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Thursday
Mar142013

At The Confluence of Free Money, Pent-Up Demand, And Reality

New vehicle sales have staged a phenomenal recovery from the financial crisis, when buyers went on strike. Sales below the replacement rate create a vacuum that wants to be filled. Pent-up demand. When it kicked in, sales jumped by over 10% annually. Exuberance took over the bludgeoned industry. But late February, something happened to that vacuum.

The average amount of time it took to sell a new vehicle has been creeping up—a sign that sales were stalling. At the end of February it hit 64 days, the slowest rate since the dreadful days of the summer of 2009, when the survival of the entire US auto industry was in question, when GM and Chrysler went bankrupt, when the taxpayer was dragged into the fray, screaming and kicking, to bail them out of bankruptcy. Cash-for-clunkers kicked off that July, $3 billion in rebates designed to save the industry. And that August, it took 64 days on average to sell a new vehicle. That we’d now see that number again is not good.

Brands hit the hardest were Chrysler, Chevrolet, GMC, and Lincoln. In response, automakers have jacked up their incentives in January and February, and now they amount to 7.8% of the price of the vehicle, the highest since 2011.

January and February sales combined were still up 8.4% from prior year, though February by itself was more sluggish, up 3.7%, with trucks up 7.8% and passenger cars flat. And cracks appear beneath the surface. While Ford’s sales were up 9.3% and GM’s 7.2%, others weren’t so lucky; Honda, Nissan, Mazda, and BMW actually suffered year-over-year declines.

Normally, we’d consider that an aberration. These things happen. Even that awful pace of 64 days could be explained away. Maybe promotions and rebates were ineffective, or a snowstorm covered the land, and we’d shrug it off. But now two CEOs of highly successful automakers have spoken—and nothing can be shrugged off anymore.

“2013 will be a challenge for the entire industry,” said Volkswagen CEO Martin Winterkorn on Thursday as he was discussing the annual results. “Competitive pressure is high and continues to rise.” He still had visions of growing Volkswagen into the world’s largest automaker by 2018; they’d add ten more plants—seven in China alone, to boost their production there by 60%. A gamble. Capacity can quickly turn into the deadly disease regularly afflicting the industry after a period of growth: overcapacity.

He’d previously announced that profit before interest and taxes would stagnate this year, and it didn’t help that he now thought the economic climate was “uncertain.” Markets would remain “weak into the foreseeable future,” he said. And Volkswagen was “feeling the headwinds.”

Then there was Norbert Reithofer, CEO of BMW, the world’s largest automaker in the luxury segment, who proclaimed the same day that the situation would “remain challenging in many markets.” He was still planning to hit another record in deliveries worldwide this year, but in the US, BMW sales for the first two months were already lagging behind last year.

In Europe, it’s a fiasco. Last year, the fifth straight year of declines, only 12,053,900 vehicles were sold, the worst performance since 1995 (graph). January and February have been even worse. Sergio Marchionne, Fiat CEO and President of the European Automobile Manufacturers’ Association, summarized the situation this way: “I understand austerity, but we can lose weight until we die.”

So automakers have been desperately counting on China and the US to keep their heads above water. China still appears to be hopping, if more slowly, and there is talk that it might “level off,” whatever that means in China. But now the first cracks are starting to appear in the US.

The confluence of record low interest rates, easy availability of financing, and pent-up demand have made auto sales one of the hottest segments in consumer spending over the last two years. The industry is dreaming about getting back to 15 million units for the first time since 2007. In dollar terms, as vehicles have gotten more expensive, it would be a big boost to consumer spending. And the old normal before the financial crisis, 16 million units, is already appearing like a mirage in the distance.

But pent-up demand is fickle—as the vacuum is being filled, it ceases to exist. That moment always comes. It’s just a question of when. If this is starting to happen now, and if consumers are dialing back their vehicle purchases, despite nearly free money and fat incentives, it would open another ugly chapter in the Great Recovery that has been dogging the US economy.

CEOs of the largest US corporations, without aiming at it, shot barn-door-size holes through the rosy jobs picture. Rosy on the surface. A picture the White House held up as proof of its ingenuity. But these CEOs didn’t see it. Not in the US. Though prospects were rosy in cheap countries. Read.... Top American CEOs About Job Creation: Not Happening Here

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