Industry observers say they don’t expect a collapse in sales, even if demand drifts below record levels hit last year. “Total sales are still strong from a historical perspective and the decline is very gradual,” said Jessica Caldwell, an analyst at Edmunds.com, an auto-research firm and car-shopping website. “It shouldn’t really be seen as alarming.”
Auto makers say they’ll stay disciplined and trim production levels to reflect weaker demand instead of cutting prices to keep their factories humming.
Concern about rising spending by auto makers to maintain sales growth may be overblown, Barclays Capital said in a recent research note. Industry incentives as a percentage of average transaction prices came to 11.2% in the first half of April, the lowest level since June, the brokerage said. “A big driver of the improvement is GM, which is pulling back on incentives despite elevated inventories,” it said.
GM finance chief Chuck Stevens told analysts the company built up stocks of some SUV models ahead of scheduled down time at several factories this summer and fall, and said inventory will return to normal later in the year. He said that even with more discounts, price levels remain healthy.
“It’s not like we’re sitting and waiting for a downturn,” Mr. Stevens said. “Day to day, we’re very focused on acting like we’re in a downturn” by cutting costs and trimming vehicle production to meet demand, he said.
Red Flags for Retailers
The industry has crossed the line into risky territory on automaker incentives, leasing levels and new-vehicle inventory, said AutoNation Inc. CEO Mike Jackson.
“It’s clear the industry intends to sell over 17 million vehicles this year, if I look at the inventory and the production plans,” Jackson said.
But Jeff Dyke, Sonic Automotive Inc.’s executive vice president of operations, said that without hefty factory incentives, today’s natural sales rate is closer to 15 million.
“To me, 30 percent leasing has always been a red line, where you’ve had a massive distortion if you take it above that,” Jackson said. He called incentives that top 10 percent of sticker prices another red line, and inventories above a 70-day supply yet another. “So we have three red lines that the industry in total is over on new vehicles,” he said.
March, incentives “went berserk,” said Sonic’s Dyke. He expects incentives to fluctuate all year, with the next spike in June.
“The incentives are all over the board,” and will remain so, he said. “I expect to see a topsy-turvy incentive environment.” Most automakers “have a good amount of supply so they will continue to push incentives on us,” Dyke said.
Earl Hesterberg, CEO of Group 1 Automotive, said the retailer’s new-vehicle inventory at its U.S. stores was 86 days, consistent with the year earlier but far too high. Domestics were the biggest challenge, he said. Group 1’s General Motors, FCA and Ford inventories were all more than 100 days.
Sonic’s Dyke said BMW is encouraging its dealers to do fewer leases and more sales, a feat he says is nearly impossible without losing volume because consumers can get into a lease for a lower monthly payment than with a sale.
“It’s a conundrum right now and something we have to figure out,” said Dyke. “The residual value is going to have to go up so [the consumer] doesn’t take it in the shorts at the end of the lease term.”
Add a fourth flag to the list: massive industry complacency in the face of weakening fundamentals.
Mike “Mish” Shedlock