•Wall Street has been rooting for a downturn in the auto market.
•The market is still at a high sales level as automakers continue to sell profitable trucks and SUVs.
In 2015 and 2016, the US auto market set consecutive sales records. Well over 17 million vehicles rolled off dealer lots each year.
With the baseline market in the US at roughly 15 million — the so-called “replacement rate” — sales growth couldn’t continue forever.
But what’s been alarming is the degree to which Wall Street has been rooting for a downturn.
That’s been going on for two years now, running counter to the actual market and its impressive performance. Prior blame for slackening sales, which in any case are still at relatively elevated levels, was being apportioned to consumers who were losing enthusiasm for new cars.
But consumer demand held up in 2015 and 2016. This has led analysts to conclude correctly that a 17 million-ish pace can’t endure, so they’re looking to automakers and their historic pattern of stoking sales with incentives.
But the automakers aren’t cooperating.
“Analysts are lowering estimates for 2017 vehicle sales after five months of industrywide deliveries declining from a
year earlier,” wrote Bloomberg’s Jamie Butters. “Among the reasons: Carmakers are showing more restraint on discounts than expected and gridlock in Washington reduces the likelihood of a second-half surge.”
It isn’t hard to understand why sales have dipped from the same period in 2016: last year, several factors combined to drive the market, including cheap gas, plentiful credit, low unemployment, the arrival of new vehicles (notably Ford’s revamped F-150 pickup truck). Production and demand were ideally aligned. US automakers were running their factories flat-out, and the mix of vehicles — heavy on pickups and SUVs — delivered fat profits.
That trend couldn’t continue infinitely, and now we’re witnessing its natural erosion, as we’ve observed the market flatten before.
Past behaviour is no predictor of future patterns
In the past, automakers might have loaded up on incentives to maintain market share, reasoning that holding into their slice was the most critical aspect of prospering as sales slid.
But many carmakers have changed their tune and are now focused instead on keeping themselves profitable. Spending money to hold share makes sense up to a point. But if the market is already turning, then it’s a fool’s errand — although if a company has piled up cash from strong sales and good discipline, a downturn can be an opportunity to attack others to raid their share, particularly if their vehicle mix is weak.
Wall Street is struggling to process all this. Rarely bullish on carmakers, it’s now become captivated with the wild but largely speculative growth scenarios supplied by Tesla, whose market cap exceeds Ford’s and General Motors, even though Tesla sells a fraction of the cars that Detroit moves and has only rarely made money.
Investors haven’t shown much enthusiasm for traditional automaker’s stocks, and the belief now is that Detroit will fritter away its profits as sales decline. But thus far, Detroit hasn’t shown much enthusiasm for frittering. Instead, it’s doing the opposite, by being far more judicious with incentives than it has been in the past.
The problem for Wall Street is that it got used to decade after decade in which automakers ran their businesses poorly, with waste and arrogance rife. The Great Recession installed a new paradigm, and investors haven’t yet sorted it out. They keep expecting the car companies to do something familiar and stupid. But the car companies refuse to comply.