Markets

The U.S. Automotive Slowdown Is Here And Now

The U.S. automotive market seems to have plateaued after six consecutive years of strong growth rates, following the recession. The re-filling of fleets took place aggressively over the last several years, and now the consumer demand has slowed down, as expected.

Volkswagen Q&A 28

The pent up demand that has now played out means that automakers such as GM, Ford, Toyota, and Volkswagen AG (OTCMKTS:VLKAY) will shift focus to increasing their market share, providing incentives, and managing inventory in the country. Volkswagen is already struggling in the country, where its namesake brand of passenger cars continues to lose sales. The aftermath of the dieselgate scandal, which involves ~500,000 U.S. vehicles, is also weighing on Volkswagen's delivery numbers. However, the group's luxury troupe comprising Audi, Porsche, Bentley, and Lamborghini is still posting positive numbers in the country, and growing by more than the overall light-duty vehicle market.

Volkswagen Q&A 28-1

The fact that the unit sales of Audi and Porsche exceed that of their biggest competitors in the U.S. bodes well for Volkswagen. Audi and Porsche combined formed 15% of the net volume sales, 37% of the top line, and ~60% of the operating profit for Volkswagen last year. This is because the average unit pricing of a luxury car is somewhere close to $44,000, compared to just over $20,000 for the average price of vehicles overall. Given the high fixed cost of manufacturing and distributing a car, a higher purchase price is the biggest guarantor of profitability.

However, Volkswagen's luxury brands form only 1.6% of the U.S. passenger vehicle market as of now, and the weak performance of the much larger Volkswagen Passenger Cars division continues to drag down the group's U.S. revenue and profit. The slowdown in the overall market will make it tougher for the German automaker to extract revenue growth from the country. Incentives and discounts will reduce the average vehicle prices, hurting profits. Volkswagen also faces stiff competition from GM and Ford, the American automakers, and Toyota - Volkswagen's closest global competition. North America formed 16% of Volkswagen's sales revenue through the first half of the year, but only 9% of the vehicle deliveries. This means that the average revenue per vehicle is more for North America for the company. Lowering model prices in the face of tepid consumer demand will hurt this metric.

S&P Global Ratings cut its estimate for automotive sales in the U.S. in 2016 to 17.5 million vehicles from 17.8 million, citing slowing customer demand and the impact of the U.K.'s vote to exit the European Union on the country's economy. S&P cut its estimate for growth this year in the U.S. economy to 2% from the previously estimated growth of 2.3%. Automotive sales are expected to fall this year from the record-breaking 17.5 million sales in 2015, and this trend could continue into the next couple of years. For reference, Ford expects its vehicle sales to fall in 2017, as compared to 2016 levels. Slowing U.S. demand will negatively impact Volkswagen, which is already underperforming in the U.S.

Have more questions on Volkswagen? See the links below.

  • Where Will Volkswagen's Revenue And EBITDA Growth Come From Over The Next Three Years?
  • By What Percentage Have Volkswagen's Revenues And EBITDA Grown Over The Last Five Years?
  • What Is Volkswagen's Fundamental Value Based On Expected 2016 Results?
  • How Much Have Big Auto Companies Been Investing In Growth Opportunities?
  • Has The Emissions Scandal Impacted Volkswagen's Volume Sales This Year?
  • Rundown Of How Volkswagen's 2015 Results Were Impacted By The Dieselgate Issue
  • How Significant Will China Be For Volkswagen By 2020?
  • Where Volkswagen Stands Relative To Its Competitors In Crucial Markets
  • How Is Audi Holding Up Compared To Its Compatriots In Crucial Markets?
  • How Has Volkswagen's Revenue And EBITDA Composition Changed Over 2012-2016E?
  • What Is Volkswagen's Revenue And EBITDA Breakdown?
  • Why Premium Brands Are 3x As Valuable As Non-Premium Brands For Volkswagen
  • How Much Will Premium Brands Contribute To Volkswagen's Top Line By 2018?
  • How Does Volkswagen's China Market Share Compare With Other Foreign Automakers'?
  • How Much Does Volkswagen Make On The Sale Of One Porsche, Audi, Skoda And Volkswagen Vehicle?

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Volkswagen

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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