Wednesday, 2 September 2009

Industry Structure – US Autos – CARS : Consequences of a “CARS 2” ?

September is upon us and justifiable concerns have at last grown over the basis of sustainable economic recovery. Of all the prime-pumping exercises from national stimulus monies, one of the most visible has undoubtedly been the 'Cash for Clunkers' exercise under the CARS pseudonym.

Intended to reprieve US auto manufacturing, kick-start consumer spending and reduce the US's carbon emissions levels, the Summer initiative has been announced as an administrative success given that the full CARS fund has been extended from $1bn to $3bn, and ultimately exhausted by deal-hunting shoppers.

However, as investment-auto-motives has previously highlighted, the CARS programme – whilst well intended – ultimately serves only as a momentary propagator of US industry which must continue to face the realities of continued structural reform. CARS has been a pleasurable diversion from that fact.

And so, as expected, now that the subsidy funding for vehicle purchases has ended, the market realities bites. The August sales figures have been reported and unfortunately for US Autos Inc, the ongoing consumer demand has tumbled sharply from the mid-year supported highs, and critically the monies appropriated have largely gone to Japanese and South Korean automakers, with only the best positioned Ford fairing relatively well.

Thus the results of CARS as expected, the 'mainstream quality' and 'mainstream value' foreign manufacturers (ie Japanese and Korean) boosted by the federal funding, the monies essentially 'wasted' on GM and Chrysler which could not draw consumer attention and conversion given their recent history and associative heavy credibility loss.

The picture detailed in sales and prime brand & product dynamics:

GM - 246,479 units vs 308,817 in Aug '08 / Pontiac sales up 23.3% (29,921) [driven by buyer demographic], Chevrolet sales down 9.2% (168,130 vehicles), Cadillac sales down 55% (6,931), Buick sales down 51.7% (8,612), Hummer >64% down.

Ford - 182,149 units vs 155,690 in Aug '08 / Focus, Fusion, Escape, F150

Chrysler - 93,222 units so down 15% / Chrysler brand down 23% (18,619); Jeep sales down 6% (22,041), Dodge sales down to 52,562 vehicles.

Toyota - 225,088 units so up 6.4% from 211,533 vehicles a year ago / Corolla ranked #1

Honda - 161,439 units so up 9.9% / Civic ranked #2, Honda brand up 15.2% (151,814), Acura sales down 36.2% (9,625).

Nissan - 105,312 units so down 2.9% /

Hyundai - 60,467 units so up 47% / Accent up 56% (10,099), Santa Fe up 41% (10,791), Genesis up 97% (2,316)

Kia - 40,198 units, so up 60.4% / Sportage >200% (7,558), Rio sales up approx 90% (6,961), Optima up 110% (7,461)..

VW - 24,823 units, so up 11.4% / Jetta up 14.8% (12,872), Tiguan up 69.7% (1,750)
Set in a broader context including Japan's 2.3% improved sales environment, Toyota and Honda are proving the current climate beneficiaries thanks to multi-national government incentives.

As GM's North American market concerns prevail - given these discouraging sales figures – it has tactically timed its announcement of its $300m JV investment in China with FAW to off-set the NA news.

As for industry comment, investment-auto-motives agrees with in as much as here have been “no surprises”, but must disagree with the presumption that to have started the CARS programme earlier (in March) when inventory and incentives were bleak would have assisted the automakers more. Consumer sentiment typically does not pick-up until May time, psychological outlook aligned to the seasonal weather, thus trying to perfectly time the programme's release and run was something not lost on the Administration Task Force,

Lastly, there is comment that SAAR at present and looking forward is less than 8m units, given an increasing trend of inventory depletion and retraction and the natural margin-seeking 'supply-demand effect' of prices slowly rising, so taking the wind out of sales. That is perhaps an overtly cynical outlook, more like 9.3m moving forward in investment-auto-motives' estimation.

So track the previous Q1/Q209 9.5m SAAR followed by 11.3m and even 15m (by over-zealous, possibly politically motivated internal planners) and the now 9.3m 'balanced reality' and the true industry capacity planning picture, which of course sets the tone for overhead and expected margins, looks very fuzzy indeed; especially for those 2 participants who are under enormous pressure to make their business models structurally sound.

The CARS programme came from good intention, but its effects may have led to greater uncertainty and problematic industrial planning – for both the industry and its governmental supervision. The CARS name evokes the similarly titled 2006 film intended to metaphorically (and humorously) highlight the ongoing structural change in US Autos Inc.

That process of structural change was always going to take time, but now the interventionist effect means it will now take longer to create that sound base from which to re-create the domestic industry.

Hence, the prospect of a “CARS 2” film in the making by Disney-Pixar, due for 2011, is all the poignant.

As investment-auto-motives has stated previously, GM may now need a 'Plan B' for its homeland operations. And the US government will need to think more laterally and creatively with plans X, Y & Z, if it is to combat the potential extensive 'W' “double-dip” or “slanted J” recession. [NB see previous post]. 2011 still seems a long way off, but it will take that long and possibly longer to re-shape American Autos Inc.