Beneath the buzz, a layer of caution
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ORLANDO -- We're in the sweet spot in the auto industry's recovery.
At volumes that would have been called meager five years ago, automakers, dealers and suppliers are pulling in heady -- even record -- profits. Sales continue their steady but manageable march upward. Some automakers already are eyeing the top end of 2013 sales projections that they cast just a few months ago.
Dealers, who retrenched deeply during the downturn, enjoyed record pretax profits of nearly $850,000 per store on average in the first 11 months of 2012, the National Automobile Dealers Association says. Dealership values are soaring.
So how is David Kelleher celebrating? Last week, the owner of David Dodge-Chrysler-Jeep-Ram in suburban Philadelphia called a management meeting.
The topic: cost cutting.
"Right now most OEMs and dealers can do a mediocre job and still make good money," Kelleher says. "But can we take full advantage by preserving capital and building a strong, balanced operation so we're not as susceptible during the next rough patch?"
That undercurrent of vigilance ran through the optimistic buzz at the NADA convention here. In make meetings, automakers tossed out bullish forecasts even while cautioning their dealers against complacency. Many factory messages echoed that of Chrysler's: "They basically said: 'Pretty nice job. Now let's get over it,'" Kelleher says.
Rod Lache, an automotive analyst at Deutsche Bank, encapsulated the guarded optimism of many at the show during a private dinner presentation: "Investors we're talking to are so optimistic it's making us a little worried."
So what factors could conspire to end this golden age of profits? Three loom largest on the radar of industry insiders:
1. A return of manufacturers' bad habits
The alignment of production to demand is the wellspring of the industry's good fortune. It's a big reason why average transaction prices hit a record $31,228 in December while average incentives per vehicle fell 9 percent for the year, according to TrueCar.com.
"I've never seen a better alignment of what's being produced and what customers want," says John Mendel, American Honda's executive vice president.
Analysts already are speculating that the falling yen will embolden Japanese automakers to get more aggressive, possibly triggering price or incentive skirmishes that had been predicted for 2012 but never materialized. Incentives on pickups have started to creep higher with the Detroit 3 jockeying for market share as that segment shows glimmers of growth amid a housing recovery.
"We continue to expect OEMs to offer increasingly aggressive financing and leasing incentives to attract the incremental buyer," Morgan Stanley analyst Adam Jonas wrote in a Feb. 4 research note.
2. Washington
The Jan. 1 expiration of the payroll tax holiday didn't seem to dampen January vehicle sales, which soared 14 percent and hit a seasonally adjusted annualized rate of 15.3 million. But some dealers worry that the hit to consumers -- as much as $150 out of a monthly paycheck -- eventually will thin showroom traffic.
Also, automakers expressed relief at the tax deal that avoided the fiscal cliff last month. But broad spending cuts that are scheduled to kick in automatically on March 1 could spook already weary consumers, dealers worry.
"There's still a lot of anxiety about the economy," says Robert O'Koniewski, executive vice president at the Massachusetts State Automobile Dealers Association. He says new-vehicle sales in the Bay State fell during the fourth quarter.
Meanwhile, some analysts say the Affordable Care Act could hurt employment, and thus auto sales, as provisions kick in next year that will force employers to offer coverage or pay a penalty. "In the back half of the year, people are going to wake up to this," Lache says. "It could cause gridlock."
3. Rising interest rates
Few industry pundits foresee rates rising soon. But they don't take cheap credit for granted because it has been such an important lubricant for the industry's profit binge. It not only encourages more vehicle sales but also dramatically lowers dealerships' inventory costs, enabling them to turn more cars.
In the first 11 months of 2012, for instance, the average dealership recorded a floorplan credit of $74 per vehicle because of manufacturer support programs, NADA estimates.
During the boom years of 2000-07, dealerships typically spent $100 to $200 per vehicle in floorplan expense.
"We know this isn't going to last," NADA chief economist Paul Taylor said.
"We know we're going to have positive floorplan costs ahead of us as a headwind to this industry."
Mark Rechtin, Bradford Wernle and Amy Wilson contributed to this report
You can reach Mike Colias at mcolias@crain.com.
