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The first half will look dismal for Detroit's automakers and fuel more buzz about possible mergers or bankruptcies ahead for the Big Three. January sales figures are a taste of what to expect: Ford's tally was down a whopping 19% from January 2006, while General Motors' plummeted 17%. DaimlerChrysler eked out a paltry 3% gain, but it will soon join the other two in negative territory.
Take the bad sales numbers with a grain of salt. "The poor [first-half] results will be a bit deceiving," explains Erich Merkle, director of forecasting with IRN Inc., an automotive consultancy. The numbers are compared with the first half of 2006, when the Big Three managed to pump up sales considerably with big discounts.
Part of the current sales slump is also a by-product of the restructuring process. GM, Ford and DaimlerChrysler together will have cut production by 1.5 million vehicles from 2005 through 2007, with around half the reductions coming this year. The idea is to sell fewer vehicles at close to full price, rather than having to offer cash incentives of $3000 to $6000 per car, SUV and pickup truck just to increase turnover.
This doesn't mean U.S. automakers are free of trouble. If you take away the special factors, the Detroit trio is still short of car models that people want to buy. Indeed, inventories of the Big Three's vehicles on dealers' lots were equivalent to 95 days' supply, up from 88 days in December and 50% above what car companies consider optimal. The U.S. auto manufacturers reduced incentives, and sales slumped in response. Meanwhile, sales leaders Toyota and Honda, which offer more-modest incentives, had inventories of 50 days and 62 days, respectively, in January.
Production cuts will also mean further losses of domestic market share to foreign rivals. Detroit's share of new vehicles sold will shrink to 52.5% this year from 53.7% in 2006. Total U.S. sales will ease by about 200,000 to 16.2 million vehicles this year.
Powerhouse Toyota will sell about 9.5 million vehicles worldwide and end GM's 76-year reign as the world's leading automaker. Toyota will zoom past Ford in the U.S. market to grab the No. 2 sales spot after GM, after dusting DaimlerChrysler last year to become No. 3.
Cutbacks in sales to car rental firms will account for most of Detroit's production trimming. The Big Three offer these vehicles at fire sale prices that yield minuscule profits. "The automakers often used fleet sales as [a last resort] when their dealers won't take any more vehicles," says Tom Libby, a vice president with the Power Information Network, a division of J.D. Power and Associates.
GM, the largest seller of vehicles to rental agencies, will cut its rental sales about 15% this year to about 595,000 vehicles, from 700,000 in 2006. Fleet sale reductions by the other two domestic automakers combined should total about 200,000 vehicles.
As rental agencies get fewer deals on cars, their customers are likely to pay more to rent, except in highly competitive markets such as Florida and California. Dollar Thrifty Automotive Group, a leading agency, says its daily rental rates will rise about 7% this year, in part due to higher vehicle purchase costs.
One major positive likely from the sales reductions: Retained values—a measure of resale value based on what a car typically fetches three years after purchase—will continue to improve, since there will be fewer used cars around. Retained value is an important factor for consumers.
Production and sales cutbacks completed to date have already helped push up retained values. The average for GM's Chevrolet brand rose from 54.8% of original purchase price in 2005 to 56.7% last year, according to data from PIN. Over the same period, Ford-brand vehicles' retained value rose from 54% to 55.3% and Chrysler's from 46.4% to 48.5%. Still, U.S. auto manufacturers have a ways to go to catch up to the top-three foreign brands' retained value—last year they were 69.2% for Honda, 66.7% for Toyota and 62.6% for Nissan.
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