North American auto sales are
How much longer can it last?
In a new note, Morgan Stanley’s Adam Jonas writes that it can actually keep going a bit more.
2013 is expected to see 16.7 million autos sold, and by 2015 sales could test 18 million.
So, he’s definitely not calling the top. But, there’s more to the story.
To meet that demand, the industry has been adding capacity at a furious pace.
And eventually, he says, the cost of adding or expanding factories will begin to weigh on the overall price of the good the factory is producing:
…at the margin at least, [capacity is] the enemy of pricing. As investors contemplate the 2014 to 2016 operating margin outlook for the US, we would suggest a serious consideration to the impact of higher structural costs (depreciation creep, engineering costs) as well as more competitive pricing.
Exchange rates and retooling machinery aren’t cheap, but Jonas says there’s one main cost investors need to be focused on: jobs.
Adding shifts still costs big money. Ford has spent some $US9bn since 2010 (through May 2012) on retooling, revamping and adding capacity in the US and Canada despite not adding a single greenfield facility.
He’s charted out his projection for the amount of new capacity the industry will add — and it shows we’re looking at a deceleration after this year.
Again, Jonas insists, he’s not trying to say it can’t get better.
The capacity issue is just something to seriously think about:
There are a lot of good things happening in the US car industry: firms are making good money and they seem to be acting more responsibly. But there are just too many car companies chasing too few consumers in one of the most cyclical industries on the planet. We’re not trying to call the top of a furious market rally. But we do hope this analysis helps encourage some reconsideration of too-optimistic 2014 forecasts to allow for some increased competitive price pressure as we face a heavier capacity burden.
It may be time to get your brakes checked.