Backlash Time: The Auto Industry Has Recovered -- but It Can't Last
It's probably true that we have a warped perspective on what "recovery" in the U.S. auto industry means. In 2006, it looked as if Ford (F) was headed for insolvency. In 2009, General Motors (GM) and Chrysler nearly disappeared. That we still even have domestic carmakers is stunning. Has this made us too excited about their revival. You bet, according to some commenters.
The difference between growth and profits
Take this piece in Time from Zachary Karabell, an investing Renaissance man who's skeptical that the Detroit Big Three can truly roar back. Here's a taste:
U.S. auto companies are part of a global industry that bears little resemblance to the business as it existed during the golden years of the mid-20th century. Industry experts, economists and financial analysts act as if demand for big ticket items -- not to mention job growth -- will organically resume along with GDP expansion. That leads to specific projections about the number of auto units that will be sold in the coming years assuming, say, 2 to 3% GDP growth. But already there are strong indications that these projections are off the mark.Karabell goes on to produce a fairly well-argued example of what I call right-wrong analysis (he was doing the same thing in 2007, before the financial crisis struck). Right because he zeroes in on industry growth predictions that when considered in a macroeconomic light seem far too optimistic. Wrong because the structure of his case is a pastiche of negative things critics have been saying about the U.S. auto industry for years.
Why recovery isn't expansion
Karabell's apparent financial specialty is green or "sustainable" investment, so the subtext of his piece is that somehow we have to change the way we've bought cars for the past three decades.
Great, but first we need to decide what a recovered market looks like. At its height in 2005, the U.S. market represented 17 million vehicles sold yearly. The general agreement now that this was too high -- a figure driven more by easy credit than fundamentals.
Bankruptcy streamlined companies like GM to be able to notch profits in an emaciated market of 10 million vehicles. However, the current consensus is that a "normal" market in which people just buy new cars to replace old cars (rather that collecting multiple new vehicles) would be in the 15-million ballpark.
Obviously, you need significant growth over a few years to go from 10 million to 15 million. But what Karabell misses is that once the market stabilizes, growth will slow. There's no infinite growth horizon. There's just a growth window.
Understanding the mix
So in the short term, it makes perfect sense that growth in the auto industry -- not to mention hiring -- would outpace the rest of the economy. In fact, it's a good thing that it is. At the moment, the auto recovery is the only recovery that has any momentum.
Karabell is also worried about Detroit falling back into what most enlightened observers think of as its old, bad habits:
You would have thought that General Motors, which was hailed for returning from the dead after its recent IPO that allowed it to exit most of its government ownership, would have learned the lesson of recent years -- namely that SUVs and pick-ups are not a sustainable foundation for its U.S. business in a world of soaring gasoline costs, stagnant wages and tighter credit. But, lo and behold, light trucks increasingly sit unsold on dealer lots: Inventories are now at an alarming 122 days, more than 40 days higher than is normal or prudent.GM upped pickup production in anticipation of a housing recovery that hasn't happened yet (housing and pickups go hand-in-hand), which is really more a problem of the banks and the government not fixing the mortgage mess.
But in a market of 10 million or a market of 20 million, GM is still going to build a lot of trucks. The two top-selling -- and most profitable -- vehicles in the U.S. are usually the Ford F-150 and the Chevy Silverado. Detroit is never not going to build trucks. But it does need to make sure it doesn't make too many trucks at the wrong time.
In the meantime, the rest of Ford's lineup is superb, GM has finally created a good small car, and Chrysler has a higher U.S. market share that Toyota (TM) or Honda.
The new automotive normal
The truth is that the kind of growth in the U.S. that automakers saw in the 1990s and 2000s is probably ancient history -- but the automakers know this. They're looking to China, India, Latin America, and Russia for opportunities to rapidly expand.
Nevertheless, the North American market remains extremely important -- as well as exceptionally competitive. It's where automakers prove themselves. And it's where they will be able to get away with ambitious growth projections for a few years. But then they really will need to avoid repeating the mistakes of the past so that they can successful shift their best efforts to the developing world.
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Photo: GM Media