How much longer can the good times roll?
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The U.S. auto industry is the healthiest I’ve ever seen it.
Suppliers and automakers are matching production to supply without big incentives, managing capacity and developing attractive models. Dealers are well positioned. Everybody’s lean and profitable. Annual auto sales are up 4 million units since 2009 and 2013 is off to a flying start.
In short, how could things get any better?
How long can this last?
It’s a fair question. The auto industry is notoriously cyclical. And this is year No. 4 of the recovery. Stringing together a longer run than that is rare. Since the 1920s, there has been exactly one five-year stretch of up years: 1996-2000. And even that had only one year above 3 percent growth.
Personally, I think this auto sales recovery still has legs -- certainly for this year, and maybe in 2014, too.
But getting this far has taken restraint and discipline. Easy on production, measure the spiffs, seek profit instead of market share.
If this industry was having a party, there’s music and cake but everybody’s still sober.
But the longer a party lasts, the greater the risk of drunkenness. And as the frothy growth rate slows, it’s harder to maintain discipline.
Once somebody starts spending madly to buy market share, it’s even harder to avoid joining in.
Especially in the car biz.
Look at the top four global markets: China, Europe, United States and Japan. This year, Europe and Japan look to fall substantially and China’s growth is easing, but the United States is growing and profitable. For German and Japanese automakers pinched by the home markets, the United States is a great make-good opportunity.
And the capital-intensive nature of the auto industry compounds the temptation to buy some market share. Most automakers hit break-even pretty close to 80 percent capacity utilization. But tooling and labor costs are so fixed that running assembly plants at, say, 78 percent of capacity yields big losses, but everything more than 80 percent is very profitable. With this cruel math and a 100,000-unit plant making 78,000 vehicles, building and selling just 4,000 more units can be a big deal.
Now how tempting is that vast U.S. market? How much do bigger incentives really cost?
You can reach Jesse Snyder at email@example.com.