It has been a very strong year for the U.S. auto industry. Sales
are up 8.4% through the eleven months of the year. In November, the
total automotive sales in the U.S. jumped 8.9% to 1.25 million
units, helped by heavy promotions on Black Friday. General Motors (
) was the only major automaker that posted double-digit growth
rates in both the car as well as the light truck category. Overall,
sales were up 13.7% for GM on a year-over-year basis.
A slew of model refreshments is helping GM round off what has
been an excellent year for the automaker. The revamped versions of
Silverado, Malibu, Cruze are striking the right chords with the
public. In addition, the Cadillac brand continues to do very well
with sales up 11.4% in November. Cadillac's sales could maintain
the momentum with the launch of the new Escalade and the ELR in
We have a
$40 price estimate for General Motors
, which is slightly above the current market price.
Due to increased competition from GM, Ford's car sales might be
beginning to feel the pinch as they could only rise 6%. Chrysler is
facing a similar situation with car sales down 7.1% during the same
period. Both these automakers continue to do well in the light
truck segment though. Note that the light truck category contains
SUVs, pickups and crossovers.
Among the Japanese automakers, Toyota's performance stood out
with a 10.1% rise in unit sales on a year-over-year basis. Sales of
Toyota's Camry, which have largely remained stagnant this year,
rose 5.6% to 30,386 units.
Demand Could Soon Plateau
Even though it has been a stellar year for the automotive
industry, growth is expected to slow down as the market size
reaches close to the pre-recession levels. Auto demand peaked in
2006 when sales touched 16.5 million units. However, sales had
crashed to 10 million units by 2009, as more people deferred buying
new vehicles due to high unemployment rates and an uncertain
future. In fact, at the end of 2012, the average age of a light
vehicles in the U.S. had risen to an all time high of 11.4 years.
The corresponding figure stood at 9.9 years in 2006.
However, with unemployment rate now below 7.5%, there is more
economic activity which is resulting in higher auto
sales. Thus, the surge in auto sales witnessed in the last 2-3
years is primarily due to a pent up demand.
The 11-month data for 2013 suggests that the annual sales should
touch 15.5 million units, which is not very far off from 2006′s
figure. As a result, sales in the upcoming year should naturally
slow down. Moreover, with the Fed announcing its decision reduce
the stimulus, there could be a further rise in the Treasury rates.
The 10-year bond yields are already up 70 to 80 basis points since
the start of the year. Higher Treasury rates will tend to push up
the auto loan rates as well, which could deter some of the
potential buyers and consequently lower the overall vehicle
The rate of expansion of the U.S. auto market is already down
for the third year in the running. In 2013, auto sales have been
buoyed by strong truck sales which are up 11.8%, compared to 5.9%
gain for cars. Stable fuel prices combined with a rebounding
housing market have resulted in a strong demand for SUVs and pickup
trucks. Pickup trucks are used extensively in construction market
and a strong housing market bodes well for their sales. The number
of housing starts, or the houses on which construction has started,
jumped 22.7% in November. But any slowdown in the housing market
(due to higher mortgage rates as a result of higher bond yields)
can adversely affect the light truck category as well.
Signs To Watch Out
There is already some suggestion that desperation might be
starting to creep in among the lenders. The percentage
of non-prime, subprime, and deep subprime borrowers rose to
26.04% in the third quarter of 2013, from 24.84% in the third
quarter of 2012. A higher percentage of subprime/deep subprime
borrowers suggests that automakers and financing companies are
having a hard time meeting their sales targets through loans to
prime borrowers (or the more credit worthy borrowers) and are
having to resort to less credit worthy borrowers.
This is reminiscent of the lending practices prevalent in the
housing market before the 2008 crash. Lenders had recklessly doled
out loans to subprime borrowers which eventually led to a bubble in
the housing market.
The inventory levels have also begun to rise, suggesting that
automakers are not able to sell vehicles at the rate at which they
are producing them. The inventory level for the Detroit Three stood
close to 90 days in November. Ideally, it should be somewhere
between 60 to 80 days. Ford has already announced that it will trim
its U.S. production by 2% in the first quarter of 2014. Others
might have to follow suit or offer added incentives to clear the
stockpile of the existing vehicles.
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