Running Out Of Gas: The Direction Of The Auto Industry

  • The auto industry is showing signs of weakness, through compressed sales figures and job losses
  • Automakers didn’t pay enough attention to consumer demand for SUVs, and they have to be careful not to repeat that error with electric vehicles
  • There are several things disrupting the industry, such as autonomous vehicles, ride-sharing, and Tesla

The auto industry always seems to be a predictive measure of weakness in the economy. If auto sales fall, we can use that to project consumer spending, which represents 2/3rds of the overall economy.  However, auto stocks have moved downward the past year, despite ideal economic conditions. There has been a slump in sales figures, even with a boost from fleet sales, especially across American automakers. There are several reasons for this decline, including quantitative tightening, job losses, heightened competition, weakness overseas, and the trade war.


The Attempt at Quantitative Tightening: Higher Interest Rates

Low interest rates have been fuel to the automobile purchasing fire over the past several years. People have taken advantage of cheap credit, and pushed the total number of outstanding auto loans to above $1 trillion, which is a 64% increase since 2010. The United States and the rest of the world are attempting to ease out of quantitative easing, with the Fed planning to hike interest rates two more times in 2019, as of now.

fredgraph (1)
Source: FRED

Rising interest rates will compress the ability of consumers to take out loans to purchase vehicles, putting pressure on US auto sales, and threatening the cheap credit that so many took advantage of when purchasing their vehicles. Rates are still historically extremely low, but combined with other factors, it has led automakers to enact plant shutdowns, resulted in job losses, and dampened sales forecasts.

Driving into a Thunderstorm: Shutting Down Plants, Cutting Jobs

General Motors (GM) cut 15% of their workforce and closed three plants and two facilities back in November 2018. Ford (F) also plans to cut 20,000 jobs in part of a $11 billion restructuring plan. Jaguar Land Rover also slashed jobs overseas.

It could be argued that the automakers are too big. The plants that they run have the production capacity of many more vehicles than they are able to sell. Automakers sold 17 million new vehicles in 2018, approximately the same amount as 2017. This is the fourth straight year above 17 million vehicles, and many expect that number to decline into 2019.


Source: Charlie Bilello

However, despite maintaining sales numbers for the year, the companies have been pretty beat up over the course of 2018. It’s becoming difficult to retain relevance in the era of foreign automakers on US soil, not to mention the advent of autonomous cars, ride-sharing, and shifting consumer preferences.

Fiat-Chrysler, in comparison to its other American counterparts, is up 161% after dropping out of the sedan market entirely in 2016. Fiat Chrysler owns both the Jeep and Ram lines, which dominate the sportier side of the SUV and truck segment of the market.

FCAU’S gamble on not producing sedans anymore has seemed to pay off, with the Ram truck winning 2018 Truck of the Year. Ford and GM are following FCAU’s lead, with Ford planning to ax every car except for the Mustang, while at the same time, planning to grow their lineup by three crossovers and SUV models by 2023.

GM had planned to stick with the sedan market, but factory closures have led them to pull several of their top models out of the lineup, such as the Chevrolet Impala and the Buick LaCrosse. They plan to still produce the Chevy Malibu and more Cadillac sedans in the future.

However, sedans and small-cars will still make up 30% of the overall auto market, and foreign automakers are planning to capitalize on that. Sedans are great cars for first-time drivers, and they are usually cheaper to gas up and maintain. SUVs carry a higher profit margin, but sedans still maintain a lot of relevance in the market.

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Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can ...

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