- The US auto market could continue to boom in 2018.
- Electric cars will probably hit a plateau.
- Gas prices look like they will remain low.
After three straight years of strong sales, the US auto market enters 2018 with a sense of trepidation. Will the good times keep rolling?
For the next 12 months, the answer looks to be a qualified “Yes.”
But plenty of stuff could happen, ranging from a surge of electric cars to spiking gas prices.
I’ve put together some predictions:
US sales will probably slip for the year — giving doomsayers plenty to chew on.
Major carmakers will report December and full-year 2017 US sales this week, and the expectation is that the year will once again top 17 million in total vehicles moved, but not by much.
That would be a decline for last year’s record of 17.55 million, which was itself an improvement on 2016’s 17.5 million.
The headlines and the actual numbers have been at odds for a solid year, as month-over-month declines from 2016’s torrid pace have made the overall market look far worse than it is. Anything above a 16 million pace is considered quite healthy.
More importantly, a sales slide in 2016 would indicate a decline in consumer confidence or a plateau in demand more so than a threat to carmakers, who will be focused on profits. A 10% margin in a 16.5-million-sales-pace environment would be A-OK.
That said, 2018 will entail month after month of industry observers prognosticating doom. The horse-race quality of reporting in the monthly sales numbers will support this, as the market almost has to post year-over-year declines – sales running above 17 million for years on end isn’t sustainable.
The last significant sales decline came in 2009 with the financial crisis, and it was horrific: the US sales market plummeted to 10 million annually and General Motors and Chrysler went bankrupt.
But prior to the Great Recession, cyclical downturn had typically just knocked off about a million vehicles annually in total sales. Automakers plan for that type of slide. They don’t anticipate Armageddon.
Regrettably, market-watchers have grown accustomed to pondering auto sales in light of the “last war.” So for the car companies, 2018 is liable to bring 12 months of grinding negative sentiment juxtaposed with historically still-robust sales.
Speaking of doomsaying, tightening credit will further darken the mood.
Automakers and banks have in good times and bad times dealt with fluctuating credit conditions. The Great Recession was a glaring exception, but for decades, a US market that moved up and moved down and interest rates that rose and fell were all managed quite capably.
Since the financial crisis, easy credit has certainly boosted US auto sales. A slow uptick in rates, driven by Federal Reserve policy, could pull the punch bowl a bit farther away, and it would trim the lower reaches of the lending spectrum, helpfully constraining subprime loans.
Slightly lower loan volumes will be yet another justification for doomsayers to argue that the market is tanking. Automakers, however, will be able to handle the situation by continuing to push up transaction prices.
They will sell fewer cars, but they will charge more for the ones they sell, and they will sell them to more credit-worthy borrowers.
Electric cars will hit a plateau.
Globally, electric-vehicle sales make up only about 1% of sales. In the US, three vehicles are driving the growth of the market, such as it is: the Chevy Bolt, the Nissan Leaf, and the Tesla Model 3 – all mass-market cars.
Leaf sales should remain predictable: this is a car that’s been around for years and recently got a big update. I’d expect it to post something like 10,000-15,000 in unit sales for 2018.
The Bolt has been an unexpected success story; at a stretch, it could hit 50,000 in total 2018 sales, assuming GM wants to make that many and demand continues to grow.
The Tesla Model 3 is the wildcard. Demand on paper is crazy high, over 400,000 pre-orders. But Tesla’s ability to deliver the vehicle is woeful. Full production likely won’t arrive until mid-2018.
That means less than 200,000 Model 3 deliveries in 2018. So the meat of the US EV market will add up to only about 250,000 – roughly a 1.5% share on the mass-market level (Tesla’s share of the luxury market, at roughly 100,000, could be added to that).
Analysts will point to a wildcard factor of more affordable EVs on the road inspiring more sales, a virtuous cycle. I’ll believe it when I see it. The overall market dynamics are pointing more toward a consolidation than growth, as flat 2018 sales will constrain EV expansion.
Growth, growth, growth for EVs in a juiced sales environment isn’t a good thing; it would be better if we saw a few years of sales at a solid level, indicating consistent demand.
Self-driving has been oversold.
The past year was huge for self-driving cars – the biggest ever. Uber, Waymo, Tesla, General Motors, and a host of others pushed the envelope and made real progress on various business models, from autonomous ride-hailing fleets to consumer-facing highway autonomous systems.
This has all been great, but it’s unfortunately also convinced the public that full autonomy is just around the corner. It isn’t. What we’ll see now is a consolidation of all the existing technologies as automakers and tech companies organise the next push.
Tech companies are at a big disadvantage here. They aren’t selling cars and consequently aren’t seeing much practical real-world testing. Big automakers are, and what they learn will permit them to make a critical judgment: Will people play for this tech?
Something like Cadillac’s Super Cruise, an impressive, but a limited full hand-free freeway-driving system, adds thousands to a vehicle’s price tag. So does Tesla Autopilot. GM and its Cruise division are in the process if discovering if a fleet of fully self-driving, hail-able robo-taxis will add up to a viable business.
The revolution has gotten ahead of itself and is now due for a pullback. Beneficially, this should allow 2018 to be the year that we focused more on electric cars – they have had their thunder stolen by self-driving vehicles, which don’t need to be electrified.
Distracted driving will become a bigger problem.
The automakers have caved to tech companies in making vehicles into rolling smartphone hosts.
This is deadly and although technologies such as Apple CarPlay and Android Auto attempt to address the threat of smartphone use while driving, they’re far from perfect themselves.
As more smartphone-addicted new young drivers hit the roads in coming years, the problem will only worsen. Industry leaders should take a stand and introduce smartphone disablers, much as they already restrict what you can do with infotainment systems while a vehicle is in motion.
Consumers aren’t going to like this, but eventually, the federal government will have to step in, so it’s in the auto industry’s best interest to get ahead of the curve, and 2018 – with sales continuing to be strong and profits rolling in – is the year to take the hit.
Diesel is dying.
The Volkswagen emissions-cheating scandal has killed off diesel as an option for US consumers who aren’t in the market for a big pickup truck.
It’s not coming back. Here and there, we’ll see a few choices for smaller diesel engines. But the game now will be to continue to enhance the traditional internal-combustion engine and to expand hybrid and all-electric offerings to comply with government regulations.
And speaking of government regulations …
No matter your opinion of President Trump, one thing is clear: his administration is determined to deregulate the US economy.
The auto industry is among the most heavily regulated in the world, so 2018 should witness a major roll-back on numerous fronts. A declining sales environment will add pressure to go hand-off with automakers are they try to maintain a level that’s not too far below 2017 and 2017.
You might not like this – environmental regulations will likely be the first to fall or be limited – but it’s no good to pretend that the political situation isn’t what it is. And even a big GOP setback in the midterm elections won’t alter what Trump is able to do with the executive agencies.
Ironically, pushback could come from consumers. They typically want better fuel economy, for example. So even absent tougher MPG regulations, the automakers might have to satisfy buyers’ demands for less pain at the pump.
And speaking of pain at the pump …
It doesn’t appear that a spike in US gas prices is on the horizon.
But the geopolitical situation is fragile. With flash points in the Middle East and Asia, outside events could affect oil pricing and supply.
Bear in mind that technology – everything from better gas motors to electric cars to ride-sharing – has the capacity to affect gas prices at the margins. As these tech factors intensify in 2018 and beyond, they might offset gradual upticks in fuel costs, keeping the situation essentially flat.
That will translate into continued demand in the US for pickups and SUVs, accelerating a shift away from passenger cars. And that in turn will translate into fatter automaker profits.
Advanced safety will trickle down.
Most luxury vehicles now come with a suite of safety features, ranging from lane-keep assist to automatic braking.
It’s unethical for automakers to reserve these features for expensive cars and trucks if, like seatbelt and airbags, they can move the needle lower for fatalities.
The technologies will gradually become cheaper anyway, so expect to see more of them to appear on newer mass-market vehicles.
Automaker executives will enter a pressure cooker.
Despite booming US sales, Ford CEO Mark Fields was ousted in 2017.
Thus far, shakeups at other automakers have been limited. But there’s no question Fiat Chrysler Automobiles CEO Sergio Marchionne will roil the waters in 2018 as he effectively breaks up FCA, probably by staging IPOs for the Maserati and Alfa Romeo brands and possibly by selling Jeep.
Wall Street will eat this up. The pressure will be on for other CEOs to follow, like it or not.
GM was reorganized after its 2009 Chapter 11, and CEO Mary Barra wants to keep the structure of the company intact. But she’s going to face pressure to liberate high-tech, high-growth units such as ride-sharing/hailing division Maven and self-driving entity Cruise, mainly to deliver more returns on the stock price.
In this environment, all eyes will be on Ford, a laggard for Wall Street – but with a stock price that looks cheap relative to its peers. CEO Jim Hackett has thus far not delivered the futuristic message he was hired to produce (not that he hasn’t tried), so even as the carmaker continues to rake in cash on pickups sales, look for Hackett to spend 2018 on the hot seat.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.