The auto sales boom is over. That’s the view of Morgan Stanley analyst Adam Jonas.
On Thursday, Jonas published a note significantly lowering his sales expectations for 2017 — a drop from 18.3 million for the full year to 17.3 million.
This wasn’t a tough call. The sales pace for May came in under 17 million for a fourth consecutive month, signalling that another record year is unlikely.
The best case is that 2017 will match 2016’s 17.55 million. A pace of 18 million hasn’t looked probable for some time, and in any case after two boom years, a jump of 500,000 vehicles sold by the end of 2017 would be a very hot market indeed.
The harder call that Jonas made in saying that the market has topped was to include a reassessment of the market through 2020.
“Our 2018 US [Seasonally Adjusted Annual Rate] forecast is cut to 16.4 from 18.9mm, implying a further 7% decline from 2017 to 2018. Our 2019 and 2020 forecasts are cut to 15.0mm units both years units from 19.2mm and 18.7mm respectively. This pace of sales is equal to levels last seen in 2013. In our view, to maintain a 15mm SAAR and no worse we may need to see government support for new car purchases in the form of an incentive program similar to “Cash for Clunkers.”
A sales pace of 15 million is what the auto industry calls a “replacement rate” — the usual churn of older cars being replaced by new ones in the US. It’s the baseline that the automakers anticipate when making decisions about investment, balance-sheet-management, and production.
A new Cash for Clunkers?
It isn’t a disaster, so it will be interesting — if Jonas is correct — to see if the market’s players have grown so accustomed to an elevated sales environment to spur a new Cash for Clunkers, which would require funding from Congress.
The last Cash for Clunkers “scrappage” program happened in 2009, in the depths of the Great Recession, when the US sales pace had at times fallen below 10 million and both General Motors and Chrysler were bailed out by the government and went bankrupt. Cash for Clunkers created an immediate spike, bringing the sales pace up to about 15 million before it slid back.
It would be remarkable if a sales pace at 15 million would prompt another Cash for Clunkers, but it’s possible that Jonas is thinking that by 2020, enough electric vehicles will be on the market in the US that the Congress could inject the stimulus to speed the turnover from gas-powered cars to EVs. Jonas also thinks that consumers may delay buying new vehicles in the while they wait for better technology — EVs, self-driving cars — in the future.
Jonas trimmed his targets for a number of companies in his coverage area, but reaffirmed targets for companies such as Tesla, Ferrari, and Harley-Davidson.