US AUTO SAAR; houses, unemployment and quality lead to longer thinner replacement cycle

2011 started the year with a high level of exuberance as I walked the floor at the Detroit Motor Show and the annual Deutche Bank Conference.  After 2 years of bankruptcy and quickie restructuring for GM and Chrysler — not to mention a number of suppliers — perhaps a bit of the exuberance was rational, but it still made me nervous.  Balance sheets were clean, and the industry claimed it could break even at 10.5 million, and it was looking forward to getting back to the good old days of 16-18 million and raking in the cash in a matter of a year or two.  Detroit even caught a break in the tragedy that befell the J3 from the Tsunami and nuclear crises.  All was right.

Now as we sit at the end of Q3, things look a little less bright.  In an Automotive News article today, GM CEO Dan Ackerson admits, this year won’t hit the 13 million mark, and baring any more crises (a lot to hope for after the past nine months) we’re looking at 12.7 million units for the industry this year and not much more next – as a note, my outlook has been more around 12.5 since the Japan crises.

Why the sudden frown, maybe the outlook was based on a lot of old data and a bit of wishful thinking.  If we look at the traditional replacement cycle and age of the current fleet, it’s easy to build a case for pent-up demand.  Analysis show that more than 2 million cars have been taken off the road over the past 2 years, some through age and nearly 900 thousand by US government incentives.  The logic here means that they are going to be replaced, right?!  At the same time, we’ve been ignoring some other factors.

First is the housing market.  Everyone acknowledges that car buyers don’t have the ATM of an overactive home equity market.  The saddest tweet I saw today was “It’s not so much that there is not a buyers’ market out there, it more that there is no market.”  I’ve seen a wide range of estimates as to how much the housing boom gave an artificial boost to the car market.

Second is the issue of unemployment.  U1 has historically been a lagging indicator forUS auto sales.  I contend that given the high level of “persistent” unemployment that it will be a leading indicator of any rebound.  Empirically, it is all too clear that even those who could afford a new car, and with a 3-5 year old car would be said to “need” a “new” car, are passing at the moment as they see worse employment prospects for kids, family and perhaps themselves.  That mandatory renewal isn’t’ so mandatory anymore.  I’d look for a mix of U1/U16 plus the good old University of Michigan Consumer Confidence survey.

Third and ironically, buoying this attitude is the automakers quality achievements themselves.  After years of getting bashed on quality and durability, GM, Ford and yes even Chrysler products are better and more durable.  Higher quality, combined with scarce used vehicle inventory, has lengthened the value-life of a car, allowing owners to hold on to it while still retaining some value.  Good for car buyers, and yes, it will be good for everyone in the long-run.

Look at the chart below.  Even Sergio Marchionne’s “very conservative” 2010 outlook, made in the depth of the crisis, maybe isn’t that conservative — perhaps it’s a bit optimistic.  Marchionne, a big believer in the palliative powers of the 2009 Stimulus bill and subsequent government programs may be looking for a way to work those numbers down.

SAAR will likely top my 12.5 million outlook in 2011, and on fleet maintenance  will peak up over 13 million in 2012, probably short of Chrysler’s 13.8, but unless unemployment comes down below 7%, and we see sustained housing stability and maybe a little growth, the 15-16 million will likely have to wait.

Alas, it’s not all bad news.  Good training in a tight market should help all automakers become more disciplines.  Will Detroit really make decent margins on C-segment products? Will GM redeem itself from Q1 pricing folly? Will truck makers correct that overbuild in Q2?  Will the J3 be able to adjust to a yen/dollar somewhere in the 80’ish range?  If they can do this over the next 12 months, then I’ll be irrationally exuberant at the 2013 Detroit Show. 

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