Will 2016 be successful?
Bubbly February volume puts the U.S. auto industry back on track toward a seventh straight year of increased sales. That’s the common measuring stick.
But it’s not the only way to measure relative health. Take incentive levels, the discounting needed to move product. Or average transaction prices, what vehicles actually sell for. Revenue. Market share. Production capacity utilization compares how many could be made and how many were made.
All leading to the ultimate metric: profitability.
Sales volume isn’t a bad tool. If 2016 U.S. light-vehicle deliveries top the record 2015 mark of 17.5 million, lots of good will follow. Selling lots of autos usually signals success.
But not always. Consider the last U.S. auto business cycle. After just missing 17 million in 1999, 2000 sales peaked at 17.4 million, a record that stood until 2015.
After that 2000 peak, automakers kept propping up sales any way they could: extra fat incentives, factory-subsidized leases, longer loan terms, captive financing companies that lent to ever-riskier consumers, pressure on dealers to move the iron and dump whatever didn’t sell into rental fleets. Automakers sacrificed all else to gorge on sales and market share.
Sales stayed high for nine years: more than 16 million annually from 1999 through 2007. The irony? By the end, hardly anybody made money on all that volume.
When the general economy fell in 2008, the car-biz crash that followed was horrendous.
We all remember the crash. We all recognize the mistakes made. We all want to avoid repeating them.
Hence our collective fervor to learn from the past and avoid repeat mistakes. We watch like hawks for any deviation from discipline.
Well, we’ll have to track more than sales. Metrics are interlinked, so checking them all helps find wobbles earlier.
Capacity utilization is the starting point for Mark Wakefield, managing director at AlixPartners in Southfield, Mich.
Traditionally, manufacturers break even at roughly 80 percent of capacity, and rapidly fare better or worse either side of that. Wakefield prefers to check plant by plant, looking for consistency in how companies run production. His second metric? Inventory, again preferring companies with stable and consistent patterns.
TrueCar analyst Eric Lyman believes every well-run automaker must control its production processes to balance output with demand. But he starts with incentive spending as a sign of balance. “It’s the No. 1 indicator of brand health and residual value,” he said today.
So where’s the auto industry?
“It’s healthy,” Lyman said. He expects 2016 sales to grow 3 percent to 18 million.
“Still an opportunity for further growth this year,” said Wakefield.
But both are cautious about this stage of slowing growth.
So am I. I’ve seen a lot of business cycles. Toward the end of the expansion phase, when margins tend to shrink, people always push a bit to keep the good times going.
We’re near the point where, inevitably, some go a step too far. Like a trail along a mountain ledge, one hiker can walk up close to the edge without going over. But if all the hikers do it, the edge might eventually crumble.
Lyman worries about a recurrence of “Keep America Rolling” type incentives, sparked by General Motors in 2001 after the 9/11 terrorist attacks, that become widespread and plunge the industry into another price war.
Wakefield sees a few ill-advised risks taking hold.
He sees subprime auto lending close to saturation levels. He’s not yet worried about default rates spiking, but expects margins have peaked for subprime lenders.
“I’m feeling a bit dicey” on loan approval decisions, he added. “It’s fine for captive [lenders] to make loans to clear slow-moving models, but not when ease of financing depends on how many cars we have on the lot.” Wakefield sees examples of captives approving a customer to buy a low-demand model, but not another model more in demand.
Overall, 2016 will likely be successful for most of the industry, although perhaps less lucrative than 2015. But the longer this expansion lasts, the more tiny breaks in discipline will creep in.