After the birth of their twins last fall, Dan Sondheim and his
wife upgraded their VW Passat to a Volvo XC60 SUV. They now have
a GPS navigating system and a rearview mirror light that warns of
another car in the blind spot, among other bells and whistles.
Most important, it's big enough to seat both babies in the back
seat, plus store a double stroller in the trunk.
The Sondheims' Volvo was one of 61.87 million cars purchased
worldwide last year -- a 5% year-over-year increase. Even more
people are expected to buy new cars this year, paving the road to
recovery for global automakers' stock shares, which crashed 40%
in the 2008 bear market.
IBD's nine-stock Auto Manufacturers group has made a stunning
comeback after crashing 24% in 2011, underperforming the market
by nearly 22 percentage points that year. It outpaced the market
last year, climbing 27% vs. 16% for the S&P. In the past
three months, the group advanced 14%.
The nine companies include three Japanese firms,Toyota Motor (
), Nissan Motor (
) andHonda Motor (
); three American,Ford Motor (
),General Motors (
) and Tesla Motors (TSLA); two German, Daimler (DDAIF)
andVolkswagen (VLKAY); and one from India,Tata Motors (TTM).
Volkswagen shares raced past the whole group in the past year,
charging ahead 35%; followed by Toyota, +26%; and Tesla, +18%.
The laggards, Ford and Daimler, fell 1% and 4%, respectively.
Nissan and Honda took the lead in the short term, rising 24% and
23%, respectively, the past three months.
Toyota and VW each has 11% global market share, GM has 10%
while Nissan and Hyundai-Kia each has 9%, according to Morgan
Stanley. Ford controls 7% and Honda 5%.
Early Stages Of Uptrend
Global auto sales are projected to grow 4.2% in 2013 year over
year to 64.47 million units, according to Scotiabank. That's
13.5% higher than 2010. In January, sales for the eight largest
makers climbed 15.1% year over year to 1.05 million units after
diving 22.5% in December, according to TrueCar.com.
"We're in the early stages of a multiyear uptrend in the
demand," said Efraim Levy, an analyst covering the five largest
automakers for S&P Capital IQ.
Total U.S. auto sales surged 13.4% year over year in 2012 to
their highest level since 2007, according to Briefing.com.
It was the third year in a row to see double-digit sales
growth and the largest increase since 1984.
Scotiabank projects U.S. sales growth to slow to 4%, but still
hitting 15 million units this year.
That's well above the 20-year low of 10.4 million units in
The annual average for the decade ended in 2009 was 15.79
million, with a peak of 17 million units in 2007.
In Europe, projections call for sales to hold steady at 11.76
million vehicles. That's far below their 14.39 million unit
annual average from 2000 to 2009. Europe could see more declines
before rebounding, says Levy.
Sales in Asia -- the fastest growing region -- hit 24.02
million units in 2012, more than double their average in the
decade to 2009. Scotiabank expects Asian sales to rise 6%, to
25.46 units, in 2013.
Emerging SUV Markets
Rapidly growing emerging market economies present the biggest
growth opportunity for automakers. With rising living standards
and incomes, emerging market consumers want more luxury cars,
SUVs, vans and pickup trucks.
Driven by sport utility vehicles' cachet among China's middle
class, SUV sales grew 24% in 2012 vs. 5.9% for overall car sales.
Emerging markets are projected to make up 70% of global sales
growth over the next four years, according to a Baird auto report
released in June 2012.
In the People's Republic, only 60 cars are owned per 1,000
people -- deep below a global average of 135 per 1,000 and a far
cry from the U.S. of nearly 800 per 1,000 -- the world's highest
-- according to World Bank figures as 2010.
The 16 Million Mark
The average U.S. car on the road is 11 years old -- a record.
People are sending fewer to junkyards and used-car lots because
they can't afford a new one or can't get financing, says Jeff
Rosen, an economist at Briefing.com.
People are buying fewer new cars because of stricter lending
standards and personal debt worries in an insecure labor market,
"Economic growth and pent-up demand are going to make car
sales move higher," Rosen said. "Sales should easily reach 15.3
million (this year), and I wouldn't be surprised if they reach 16
million by the middle of the year or surpass 16 million."
In addition, companies that put off upgrading their fleets
during the economic slowdown are starting to buy again, Rosen
Efficient, Wired Cars
In the developed countries, rising fuel prices are pressuring
sales of SUVs and trucks, favoring smaller, more efficient
"This change in consumer preferences has supported German,
Japanese and Korean manufacturers, whose market share has
consequently expanded," the Street Ratings wrote in a client note
New car buyers also want Internet connectivity, electronic
gadgets, longer life spans and improved safety features.
Nearly 90% of auto executives say new product development is
their major growth tactic over the next five years, according to
KPMG's Global Automotive Executive Survey 2013.
Environmental regulations enacted by the Obama administration
last year require cars and trucks to get 54.5 miles per gallon by
model year 2025. The move was supported by the United Auto
Workers and 13 major global automakers.
They must boost fuel efficiency by improving ICE (internal
combustion engine) technology, aerodynamics and air-conditioning
systems while exploring alternative fuels such as ethanol, diesel
and natural gas.
New U.S. fuel efficiency standards that take effect in 2017
will require automakers to reduce weight and drag by using
lightweight materials such as high-strength steel, aluminum and
With cities growing more crowded, automakers are churning out
smaller cars. However, profit margins are much smaller on economy
cars vs. luxury models and trucks.
"People have an idea that if you buy a small car it should
have a smaller price, but the technology in each vehicle is the
exact same," said Rosen of Briefing.com. "The only difference is
the size of the vehicle and the steel component, which is small
compared with the total cost of making a car."
Plus, research and development costs more for small cars, he
"That means that manufacturers see notably smaller profit
margins on cars than they do on trucks," Rosen wrote in a report.
"Thus, even as overall motor vehicle sales rise, the breakdown
between cars and trucks will be instrumental in determining
overall profit growth."
As a result, automakers have boosted bottom lines by cutting
back on consumer perks and rebates. On average, carmakers offered
$2,274 in incentives per vehicle in January, down 8.3% from the
year-ago period and down 12.2% from the prior month, according to
a Jan. 28 TrueCar.com report.
At a total of $2.39 billion, incentives are at their lowest
levels since October 2005.
The major risks of hopping aboard auto stocks include
overcapacity, trade uncertainty, increases in raw material costs,
reduced consumer spending and increases in labor costs.
More than 50% of auto executives surveyed by KPMG said Japan,
Germany, America, Korea, Spain and France have a high risk of
overcapacity. Brazil hiked import taxes by up to 30% in 2012 to
protect local producers. India has also jacked up tariffs. The
three major U.S. automakers are negotiating new labor contracts
with the UAW to become more competitive with foreign
"Huge health care and fringe benefits provided to big three
(Ford, GM and Chrysler) employees give foreign competitors a
strong advantage," the Street Ratings wrote.