TABLE OF CONTENTS
June US Car Sales: Recovery Continues As GM, Ford, Chrysler and Toyota Report Gains
Mexico Auto Output in June Up 14% to Record 268,388
China’s Luxury Auto Market Speeds Up as Mass-Market Sales Slow
Chinese Cars Make Valuable Gains in Emerging Markets
W. Europe Auto Manufacturer Sites Industry Overcapacity, Plant Consolidation Needed
European Car Market Is Headed For a Meltdown Due to Overcapacity
South America Light Vehicle Forecast Reduced
Argentine Factory Output Tumbles as Brazil Buys Fewer Cars
Brazil Has Record Auto Sales, but Tax Break May End
June U.S. car sales were strong across the board, topping the 14 million unit seasonally adjusted annual rate (SAAR) after a lackluster May, indicating a continued recovery for the industry that will likely carry through the second half of 2012.
Detroit’s carmakers saw strong June U.S. car sales, with Chrysler Group LLC, a subsidiary of Italian Fiat SpA, reporting 20 percent year-over-year sales growth and Ford Motor Co. reporting more modest 7 percent sales gains.
The Detroit three, Chrysler Group LLC, a subsidiary of Italian Fiat SpA, Ford Motor Co. and General Motors Co. all posted substantial U.S. sales gains in June, driven by incentives on trucks and SUVs, lower gas prices and contractor buying. The major Japanese automakers, Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co., continued their recovery from last year's Japanese earthquake and tsunami and floods in Thailand, as inventory levels return to normal.
"A strong June was definitely something the industry was looking for and needed," said Jeff Schuster, senior vice president at LMC Automotive. His company predicts a SAAR of 14.5 million for the year. "June was seen as a pivotal month for the year ... if it had been a flat or a little bit weaker June, there would have been some concerns," he said.
A major continuing factor driving strong U.S. car sales is pent-up demand. Consumers are drawn to new car lots to replace aging and decrepit vehicles. Particularly important for the Detroit three are contractors who increasingly began replacing trucks in June as the housing market remained relatively stable, according to Schuster.
Chrysler was the first major automaker to report June car sales, the strongest in five years, with 144,811 vehicles sold. June sales for U.S. automakers were strong in part due to insulation from macroeconomic uncertainty for the industry.
Chrysler reported 20 percent year-over-year sales growth, GM said sales jumped 16 percent and Ford announced more modest 7 percent sales gains.
Japanese carmakers may continue to see major recovery from last year's earthquake and tsunami and flooding in Thailand, which disrupted supply chains, production and inventory levels. Toyota reported June U.S. sales gains of 60.5 percent.
Chrysler
With 20 percent June gains, Chrysler marked the 27th month of year-over-year sales growth. The Chrysler, Jeep, Dodge, Ram Truck and FIAT brands all posted gains. Chrysler brand sales rose 63 percent, the best June sales since 2008.
Chrysler has been the only profitable division of Fiat in recent quarters. Strong sales from the American unit could bolster weak European sales for the Italian automaker.
Ford
Ford reported June sales rose 7 percent from last year due to higher sales of trucks and SUVs.
"June was a good month for Ford and a particularly strong month for vehicles like Escape, Fusion, Explorer and F-Series," said Ken Czubay, Ford's vice president of U.S. marketing, sales and service.
Ford sales are up 7 percent for the year so far with 1.14 million vehicles sold, including 207,759 sold in June. The bulk of June sales gains came from SUV sales. SUV sales rose 24.8 percent while truck sales gained 1.2 percent. Car sales growth was more modest at just 0.3 percent.
Sales of Ford's flagship F-series trucks rose 10.9 percent with 55,025 sold, the best June sales in five years, indicative of increasing demand for Ford trucks. Car sales were weaker, though, with both the Fiesta and Focus posting losses. However, Fusion sales gained 17.4 percent.
Ford's Lincoln brand actually posted a 2.5 percent gain, with 7,544 units sold.
General Motors
GM, the No. 1 automaker, reported 15.5 percent year-over-year U.S. sales growth and the best sales month for the company since September 2008.
All four GM brands, Chevrolet, GMC, Buick and Cadillac, reported double-digit sales gains, with Cadillac leading the pack at 26.8 percent. Overall, GM sold 248,710 vehicles in June and projected a seasonally adjusted annual rate of sales of 14 million for June, in line with the high end of analyst expectations.
Toyota Motor
Toyota, Japan's No. 1 car company said June U.S. sales rose 60.3 percent compared to the year before.
The exceptional growth in year-over-year sales likely reflects the company's continued recovery from supply-chain, manufacturing and inventory disruptions caused by last year's Japanese earthquake and tsunami and floods in Thailand.
Honda Motor
Honda Motor Co.(NYSE: HMC) reported June U.S. auto sales rose 48 percent, the company's best June since 2008, with strong sales gains for both Honda and Acura brand vehicles.
Honda sold 193,811 vehicles in June. Car sales for the Japanese automaker rose 48.8 percent while truck sales rose 55.9 percent, mirroring substantial industry-wide gains in truck and SUV sales in June. Honda's two best selling vehicles were the Civic car and the CR-V crossover SUV.
Nissan Motor
Nissan Motor Co. said June U.S. car sales rose 28.2 percent on gains for almost every model in the Nissan lineup, demonstrating the continued recovery of the Japanese automotive industry after last year's Japanese earthquake and tsunami and flooding in Thailand.
Nissan sold a total of 92.237 vehicles in June. Car sales increased 19.1 percent, while truck sales increased 45.2 percent. The flagship Nissan Altima led the way with an 11.7 percent sales boost. G-class vehicles were the top sellers for the Infiniti brand. Nissan vehicle sales are up 14.4 percent for the first half of 2012 compared to the year before.
Subaru
Subaru, the automotive manufacturing arm of Japanese industrial company Fuji Heavy Industries Ltd., reported June U.S. car sales rose 40 percent over the year before.
Sales for the first half of 2012 were also up 24 percent on the year before, according to Subaru. Strong June sales were fueled by massive sales gains for all of Subaru's models, particularly the Impreza which increased sales by 147 percent. June marked the seventh consecutive month of sales gains for Subaru.
Volkswagen
Volkswagen AG announced June U.S. sales rose 34.2 percent. The company reported its best June and first half since its heyday with the VW Bus in 1973.
VW sold 38,170 vehicles in the U.S. in June, a 34.2 percent gain year-over-year, which supported sales growth of 35.4 percent for the first half of 2012. VW's leading models were the Jetta, Passat and Golf, which combined accounted for over two-thirds of the company's June sales.
Mexico's auto production in June rose 14% compared to that of June 2011, to a record 268,388 vehicles, as exports to the U.S. and South America continued to soar, the Mexican Automobile Industry Association, or Amia, said recently, as reported in the Wall Street Journal.
Auto exports jumped 22% in June versus the year-ago month to 229,089 cars and light trucks.
Eduardo Solis, head of Amia, said June's production and export figures were both records for the month of June in any year.
Domestic auto sales last month rose 15% to 75,508 vehicles, Amia said. The local sales numbers were similar to those from roughly nine years ago due to a flood of cheap imports from the U.S., the association said.
Accumulated production for the first six months of the year grew 13% compared to the same period last year, to a record 1.42 million vehicles, and exports rose by 15% to 1.17 million, Amia said.
Domestic auto sales in the first six months of the year rose by 12% to 462,239 units.
Mr. Solis said the U.S. market continues to show strength despite concerns about economic slowing north of the border. In June, Mexico auto exports to the U.S. rose 23% versus June of last year to about 150,000 vehicles. In the first six months of the year, Mexico car exports to the U.S. were about 741,000 vehicles, an accumulated increase of 11% compared to the same period a year ago, according to Amia.
June auto exports to other Latin American nations, particularly to Brazil and Argentina, grew 82% to more than 49,000 units, but Mr. Solis said trade measures to restrict Mexican auto exports to Argentina and Brazil will begin to be felt beginning this month.
Argentina unilaterally suspended a free-trade agreement on cars, and new tariffs will hit Mexican auto exports in the July, Mr. Solis said.
Brazil renegotiated an auto-trade deal with Mexico earlier this year that imposes import quotas. Mr. Solis said individual car makers use their quotas in different ways, and he didn't have enough information to predict when the quotas will have the most impact.
Mr. Solis sees another record year for Mexican auto production and exports, despite the trade restrictions to the south and worries about the U.S. economy to the north. Mr. Solis said auto output should be around 2.7 million to 2.8 million vehicles this year versus 2.6 million last year.
India will surpass Japan as the No. 2 vehicle market in Asia by 2016, according to a Wall Street Journal report based on data and research from IHS Automotive. The report also says auto sales in China, Asia and the world's largest market, will continue to grow steadily through the rest of the decade.
According to IHS Automotive, China will post sales of 30.68 million annual vehicles by 2020. That's up an astounding 74 percent from the 17.66 million sold last year. IHS' research includes only cars and light trucks, not buses or trucks.
This year, sales in China are expected to climb to 19.21 million vehicles, helping China surpass the entire struggling market of Europe, which will end up with combined sales of 18.15 million, according to IHS.
Meanwhile, sales in India will peak at 4.88 million vehicles by 2016, a healthy increase from 2.91 million last year. The burgeoning market is expected to post sales of 6.73 by the end of the decade.
Japan's sales, on the other hand, will fall by the end of the decade, according to IHS. The market had only 4.13 million sales last year, when production and supply was stunted by the Japanese earthquake and tsunami and floods in Thailand. Those sales are expected to rebound this year to 5.19 million. But IHS projects sales of 4.51 million vehicles in Japan by 2016 -- when India is projected to surpass it -- and those sales will shrink somewhat to 4.35 million in 2020.
IHS also expects Toyota Motor Corp. to stay as the top automaker in Asia, projecting 5.4 million vehicle sales in 2020. That's an increase from 4.2 million last year. It could be close, but General Motors Co. could lose its No. 2 spot to current No. 3 Volkswagen AG.
While growth in China’s auto market is decelerating, demand for premium cars is on the rise, with sales in the luxury segment set to outpace the overall market in the coming years.
“Premium brands in China are set to register higher growth rates than those seen in the mainstream market over the next five years,” Namrita Chow, Analyst, IHS Automotive said in a report, with sales in the luxury segment set to grow by a cumulative 139 percent between 2010 and 2015.
Dieter Zetsche, Chairman of the Board of Management at Daimler says, “We expect the total market to grow by 5 percent, and the premium market to grow by 15-20 percent.”
Overall car sales in the world’s largest market have slowed since last year after the government rolled back auto purchase incentives, and major cities including Beijing limited the issuance of new car license plates to ease traffic congestion.
In January-March, total vehicle sales fell 3.4 percent from a year earlier to 4.79 million vehicles, while sales of passenger cars dipped 1.3 percent to 3.77 million vehicles.
On the other hand, demand for luxury cars is being driven by the nation’s burgeoning young and affluent population, particularly 25-35 year-old males, who are looking to display their wealth.
China’s premium market has expanded rapidly in the last decade, with fewer than 10 brands and total sales of around 45,000 in 2001 to over 20 players and total sales of over 735,000 in 2010, according to IHS.
The country is already the second-largest market, after the U.S., for Ferrari. The company posted a 77 percent increase in sales in China in 2011 from the previous year and CEO, Amedeo Felisa told CNBC he expects that growth momentum to continue.
China is shipping just a few thousand cars a year to the European Union and virtually none to the United States. But China’s exports to emerging markets are surging as its own auto market slows and its automakers keep pouring billions into new factories. Roads in countries like Algeria, Brazil, Iran, Russia, Saudi Arabia and South Africa are increasingly dotted with cars from manufacturers like Geely, Great Wall Motors and Chery.
Less affluent buyers from Santiago to Baghdad are starting to buy cheap Chinese cars as alternatives to used cars, motorcycles and low-end models sold by multinationals. Chinese car exports were up 21 percent in the first five months of this year, and up 43 percent in May from a year ago.
Chinese automakers said they were preparing for further expansion in exports to developing countries. “They’re easy for us to operate in,” said Steven Wang, the deputy general manager for exports at Great Wall Motors Company. “In Europe, they have lots of laws for new entrants, and in Europe and the United States, customers like to keep familiar brands.”
The Chinese companies pose a potential challenge for the overseas divisions of companies like General Motors, Ford, Toyota, Volkswagen and Fiat, all of which are looking to emerging markets for growth and watching the Chinese contenders with varying levels of concern.
Annual auto sales in developing countries other than China have risen by 45 percent since 2005, to 21.3 million cars and light trucks last year, according to LMC Automotive, a global data company. Including China, emerging markets passed industrialized countries in 2010 for the first time in the number of cars and light trucks sold.
Since 2005, auto sales in industrialized countries have fallen 17.4 percent, to 36.2 million cars and light trucks last year.
When J. D. Power & Associates, the consulting company, surveyed new-car buyers in China last year, it found that they reported 232 quality problems for every 100 Chinese-brand cars purchased. For cars carrying international brands, 131 defects were reported for every 100 cars.
Jacob N. George, the managing director of J. D. Power’s China division, said that Chinese automakers had been steadily closing the gap with their overseas rivals since his company began doing annual surveys in 2000. If trends continue, he predicted Chinese manufacturers would catch up in quality by 2018.
The shortcomings of Chinese cars tend to lie in basic designs. Chinese automakers spend an unusually low share of revenue on design, focusing on ruthless cost-cutting instead.
Chinese regulators are putting pressure on Chinese automakers to strengthen their designs. They have begun issuing star ratings for safety to cars sold in China, after copying the test methods from the National Highway Traffic Safety Administration in the United States.
But the fact remains that consumers in China and other emerging markets generally focus more on price. And Chinese automakers are low-price leaders around the globe, selling new cars for as little as half the price of Western rivals. Emerging markets tend to have relatively few late-model used cars competing with new subcompact cars, unlike in the West, making cheap Chinese cars even more salable.
Chile, though it is a small market, offers a window into the potential of Chinese brands. While Chinese companies barely registered there six years ago, today they claim 10 percent of all passenger vehicle sales and 19 percent of all commercial truck sales. This unparalleled growth was bolstered by a lack of local manufacturers and a near absence of trade barriers, said Francisco Errandonea, head of equity research at Santander GBM in Santiago.
In Brazil, the rapid growth in Chinese car sales led the government to announce in September that it was raising import tariffs on cars by 30 percentage points, to as much as 55 percent, to protect local subsidiaries of multinationals. Brazil went from being one of the top three export markets for Chinese cars last year to not ranking in the top 10 so far this year.
Over all, China exported 850,000 vehicles last year. That was dwarfed by Japan, which exported 4.4 million cars and trucks last year, and South Korea, which exported 3.2 million. But China is starting to catch up, with exports up 50 percent from 2010.
Despite the extensive presence of Western brands and factories in China, top executives at multinationals said they had no plans to export significant numbers of their Chinese-made cars.
“I’m not saying we could not export, but there is no need to export,” said Carlos Ghosn, the chairman and chief executive of Nissan and its corporate sibling, Renault.
For now, multinationals are fighting for greater market share in China, the world’s largest auto market with 18 million cars and light trucks sold last year.
Indeed, as Chinese buyers become more prosperous and demanding, Chinese brands are finding that their own country is one of their most challenging markets. Chinese automakers held 28.7 percent of their home market for passenger cars in the first five months of this year, down from 32 percent of the market during the same period last year.
There was much jawboning at the Geneva auto show about the urgent need for Europe to finally address its auto industry’s overcapacity problem. Western European factories are churning out far too many vehicles for too few buyers. Automakers don’t dare close factories for fear of retaliation by their unions and repudiation by local governments. The situation has existed for years but is worsening with the deteriorating economy. Mass-market automakers like General Motors’ Opel, Ford, PSA Peugeot Citroen and Fiat are forced to offer deep discounts to move the metal and continue to pay workers when assembly lines are idled, leading to untenable financial losses.
Chrysler/Fiat CEO Sergio Marchionne long has sounded the alarm that a consolidation of auto companies and the closing of plants are absolutely necessary. In fact, Fiat is only one of two companies to have closed a plant in recent years, its plant in Sicily, which was no easy task. The other was GM, which closed its plant in Antwerp, Belgium. Marchionne, who now holds the rotating presidency of the European automobile manufacturers association ACEA, last week called on the European Union to oversee the rationalization of the region’s auto industry – a rationalization that would “distribute the pain and suffering” across all the members. He suggested using existing EU funds for research and development as well as to help displaced workers.
Marchionne estimates 20 percent of Western Europe’s car-making capacity – or about 3 million vehicles a year – needs to be shut down, a number with which other executives concur. “All of the car manufacturers have capacity problems — all of them,” Nissan/Renault CEO Carlos Ghosn, head of the Nissan-Renault alliance, said in Geneva. The issue will worsen as Ghosn predicted Western European car sales will fall another 3 to 4 percent this year. Philippe Varin, chief executive of PSA Peugeot, agreed with Marchionne, endorsing a common policy in Europe to solve the overcapacity problem. ACEA Secretary General Ivan Hodac, likewise, said Europe needs an “EU-wide solution.”
The overcapacity and desperate financial situation of some car makers are driving partnerships like the alliance recently announced between GM and France’s Peugeot. GM will take a 7-percent stake in money-losing Peugeot. The two expect to save $2 billion in costs by leveraging their parts purchasing power and co-developing shared vehicle architectures and components in the next few years.
In Geneva, the two companies revealed little more about the alliance that is being received with intense skepticism by other auto executives and analysts because it doesn’t address the bigger problem of overcapacity. GM Europe President Karl-Friedrich Stracke said in a briefing that the two companies will deal with their overcapacity issues separate from the alliance. With its plants operating at only 80 percent of capacity, Opel needs another “two to three months” before providing details on how it will do so. “We need to engage every stakeholder,” he said. GM announced late last year that it is re-examining Opel, which has lost money for a dozen years, up and down the financial ledger. GM Vice Chairman Steve Girsky, the architect of the PSA-Opel alliance, said in Geneva that the deal with Peugeot is just “one tool in our tool box” to fix Opel, hinting there was more to come, though he didn’t utter the words “plant closings.”
The GM-Peugeot alliance likely is but the first of more to come, said Ghosn, who has led one of most successful and long-lasting mergers though it was met in 1991 with much skepticism because of the unlikely combination of a Japanese and French company. In addition, Renault-Nissan has alliances with Daimler in Europe as well as partners in Russia and India. Ghosn said the Daimler alliance was going extremely well and would help Renault move more premium, a segment that has not been as hard-hit as the mass market.
Marchionne made clear Fiat is shopping for partners. A proposed Fiat-Opel merger was blocked in pre-bankruptcy 2009 largely due to opposition from the governments and unions. Fiat had also been rumored to be talking with Peugeot, and GM’s move blocked a Fiat-Peugeot alliance, though Marchionne insisted he would not want to trade places with GM. Yet, asked by a reporter if Fiat had talked with Sweden’s Volvo, now owned by China’s Geely, Marchionne said no – “but give them my phone number…We’re talking to anyone.” Marchionne said alliances are a matter of “cash preservation” as global automakers face the costly requirements to boost fuel economy, lower emissions, develop vehicles for global markets and generally leverage economies of scale.
Alix Partners weighs in on Europe — and it warns European carmakers are especially vulnerable to economic unrest because they haven’t taken the steps required to eliminate a huge problem with overcapacity.
In Alix Partners study, the consulting firm estimates that there are 5.9 million units of excess capacity out of 26 million units in the European market. The situation threatens European companies’ profitability, which is already under pressure because of fears over the economy.
“ If there’s some problem related to the Euro or the economy in Greece or Spain, it’s going to get even worse than this,” says John Hoffecker, who heads Alix’s automotive practice.
Alix Partners says European companies have to keep their plants running at least 75 percent full in order to break even. Among the industry’s 10 major companies, it says five car makers — BMW, Daimler, Hyundai, Volkswagen and PSA — are above that level. But five others — Renault/Nissan, Ford, Opel, Fiat and Toyota — are operating below it.
By contrast, plants in the United States are running at about 90 percent capacity, due to the deep cuts the carmakers made between 2007 and 2011. In that time, the companies closed 18 factories. In Europe, however, carmakers closed only three plants and they continue to open new ones in Eastern Europe as well as Russia.
The overcapacity comes at a time when the European market mix is shifting precipitously. Currently premium manufacturers have 16 percent, value manufacturers have 20 percent, and there’s just 63 percent left for the middle of the market.
Hoffecker thinks the value market will continue to grow in Europe, as customers face financial pressures, and as more players pour in from around the world. As that happens, the most likely survivors are those who can get their capacity in line with demand.
Polk has just finished updating its light vehicle sales and production forecast. For the South American market, the numbers are not as positive as one would expect for emerging countries. We've reduced the sales forecast by 2% for 2012, 3% for next year and 5% for 2014. Regarding production, the forecast was reduced by 3.4%, 2.9% and 1.6% for those same years.
The main cause of these reductions is the Brazilian market, which represented 67.3% of the total South American auto sales last year. Registrations between January and May 2012 were down by 4.4% compared to the same period of last year. Wholesales (from OEMs to dealers) are down by 9.3% – a higher difference that is easily explained by new taxes over imported vehicles in effect since mid-December, which made inventories higher in 2011 in order to keep prices lower.
Lower sales impact production in a negative way because 75% of the Brazilian market is fueled by locally-made vehicles. It also impacts the production in Argentina because vehicles exported to Brazil represent more than 40% of what is made in Argentina. However, production will tend to increase until 2014 as Toyota, Hyundai, Suzuki, Chery, JAC, Nissan and Fiat open new factories in Brazil and other OEMs, like General Motors, Volkswagen and PSA Peugeot Citroën, expand the capacity of existing factories.
To put sales on the growth track again, the Brazilian government announced tax incentives in late May. One of them - the reduction of the tax over industrialized products - is in effect until August. If the government postpones its end to December, our light vehicle forecast for Brazil is 3.5 million units this year, but we estimate that 100,000 vehicles will not be sold in 2013 because of anticipated purchases. For Argentina, the forecast is 824,000 light vehicles, as the following table shows.
Argentina’s industrial production fell more than 4 percent for a second straight month in June, the biggest two-month drop in a decade, as slowing growth in Brazil undermines automobile exports and steel production.
Output fell 4.7 percent last month from a year earlier and 0.1 percent from May, the national statistics institute said today in Buenos Aires. The annual decline was steeper than forecast by eight economists surveyed by Bloomberg, whose median estimate was for a 4.5 percent fall. Auto production, which led industrial growth in recent years, dropped 34 percent in June, mainly because of lower demand from neighboring Brazil.
South America’s second-biggest economy will expand 2.45 percent this year, the least since 2009, according to the median estimate of six economists surveyed by Bloomberg.
South America’s second-biggest economy will expand 2.45 percent this year, the least since 2009, according to the median estimate of six economists surveyed by Bloomberg. Economic activity fell 0.5 percent in May from a year earlier, the first year-over-year decline since July 2009, the agency said.
Brazil’s economy is recovering more slowly than expected from a contraction in last year’s third quarter. Gross domestic product expanded at a 0.8 percent annualized rate in the first quarter, and economists in the latest central bank survey lowered their 2012 growth estimate for the 10th straight week, to 1.9 percent.
Brazil is on course for a July record for auto sales, although the tax incentives that were largely responsible for the increase may not be extended past August, Finance Minister Guido Mantega said recently.
Mantega touted the peak in auto sales as a sign that Brazil's economy, which has been stagnant for the past year, has finally turned the corner and will accelerate during the second half of 2012.
"The most difficult phase has passed," he told reporters in Brasilia.
Yet analysts have attributed the recent recovery in auto sales primarily to a temporary reduction in the so-called IPI tax that cuts about 5 to 7 percent off the final price to the consumer. Auto sales had struggled earlier this year until Brazil's government implemented the IPI tax break as one of several economic stimulus measures.
The government was not "currently" studying extending the IPI tax break past August, when it is set to expire, Mantega said following a meeting with representatives from the auto sector.
Mantega also said it is not the government's role to get involved in a dispute between General Motors Co and an auto workers' union, which accuses the company of planning layoffs at one of its plants.