or truck that they really want, they will be forced to purchase less expensive new vehicles, or even used vehicles, both of which are bad for automakers.  They don't make any money on used vehicles, unless they are "Certified" and then they only make a little, and they naturally usually make less money on inexpensive vehicles than they do on expensive ones.

It is an absolute fact that new vehicle sales are extremely slow in the United States right now, tighter lending standards by banks will only compound this problem.

Deej

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#3) On April 03, 2008 at 6:30 PM, TDRH (99.67) wrote:

Deej,  Great post, glad you have had luck with your short timing.    Mine has been pretty poor.

I believe you are right about the high percentage of GDP represented by the auto industry and its suppliers.   Things are going to get ugly as consumers and lenders go to the mattresses.  

I would almost go as far to say that in 10 years the domestic automobile industry will disappear, or at minimum the landscape will be considerably changed by consolidation.  It would be interesting to compare the % of domestically manufactured components in a Toyota and a Buick.  What is an American auomobile?

 We, the US consumers are going to see a dramatic shift in our standard of living if we are going to be competitive on a global basis.   Doomsday economists have been predicting it for some time, but perhaps the last few credit bubbles will be the starting point that historians point to for the start of the downslide.

 

 

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#4) On April 03, 2008 at 7:40 PM, devoish (98.18) wrote:

Hi Deej,

I went searching for your sales data at my favorite usually reliable source.

aamw on the 'buying and maintaining a car' board offers this answer:

"Well if you take the numbers you can fudge it a bit. Average price of a car in 2008 is $28715. Number of units predicted for 2008 is 15.7 million. So the auto sales can be estimated at: $450B.

Hope that helps! "

Show some love for The Motley Fool!

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#5) On April 03, 2008 at 9:31 PM, TMFDeej (99.31) wrote:

Thanks for the comments everyone and for the stats, devoish.  I never actually shorted any of the automakers with real money, just in CAPS.  For whatever reason, I've never been into shorting in real life.  The automakers would have been a heck of a short though.  I think that the last time that I shorted something was a long Goldman short Merrill trade earlier some time last year.

Deej

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#6) On April 04, 2008 at 3:25 AM, StockSpreadsheet (71.49) wrote:

If you assume that the American economy is about $13 trillion, then that $450B number would make the auto industry about 3.5% of the U.S. economy.  I know I have heard in the past that it was supposed to be more than that, (by the time you count in the rubber and plastics manufacturers, the metal smelters and formers, etc.), and was supposed to be more like 10%, but that is old data and probably no longer takes into account foreign manufacturers, growth in other sectors, (finance, IT, etc.), so 3% probably isn't that bad of a number.  Of course, this only counts car sales.  When you add in car parts, tires, paint jobs, car washes, etc., you are probably close to 10% of the economy.  There is an old quote that says that "What is good for General Motors is good for America", though I don't think that is that true any more.  Lots more pain coming for America's Big Three, due to their reliance on big trucks and SUVs for most of their profits.  High oil prices, (or most particularly, high gas prices), is going to put a big crimp in Detroit's bread-and-butter sales. 

Craig 

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#7) On April 04, 2008 at 6:23 AM, TMFDeej (99.31) wrote:

I completely agree, Craig.  While their cost cutting measures have been admirable, GM, Ford, and Chrysler squandered the glory days of the past decade for the U.S. auto market.  Despite relatively poor execution, the rising tide of strong light vehicle demand in this country kept them all afloat.  Now they've got problems because demand for new vehicles has significantly fallen off.  The fact that I work in a field that's related to the auto industry, which is slowing, and I have a a wife who first worked in corporate for a now defunct mortgage company and currently in corporate for a real estate company probably lends to my pessimistic view of the economy.

Deej 

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#8) On May 13, 2009 at 7:43 AM, autoloans123 (< 20) wrote:

Wishes and desire of people fluctuate depending upon their own preference and likes. People make their absolute effort for completion of such wishes and desire. Sometimes these wishes and desires become requirement and essence requirement for the life of people. Auto and cars are also one of such wishes which have now become necessity and requirement for the people. However completion of this necessity requires huge amount of money so it is very hard for the poorer or middle class family to assemble money for completion of their desire. So there are various banks which provide facility to complete your dream.

Suzzane Waltz

Auto Loans

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#9) On February 04, 2010 at 10:18 PM, BrandonPaulChevy (< 20) wrote:

Well, we have to accept the fact that this is happening. Actually even car parts are hard to sell nowadays. I was trying to buy a fuel injector just recently but it seems like most of the car parts stores near our area were closed already.

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