The Ugly World Of Auto Sales

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By Wolf Richter   www.testosteronepit.com

While the media giddily reported the September new vehicle sales numbers, beneath the surface, there was little to be giddy about. At 1,053,722 units, sales were down 2% from an already lousy August, but up 10% from an even lousier September 2010. The Seasonally Adjusted Annual Rate (SAAR) of sales—a theoretical construct that tries to eliminate seasonal fluctuations—was 13.1 million vehicles, up 8% from August, the third best month so far this year.

As always when there is an unusual monthly uptick, the industry speculates that this may finally be a harbinger of the ever invisible "pent-up demand" throwing its weight around. The expectation makes sense, given where vehicle sales used to be: in September 2006, the annual rate clocked in at 16.5 million units. So the September sales rate was down over 20% from pre-crisis levels.

But September benefited from a traumatic August: Consumer confidence was hit by the absurd debt-ceiling negotiations in Congress; stock markets worldwide plummeted; and upheavals in the Eurozone made it into the daily news. Then during the last week of August, hurricane Irene wreaked havoc on the East Coast. Sales in the affected areas came to a halt. Hence, the SAAR in August—12.1 million vehicles—was the third lowest of the year.

By the Labor Day weekend, however, the trauma had settled down, and shoppers returned to dealerships. Sales rocked in early September, especially on the East Coast. But if August and September sales are combined to balance out the impact of hurricane Irene, the numbers are no better than average for the year.

The big losers were the top two Japanese automakers, Honda and Toyota (Nissan is having a good year).

Honda sales dropped by 8% from August and are down by 6% year-to-date. With total September sales (including Acura) of 89,532 vehicles, it is fighting tooth and nail to stay ahead of Hyundai Group (including its affiliate Kia), which had sales of 87,660. A difference of less than two thousand vehicles. This trend is likely to continue. Already in sixth place behind Nissan, Honda is likely to drop to seventh place in the near future behind Hyundai-Kia.

Toyota was hit even harder. Its sales dropped 18% from August and are down by 9% year-to-date. This knocked Toyota down to fourth place in September, behind even Chrysler. For the year, it is in third place. Not long ago, Toyota was engaged in a mano a mano struggle with GM for first place.

Blaming these sales declines on production shortfalls following the March 11 earthquake and tsunami worked for a while, but that's over. In September, Toyota's inventory levels were high enough to where it opened the floodgates on incentives to move the iron. It jacked them up by 16.5% from September a year ago to $2,472 per vehicle. Honda followed with an increase of 7.5% to $2,370 per vehicle. Yet GM and Nissan kept their incentives at about the prior year's level, while Hyundai-Kia, Ford, and Chrysler reduced their incentives by 7% - 19% (TrueCar.com).

Discounting strategies become even more apparent on a percent of sales basis. In September Honda and Toyota, which historically didn't discount much, discounted a bit above the industry average of 9.2%. Among the Big 7, Hyundai-Kia discounted the least at 7.7% (Ford incidentally was at 8.8%). Yet, despite the intensified discounting, Honda and Toyota continued to lose sales and market share.

Clearly, Honda and Toyota have market issues that will be difficult to resolve. Hyundai-Kia has been grabbing market share hand over fist since the financial crisis. Their strategy: compelling prices, appealing products, and improved quality. Much of their market-share gains have come out of Honda's and Toyota's hide. Particularly Toyota is vulnerable; numerous recalls and safety scandals have wiped out its previously untouchable aura of quality that (once upon a time) had propelled it to the top of the heap.

In a curious anti-bailout themed note, Ford Motor Co. ran a TV commercial where a regular guy said he bought an F-Series pickup because Ford was the only U.S. automaker that hadn't received federal bailout funds (Youtube). But suddenly the ad got yanked off the air. Speculation boiled over that the White House had pressured Ford to pull the ad. Denials from the Obama administration were swift. Now Congress got involved. Last Thursday, Darrell Issa, chairman of the House Committee on Oversight and Government Reform, sent a letter to Alan Mulally, CEO of Ford, asking whether the White House or the UAW had talked to Ford about the ad. This bears watching.

Another interesting development: all major automakers have heavily invested in China, by far the largest vehicle market in the world. BMW, for example, earns 25% of its profits there. But when the China bubble bursts, it will likely devastate luxury car sales. BMW shares have already responded with a 39% dive from their 52-week high. And BMW faces other problems: China Puts The Screws To BMW.

Wolf Richter   www.testosteronepit.com