The disconnect between the U.S. economy and the U.S. new vehicle market

03 Oct 2012 Tom Libby

We hear all the time about the troubled U.S. economy. If it isn't high unemployment, it's the sluggish GDP or a decline in manufacturing or something else. But, there is also frequent mention in the media about the positive trends in the car business. Car and light truck sales are up, the manufacturers are turning in hefty - sometimes record - profits and even adding jobs to keep up with strong demand. There seems to be a disconnect here. How could the car business be doing so well while the overall economy remains in the doldrums? The car business is supposed to be a major factor in the general economy, so shouldn't it be following the same patterns?

The U.S. car business is an industry with its own unique characteristics, but it is also part of a larger, global new vehicle business. The dynamics we see here in the U.S. stem in part from the patterns of international economies as well as from actions taken by global auto manufacturers who happen to be doing business in the states.

One of the most vivid examples of the connection between the U.S. vehicle business and the global landscape is the recent performances of both Toyota Motor Sales USA and American Honda Motor Company in this country. For the past several months, including the just-ended September, these two companies have enjoyed major year-over-year sales gains, outpacing competitors and rapidly gaining market share. Yet most, if not all, of these gains are merely recapturing share they lost in 2011 because of the Japanese earthquake/tsunami and the flooding in Thailand. Both the declines last year and the improvements in 2012 are mostly unrelated to the U.S. economy.

Another example of the link between the global environment and the U.S. car market is the recent U.S. performance of Volkswagen Group of America. Several years ago, Volkswagen AG adopted an aggressive global plan to become the number one auto manufacturer in the world by 2018 (based on sales). One pillar in this strategy is to increase the company's U.S. deliveries to 1 million units, including 800,000 and 200,000 VW and Audi registrations, respectively. To do this, both makes have been aggressively launching new products in untapped segments as well as repositioning high-volume products based on price (i.e., Jetta and Passat) to become more competitive. As result, both Volkswagen and Audi have seen major year-over-year sales gains throughout 2012. Clearly these improvements, like the Japanese increases, have had little to do with the U.S. economic picture.

Ford's recent well-documented improvements also reflect that company's global outlook. Back in 2006/7, Ford CEO Alan Mullaly put in place the now-famous "One Ford" plan; this strategy focuses all Ford employees worldwide on the same objectives and products. Extraneous diversions such as Jaguar, Land Rover, Aston Martin, Volvo and Mercury were sold or discontinued. Importantly, the "One Ford" plan also has enabled Ford to lower its cost structure by achieving huge economies of scale through 'commonizing' platforms, systems and components globally. Again, we are seeing local results of a worldwide strategy.

Yet another example of the connection between our auto business and the global economy is the recent performance of Hyundai. In the past few months, the Hyundai make has cooled somewhat here in the U.S.; this has followed many months of record double-digit sales gains and public adulation. A core reason for Hyundai's recent moderation is that dealers have not had the cars to sell because of labor unrest in Korea. Hyundai and its workers recently reached an agreement so supply will improve, but there will be a short window in which Hyundai has lost its momentum, and this is due, at least in part, to challenges halfway around the world.

Lastly, all manufacturers, and particularly GM and Ford, feel under enormous pressure to maximize sales and profits here in the U.S. because of challenging conditions in other regions of the world. The plight of the European countries is well known (and GM, its partner Peugeot, and Ford are in more trouble there than most OEMs), but recently there has been a slowdown in both the Chinese and Brazilian markets as well. Previously the OEMs had relied on at least China to buoy an otherwise modest global situation. So, we see renewed focus on the NAFTA region because of patterns well beyond our borders.

To be sure, the U.S. economic landscape has some influence on our stateside car business. There are several macroeconomic forces boosting retail demand, including exceptionally low interest rates and the Fed's promise to keep them low through at least the beginning of 2015. This has a huge impact on the industry since about four of every five new vehicle transactions involve either a loan or lease. The housing market seems to be gaining traction, according to several measures, and in the long term this should assist the large pickup segment at a minimum.

We are also seeing an exceptionally high number of major new product launches in key segments. In the midsize car segment, there are six launches of high-volume models within a one-year time frame; the situation is similar in the compact crossover category, with the CR-V, Escape, Rogue, CX-5, and RAV4 all launching within a brief time span. These two segments account for a third of the market all by themselves, so all this product and marketing activity should boost the industry somewhat.

On the other hand, there are some local conditions inhibiting the industry; if these were to recede, the industry might climb at an even faster pace. The national unemployment rate of 8.1% is far above optimal levels and the current GDP growth rate is a sluggish 2%.

While some local, North American trends play an influential role in the behavior of the U.S. new vehicle industry, there are other, broader global factors at work. A look at the worldwide strategies of the automakers and the patterns of the global economy frequently reveals the underlying causes for the results we witness here in the U.S.

Posted by Tom Libby, Lead Analyst, North American Forecasting, Polk (10.04.2012)


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