Sales Slowdown Leads to Specter of Overcapacity

As of Feb. 1, automakers had an average 88-day supply of unsold vehicles in the U.S., the most since the height of the Recession in 2009. The Detroit 3 started February with more than a 100-day supply. While bad winter weather kept car buyers home, are supply issues a trend?

At the Automotive News World Congress in January, AutoNation CEO Mike Jackson told the industry it needed to contain inventory levels of unsold vehicles. If not, the industry could be faced with an incentive war to move the metal, he warned.

Total discounts on new cars have been inching higher since November and year over year, according to Edmunds.com and CNW Research.

This comes on top of reports of auto manufacturers opening up new domestic plants and increasing production. Volkswagen is investing $7 billion in North American manufacturing infrastructure in the next four years. Japanese automakers Nissan, Honda and Mazda are building and opening plants in Mexico to serve North America. General Motors, Ford and Toyota are ramping up production at existing plants.

And while new car transaction prices remain high, new vehicle sales in 2014 aren’t expected to sustain the double-digit growth of the past few years.

Sales Into Rental

“Sales gains appear to be slowing for a number of manufacturers, although it may be difficult to tell from January’s sales reports due to the bad weather,” writes Eric Ibara, director of residual value consulting for Kelley Blue Book. “Should the slowdown turn out to be real, it will mean that virtually all manufacturers will have to decide whether they continue to run their production lines or pare back to preserve their margins.”

“Of course, along with higher incentives, the option of diverting more volume into daily rental will loom large for any manufacturer that chooses the former option,” Ibara continues. “If that happens, the possibility that the rental industry will see more volume this year could be real, and accompanying that route of course is the likelihood of lower used car values.”

Since the Recession, the automotive industry has done a historically good job of rightsizing production and tempering sales to rental fleets. According to data from Auto Rental News, last year’s rental fleet sales did not keep pace with the overall increase in new vehicle sales.

However, one fleet seller acknowledged a higher level of manufacturers’ year-end dealmaking than unusual.

“The OEMs swore they were only doing so many cars into rental,” says the fleet seller. “The manufacturers are sacrificing profit for market share, which means residuals will suffer.”

CONTINUED:  Sales Slowdown Leads to Specter of Overcapacity
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