Are US Manufacturers Heading For A Slump?

I read an interesting article recently that suggested that the US car makers were heading for a slump in sales despite several key factors that would help keep sales up, notably low oil prices and cheap finance. There are also good profits from the Big 3 (GM, Ford & Chrysler) at the moment.

Back around 2008/09 car sales in the US had dropped to 10M units per year and as the economy recovered slowly and the Government put in policies to help manufacturing (notably the Cash for Clunkers scheme), sales have risen by about 1M per year reaching 16.5M last year which was the best for nearly 10 years.

However there is concern by the industry analysts that the sales growth might slow down or even contract over the next few years. There are several reasons for this pessimism:

1. The Cash for Clunkers scheme has ended and many old cars are now off the road and scrapped. The scheme helped some buyers ditch an old, unsafe car for a new one that had better economy and safety. This was especially good for families who wanted their teenagers to drive a car that was not a death trap! This scheme inflated sales for a while.
2. Younger people don’t use cars like teenagers of the past. Since the 50s it has been a right of passage to get a car or licence and to use this to visit friends etc. Now people are more connected through a mobile device which doesn’t have 2, 3 or 4 wheels.
3. Despite access to credit and other financial incentives, people are using ride sharing or car sharing schemes – an example for me is a neighbouring couple who have sold their mini SUV and now use a car sharing system and public transport.
4. Cars are much more reliable these days so owners are keeping them longer, we are not seeing the large step changes in design and safety that the industry has had in recent decades.

The rise of great quality imports has meant that the Big 3 have to be more focussed on beating them through a price/quality model rather than a patriotic sale. Last week I was in California and the rental company had more Hyundais than US brands and the Sonata I had was on par with anything that comes out of Detroit or Alabama. VW and Alfa Romeo are heading back to the US as well with a range of vehicles that will put more pressure on the locals – the VW Golf (or Rabbit as it used to be known) was awarded the North American Car of the Year recently.

Of the Big 3, Ford and GM are struggling in some countries (Europe is tough, Australia is closing factories, Russia is a mess) and Chrysler is catching up with them on sharing technologies with a European brand (FIAT), however Europe is a difficult territory to conquer with so many political and economic issues to deal with. This could bleed the companies of cash that the US market cannot cover.

What to do?
The GFC was actually a good wake-up call for many manufacturers, supply far out-stretched demand, so the need to reduce costs meant that capacity was removed from the structure or moth-balled. The trick will be to build the cars, SUVs and trucks that the US market demands and this will be heavily influenced by the price of oil and the economy in general. Basically they will have to go back to their strategies from 08/09 and consider what could happen globally, produce vehicles at a good price and not get into a price war between each other. They need to find a new Robert McNamara – he was an early king of data and figured out strategies from what he saw in the trends firstly for the military and then for Ford, dramatically improving their business.

They will need to look at the imports and figure out how they stop buyers from selecting an Audi or Mercedes and instead choose a Lincoln or Cadillac. Very soon, Chinese manufacturers will be looking at the US market as well with possibly cheaper vehicles and this will hit the locals at the bottom end.

The analysts are concerned and this should concern the Big 3 too – they cannot ignore the warning signs or the industry data. Perhaps we will see the manufacturers lobbying the Government for protective tariffs which could damage the talks for a new US/Euro Free Trade Agreement!