After a half-decade on the roller coaster, U.S. automakers are preparing for a slow, steady ride that could yield strong profits for carmakers and their suppliers throughout the rest of the decade.
The automotive industry could be settling into a sustainable period for the foreseeable future, a period perhaps defined by its stability rather than any dramatic peaks and valleys.
Auto sales beat most analysts’ expectations last year by about 1 million units. U.S. light vehicle sales rose 13.4 percent in 2012 to nearly 14.5 million units, compared to about 12.8 million units in the prior year. The Detroit Three automakers, the main customers for many auto suppliers in West Michigan, had a market share of 44.8 percent last year, an erosion of 2.3 percent from the prior year.
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Although analysts expect light vehicle sales to grow this year, they say that growth will be much more contained. That’s good news for a supply chain that’s been struggling to keep up with double-digit growth in the last couple of years.
But the forecast for slow, steady growth fails to tell the whole story, analysts said.
While automakers have focused on the growth of smaller, more fuel-efficient cars during the past few years, most analysts agree the automotive market will soon see resurgence in a somewhat unlikely segment: full-size pickup trucks, which are being bolstered by an improving housing market. These high-volume, highly profitable models, coupled with growth in the premium vehicle segment, should help buoy automakers’ balance sheets even considering that overall sales are expected to flatten through 2019.
“I think 2013 could be characterized as the year of pickup trucks and the rebounding premium market, and I don’t think many of us would have thought that just a couple short years ago,” said Jeff Schuster, senior vice president of forecasting at LMC Automotive, in a speech at the Society of Automotive Analysts annual outlook conference in Detroit on Jan. 13.
What’s more, the local automotive supply chain has another potential source of optimism: Automakers are continuing to increase production in North America, which is leading to more import substitution as models that had been imported to North America get produced here. Analysts say every gain for North America opens up new sourcing opportunities, which translates into more potential business and jobs in the supply chain.
Speakers at the SAA conference, held on the eve of the North American International Auto Show in Detroit, generally expected 2013 U.S. light vehicle sales to reach about 15 million units, with a range of 14.9 million to 15.3 million units.
That slow growth of about 4 percent comes after a string of years that saw the industry grow at a break-neck pace since 2008 and the depths of the recession.
“It’s a great [respite] after three years of double-digit sales growth,” said Ellen Hughes Cromwick, chief economist at Ford Motor Co., who presented at the SAA conference.
Meanwhile, global vehicle sales should tick up a “very modest” 3 percent this year and top out at around 83 million units, said LMC Automotive’s Schuster.
“I would dare use the word stable,” Schuster said of the global automotive forecast.
In North America, where both sales and production have been climbing since 2009, IHS Automotive has already revised its production forecast for the year to 15.9 million units, up about 440,000 units from its previous forecast at the end of last year.
“What’s baked into that is a rosier sales outlook,” Mike Wall, automotive analyst at IHS Automotive based in Grand Rapids, told MiBiz. “We’ve been plodding along in this slow-but-steady recovery, but we’re starting to see us finally make that pivot.”
“Leasing has come back. We’ve seen the fleet and rental buyers come back. All this starts to build a healthier outlook,” Wall said.
LMC Automotive’s Schuster said improvements in the general economy should continue to drive growth this year, as should the availability of credit for vehicle buyers.
Schuster said the long-term trends are looking favorable for the U.S. market.
LMC projects U.S. light vehicle sales to stabilize and reach about 17 million units by 2018, although Schuster notes there is “more upside potential than there is downside risk.”
Another positive factor: Myriad new products will bring more people into the showrooms. While 40 new or redesigned vehicles hit the market in 2012, that number is expected to jump to 61 in 2013, Schuster said.
“That’s a pretty pronounced increase in model activity,” he said.
While North America and Asia remain the bright spots for the global automotive industry, Europe is projected to continue to be a drag, with sales expected to fall 2 percent next year. Sales in Japan are also expected to drop 11 percent, according to LMC.
The European crisis has the potential to affect West Michigan suppliers, sources said. Many suppliers have plants or joint ventures in Europe to service the European market, or ship product from the U.S. to be installed at European facilities.
For example, Zeeland-based Gentex Corp. said in its earnings report on Jan. 29 that it expects sales to decline between 5 and 10 percent in its first quarter of 2013. That’s because “unstable macroeconomic factors continue to be a concern, especially the sovereign debt crisis in Europe, as it is the company’s largest shipping destination,” Gentex reported.
Schuster said the recovery in Western Europe could take longer than a decade, which compares to the five-year recovery from the recession that occurred there in the early 1990s. By 2020, LMC expects European sales to cross the 14-million-unit mark — “still 500,000 units below the level it was at in 2007,” Schuster said. He expects production in Europe to have declined about 6 percent in 2012 and to continue to dip another 4.2 percent for 2013.
Estimated production levels for Europe are about 18.5 million units for 2013, which compares to 22 million in 2007.
RETURN OF PICKUPS
Among the new vehicles set to launch this year are the 2014 Chevrolet Silverado and GMC Sierra full-size pickup trucks. And, according to Itay Michaeli, vice president at Citi Investment Research and Analysis, they couldn’t be hitting the market at a better time.
Michaeli, speaking at the SAA conference, said he believes the U.S. market is “on the cusp of a major unlocking of pent-up demand” for full-size pickup trucks over the next three to five years.
“What’s astonishing is that every pent-up demand indicator we look at — and I mean every one — screens much more positively for pickup trucks than it does for cars,” Michaeli said. “I think it’s analytically almost impossible to be very optimistic or bullish on auto sales, but to be pessimistic or not equally as bullish — if not more — on the pickup truck segment.”
The root of that optimism starts with housing. The U.S. Census Bureau reported that about 1 million new households were formed last year, and analysts reported the housing inventory stands at about 4.7 months, which is insufficient to meet increased demand.
“We’re starting to see a little more normal re-synching up of housing and autos, in particular, pickups, which are so important to the housing recovery,” said Ford’s Hughes-Cromwick.
Other contributing factors, according to Citi’s Michaeli: The average age of U.S. pickup trucks is about 13 years old, fewer trucks are getting scrapped, used trucks have held their values, and full-size trucks are just at the start of the new product cycle.
IHS forecasts sales this year of 2.2 million full-size pickups, not including some of the SUVs that share platforms with those vehicles. That compares to 2009, when pickup truck sales hit just 1.3 million units, Wall said.
“I think we could get even a little bit higher than (our forecast),” Wall said. “I think we have the capacity, and as housing starts to come back, I think we could see that pick up a bit further. But more importantly, I think we could see some sustainability in the 2.1 (million) to 2.2 (million) threshold for a while.”
Wall said growth in the pickup truck segment coupled with recent (Dodge) or very near-term (GM and Ford) truck redesigns could have “huge implications” for the supply chain in West Michigan.
“For a lot of suppliers on this side of the state, a healthy chunk of their business is comprised of that full-size truck and SUV lineup,” he said. “The beauty of all this is that the housing market is starting to turn. There is a very solid correlation between housing starts and pickup truck sales.”
The same improved economy that’s buoying pickup truck sales should also translate into better sales in the premium vehicle and luxury segment, the analysts said.
Improved higher-end sales also bode well for the North American supply chain since these days, those brands — especially BMW, Audi and Mercedes-Benz — are building more products in North America instead of importing them, what the analysts term import substitution. And the luxury segment isn’t alone, as Honda, Toyota, and Hyundai-Kia all shift production to North America from Asia.
“We’re entering into a period that we have not seen in several decades where production volume outpaces demand in the U.S.,” said LMC’s Schuster.
That’s because of two different kinds of investment, Schuster said.
One, automakers have already expanded capacity by about 600,000 units in the U.S. on top of new capacity of about 1.9 million units in Mexico. Through the end of the decade, Schuster expects to see an increase of around 4 million units in production capacity in North America, resulting in a 76 percent rise in North American production across non-domestic automakers including Daimler, Honda, Hyundai, Nissan, Toyota and Volkswagen.
Secondly, North America is increasingly becoming an export hub. Some of the European automakers are looking to source vehicles for the global market from just one plant. BMW sees its North American plants as its one global source for crossovers, for example, while Honda plans to “grow exports significantly” by sourcing several Honda and Acura vehicles exclusively from North America.
“This is using a lot of that capacity that’s come in,” Schuster said.
That increase in North American production volume from non-domestic companies that used to import vehicles or that are starting up new products also creates an opportunity for suppliers, he said. In addition to the volume increases, many of the non-domestic automakers that build cars in North America have less than 50 percent of the content on those vehicles sourced from suppliers in North America.
Last year, the North American market imported about 3.9 million units, while automakers exported about 1.3 million units that were produced in North America, according to IHS Automotive data.
Wall from IHS Automotive said import substitution should really become noticeable in 2014 and 2015 as automakers bring online new facilities in Mexico.
“Import substitution is huge and … it’s going to heat up even further,” Wall said. “As that heats up, all they do there is basically build vehicles here that they formerly had imported. In many cases, it’s just moving that production here. And I think there’s more to come, too.”