Why the momentum could last

August was another month that U.S. auto sales beat expectations. Did automakers go crazy on spiffs to hit the highest selling rate in a decade? Is the industry’s vaunted discipline finally breaking down?


Auto marketers are still standing back from the edge of 2009’s pit of despair, though maybe some leaned in a bit last month.

August comparisons are skewed. Compared to a year-ago August calendar that somehow included Labor Day, U.S. sales slipped 0.6 percent, not surprising with a back end that included a stock market crash and speculation that China was going to drag the world into recession.

But on a seasonally adjusted annual selling rate basis, August’s 17.8 million mark was the best month in a decade.

Average per-vehicle incentives, according to TrueCar.com, topped $3,000 in August. It’s a number that normally makes President John Krafcik queasy. But average transaction prices keep rising, so incentives as a percentage of actual prices are less threatening.

Industrywide, August spiffs averaged 9.6 percent of transaction prices, against 9.5 percent a year ago, TrueCar says. “A little high, but August is a clear-out month,” Krafcik told me today.

Through the first eight months of 2015, the incentive average is 8.8 percent of transaction prices, the same as the overall monthly average since TrueCar started tracking incentives in 2009.

We all remember 2009 when the build-and-incentivize bubble burst. Nobody wants to return to those old bad habits. And so in the sixth year of sales growth everybody strains to spot the first fall from grace, to stop it before it spreads.

Me too.

I’ve seen a lot of business cycles. Never saw one where discipline didn’t eventually slip. Somebody always gets an itch for more market share. Somebody always starts discounting to buy a bigger slice.

In most cycles, it happens quickly. How long until memories of bad experiences fade?

I’ve been surprised, and a little impressed, that nobody has broken yet. A pretty virtuous bunch of marketers, huh?

But maybe I just had marketing goggles on. Last week, the folks from Moody’s Investors Service stopped by our offices. You know, the ones that tell the world how likely your company can repay its debts. In stark, detailed letter grades.

Bruce Clark is Moody’s lead automotive analyst.

The good news: He believes auto companies are still disciplined. Discipline is a major board-level decision. “Companies know what they have to do to maintain their credit ratings,” he said.

Moody’s analysis is complicated and painstakingly detailed. But ratings are simple. The higher a company’s letter grade, the easier to borrow money and the less it pays.

Auto companies borrow a lot of money. Paying more than your rivals isn’t just painful, it’s a strategic disadvantage, whether it’s paying more for tooling or more than a rival to subsidize a $199 lease offer.

Lots of auto companies’ ratings tumbled last decade. It took years of hard work to restore them. Years of reinvestment to restore reserves, restore r&d and product development budgets, replace worn tooling and restore employee compensation. Lean years. Lost opportunities. Years of sacrificing.

Here’s my takeaway from the Moody’s session, and the implication is upbeat.

Reset the discipline clock. How long will it be for the industry’s painful memories to fade and bad habits to return?

Don’t count from 2009, the U.S. auto industry’s latest trough. Start the clock when companies regained investment-grade ratings.

Suddenly, that collective discipline isn’t remarkably long. Maybe it’s just getting started.

You can reach Jesse Snyder at jsnyder@crain.com -- Follow Jesse on Twitter: https://twitter.com/spartyjesse

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