Automotive analysts are looking at recent sales results and warning that the industry cycle may have peaked.
The strong recovery over the past seven years was a welcome antidote to the economic downturn of 2008-2009, when vehicle demand and production fell off a cliff. It is worth briefly reviewing the events of that time to appreciate the contrast with what is ahead.
The year 2008 started out with a gentle downward drift, although monthly light vehicle sales in the first quarter still ran above a seasonally adjusted annual rate (SAAR) of 15 million units. In the second quarter, we saw sales slide to the mid- to low- 14 million unit range, which still would have been a reasonable cyclical downturn.
Instead, with the start of the economic meltdown in the late summer of 2008, sales plummeted from a 13.69 million unit SAAR in August to a rate of just more than 10 million at the end of the year. Potential new car buyers were swept away during the second half of the year by the overwhelmingly bad news coming from Wall Street and Washington, D.C.
Automotive manufacturers were managing vehicle inventories pretty effectively through the summer months of 2008, but by December, the industry average had swelled to nearly 110 days on hand. Fifty to 65 days’ worth of sales in the distribution pipeline is considered normal.
Some automakers like GM and Chrysler subsequently instituted complete shut-downs, while others resorted to line slow-downs, short work weeks, and other solutions. Light vehicle production in the first half of 2009 was 50-percent below the volumes of the same period a year earlier.
Low vehicle sales and production translate to significant stress for dealers, automakers and the supply base. The rapid industry decline in the latter half of 2008 and continuing in 2009 set the stage for a drastic financial situation, leading to the dramatic Chapter 11 filings of Chrysler and GM and a number of their suppliers.
An industry downturn was expected, but the severity that year took everyone by surprise. The companies best positioned for survival at the end of 2008 were those with conservative fiscal management and strong balance sheets. For everyone else, aggressive cost-cutting to cope with slumping demand became the norm.
Thankfully, the auto market did not wallow long, but began to rebound quickly, and U.S. sales rose to the impressive level of 17.5 million by 2015. North American vehicle production similarly grew from a low of 8.6 million in 2009 to 17.4 million in 2015. But last year, analysts began cautioning that it was time to expect a tapering off of growth in North American vehicle demand.
While forecasts for 2016 sales are still projecting slightly higher levels over last year’s, industry observers point to weaker sales in May, down 6 percent compared to the year earlier, as evidence that the next downturn is in sight.
We can take comfort in the unlikelihood that the slowdown will be anything like the last one, but it is also true that it has been a long time since the last “normal” market softening of the early 2000s. Suppliers should refresh their memories on the virtues of caution when approaching a slowdown to minimize the need for traumatic adjustments.
Automotive history suggests that many companies make substantial investments in the last few years of a positive cycle. They may have been delaying the decision, waiting to be convinced of the need. They may have finally concluded that they have been overtaxing the existing workforce or equipment for too long.
Suppliers currently on the cusp of a sizable purchase should be comparing different forecasts and doing “what if” analyses to gauge the impact if the tide has turned. In a slowing market, it is safe to assume it will be much more difficult to fill any gap between committed work that is justifying the investment and the new capacity created.
Winning business to replace programs that are ending is also a challenge during the cyclical softening of the market. Companies can get into a rut where the new business they win only serves to replace that which has ended or been lost, so pursuing and winning successor programs is much more significant in this environment.
Fortunately, the situation is not acute, and all is not lost. The automotive market is expected to plateau, not drop, so suppliers have time to adjust to a different, slower tempo, starting now.