Black September - US Auto Sale Collapse and The Pending Great Reckoning

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October 3, 2008

US auto sales in the month of September collapsed, falling below 1 million sales for the first time since February 1993. At current sales rates, it is estimated the annual 2008 vehicle sales can drop to 14.5 million vehicles. The industry finished 2007 with 16.2 million vehicles sales. As recently as 2000, US yearly sales reached a record 17.4 million and has average 16.8 million this decade.

All the major manufacturers report significant sales drops in the month. Toyota, Ford, Chrysler, and Nissan saw year-over-year sales declines of about 30% or more. Honda was down 20% and GM managed declines of only 15%. However, GM’s monthly sales declines were bolstered by steep discounts and heavy low profit fleet sales. For example 53% of all Malibus were sold to rental companies, governments or corporate fleets. More significant has been the sales decline in September compared to an already weak August (Table 1). Nissan, Hyundai, BMW and Toyota are noteworthy as these companies have been strong performers over the past 9-months.  Nissan saw its sales drop almost 50%.


Aug. 2008 Sept. 2008 Aug./Sept. Pct. Change Septt. 2007 Pct. Change 9 mos. 2008 9mos. 2007 Pct. Change
Aston Martin 140 140 - 172 –18.6% 1,260 686 83.70%
BMW Group 30,968 18,543 -40.1% 24,968 –25.7% 236,660 248,590 –4.8%
Chrysler LLC 110,235 107,349 -2.6% 159,799 –32.8% 1,183,519 1,578,823 –25.0%
Daimler AG 20,952 20,582 -1.8% 22,481 –8.4% 195,629 180,463 8.40%
Ford Motor Co. 155,117 120,355 -22.4% 189,020 –36.3% 1,608,983 1,971,691 –18.4%
General Motors 307,285 282,806 -8.0% 334,974 –15.6% 2,412,666 2,934,093 –17.8%
American Honda 146,855 96,626 -34.2% 127,200 –24.0% 1,180,583 1,193,520 –1.1%
Hyundai Group 66,195 42,148 -36.3% 57,301 –26.4% 565,752 590,450 –4.2%
Isuzu 289 258 -10.7% 565 –54.3% 4,189 5,534 –24.3%
Mazda 23,680 16,169 -31.7% 25,098 –35.6% 215,408 228,400 –5.7%
Mitsubishi 9,200 7,378 -19.8% 12,102 –39.0% 80,105 105,826 –24.3%
Nissan 108,493 59,565 -45.1% 94,269 –36.8% 785,699 813,052 –3.4%
Porsche 1,404 1,458 3.8% 2,641 –44.8% 21,076 26,278 –19.8%
Subaru 18,932 14,491 -23.5% 16,457 –11.9% 143,789 138,622 3.70%
Suzuki 6,083 4,083 -32.9% 7,653 –46.6% 74,517 82,000 –9.1%
Tata Motors 3,100 3,432 10.7% 13,789
Toyota 211,533 144,260 -31.8% 213,042 –32.3% 1,793,302 2,001,645 –10.4%
VW 28,876 24,504 -15.1% 27,061 –9.4% 242,996 246,516 –1.4%
Other (estimate) 439 638 45.3% 599 6.50% 5,880 5,689 3.40%
TOTAL 1,249,976 965,160 -22.8% 1,315,402 –26.6% 10,766,177 12,351,878 –12.8%

Table 1: Automotive Sales (Source Automotive News)*

The current economic climate is also adversely affecting used vehicle sales. The largest used auto retailer CarMax Inc. recently released their latest financial results and showed its second-quarter earnings have fallen 78% as a result of a weak economy and high gasoline prices. The company said earnings for the quarter ending August 31 fell to $14 million, from $65 million, in the same quarter last year. Total sales fell 13% to $1.84 billion from $2.12 billion a year ago. CarMax also said it saw a 51% decline in its third-party finance fees, partially affected by a tightening in credit availability from some nonprime finance providers and a decline in credit profiles of its average customer.

CarMax Auto Finance reported a pretax loss of $7.1 million, compared with income of $33.4 million in the same period last year. Results were reduced by $28.2 million for adjustments related to loans that originated in previous fiscal years. The company also announced a plan to eliminate 600 jobs.

Besides the general poor economic conditions in the US affecting sales, the tightening of the credit markets is also a large factor. The auto industry is very dependent on credit availability and interest rates because over half of all new vehicles bought or leased are financed. Dealers use financing to stock their showroom. About 5 billion in loans for new and used cars are made annually, according to the National Automotive Finance Association. Without credit readily available the automotive industry cannot sell product. Adding to the problem is that, recent data has shown the percentage of US auto loans past due 60 days or more rose 11.5% in the second quarter 2008 compared to the prior year.

The days of the “subprime” risky car buyer inflating auto sales in the US will be over for the near future as are the days of the upside down car loans where buyers trade in a vehicle they still owe money on into a brand new vehicle. GM Vice President of Sales Mark LaNeve recently stated that the company is currently loosing 10,000 to 12,000 sales in the US per month because the credit markets are tight and consumers could not get loans (I believe he is refering to "subprime" buyers). According to Power Information Network, 1.85 of the 9.6 million customers in 2006 who leased or financed a new car were subprime borrowers or consumers with weak credit. This equals about 12% of all new vehicles sold. Dealers are saying it is getting very difficult for buyers to get a loan particularly for those with a “subprime” rating. Data illustrates (Figure 1) that 81% of prime, 77% of near prime and only 22% of subprime buyer are getting approved for loans. As credit becomes tighter, it is possible the “subprime” market could be lost completely.


Figure 1: Loan Approval (Source Detroit News)

Borrowing costs are also rising for credit worthy car buyers, further eroding demand. GMAC and Chrysler Financial have raised interest rates on dealer floor plans making it more expensive for the retails to stock inventory. The credit markets specifically are hurting GM, Ford and Chrysler more so because of their poor credit rating. Toyota, Honda, Daimler, etc. have a slight advantage and can offer more competitive borrowing to customer. Another factor to consider is, just as mortgages were pooled by lenders and sold off to investors, auto finance companies such as GMAC were doing the same with auto loans. In 2006, $89 billion worth of auto loans were bundled and sold, dropping 19% in 2007. I would have to suspect that the market for auto loan backed investment grade securities in 2008 has dropped to a small fraction of what it was last year just like the market for mortgage backed securities. This means auto finance companies will not be able to offload their debt like they once did and they certainly will not be able to offload “subprime” loans. Hence the banks may require more money down to buy a vehicle and be very selective who they lend to.

The banks have also been reducing their exposure to leases with Chase being the latest. In the first half of 2008, Chase Auto Finance had nearly 5.2 percent of the overall U.S. auto lending market, trailing only Toyota Financial Services and GMAC Financial Services, according to Experian AutoCount. Chrysler was the first to discontinue subsidized leases back in July and I recently discussed the losses incurred by both Ford and GM on off-lease vehicles. Since that time both have also cut back on their leasing programs. At one time leasing accounted for approximately 25% of vehicles sold. As residuals and used vehicle prices are in question (downward trend), leasing as a percentage of sales should be significantly reduced. I will estimate that leasing will drop to about 10% of sales and be limited primarily to European luxury vehicles and possibly to some Honda and Toyota models with good resale value.

Now factor a global slow down in auto sales as Western Europe was down 16% in August with September expected to show a similar trend. Russia, the largest single market in Eastern Europe (may overtake Germany this year) continues to grow with sales up 40% for the year, however, it is unlikely that increase will continue and offset sales declines in the west. In the last month, Russia has been having it’s own economic problems (drop in oil price, corruption and closure of their stock market) that may add downward pressure on auto sales. The Russian economy is heavily dependent on oil and gas sales.

The explosive growth in China this past decade resulting in it becoming the second largest auto market behind the US, is also showing signs of slowing down. In August, J.D. Power and Associates lowered its annual sales forecast for the Chinese market to 5.95 million cars and light trucks, an increase of 9.7 percent over 2007, down from its earlier forecast for 15 percent growth. Not only has the US market all but collapsed in the past few months, the auto companies may not be able to rely on other markets to sustain them during troubled economic times such as what they are now facing.

Going foward, the US sales projections for 2009 are not looking up. The industry-forecasting firm Global Insight reduced their 2009 estimate for US auto sales from 14 million to 13.4 million vehicles and is consistent with my expectations for the market. The last significant automotive downturn was in 1991 when sales dropped to 12.6 million vehicles.

McDonald Equity Research conducted an analysis of the significant sales downturn since the late 1960s. Using a moving average of annual vehicle sales a trendline (Figure2) was constructed against the actual yearly sales.

Figure2: New Vehicle Retail Sales Vs. Trendline (Source McDonald Equity Research)

The analyses then went on to compare the trendline to the vehicle sales in the year of the downturn. Projecting their data forward and assuming the current trend data expects 16.8 million sales, 2009 sales may results in declines of 12 – 24% below expectations. That may mean that 2009 sales could range from 12.2 – 14.6 million vehicles (Table 2). General Motors latest restructuring plan was based on a 20% market share and an annual sales rate of 14 million vehicles. If the market holds closer 12 million, GM will have to make deeper cuts.


Year Sales Trendline % Below
1967 9.8 11.1 12
1970 10.1 11.9 15
1975 11.1 12.9 14
1982 10.5 13.9 24
1991 12.6 14.8 15
2009e 14.8 16.8 12
2009e 12.8 16.8 24

Table 2: Past Automotive Sales Downturns Vs. Trendline (Note 2009 estimated)

Downward pressure on auto sales should continue as the job climate in the US continues to deteriorate. In September, employers eliminated 159,000 jobs which represents the nation's ninth consecutive month of job losses, totaling more than 600,000. September’s declines are the most in 5-years.

The Conference Board which produces the Leading Economic Indicators reports for the US, earlier in the week released it’s latest Consumer Confidence Index. According to the report, September’s Consumer Confidence was up slightly at 59.8. That is up slightly from a revised 58.5 in August, however, the mood of the country is down sharply from about 100 a year ago. Consumer Confidence is at the lowest since the index registered 54.6 in October 1992, coming out of a recession.

2009 could very well turn out to be the worst sales year in recent memory with severe consequences for the US manufacturers. In an interview with Reuters, GM CFO Fritz Henderson said

"Perhaps we have found the bottom ... in the U.S. I can't say the same thing for other markets."

Given the lack of consumer confidence and the rising unemployment data, I do not believe the market has found its nadir and 2009 yearly sales may approach a level not seen since 1991. In the past week the President signed the law that will appropriate funds to allow US auto manufacturers to apply for up to $25 billion (total for industry) in low interest loans that would be used to retool factories for more fuel efficient vehicles. All manufacturers including foreign transplants and suppliers will be allowed to tap into that line of credit. Volkswagen even suggested they may apply to help fund its planned US factory in Tennessee. However, these funds many not be available for a year or two as the US Department of Energy must write the regulation to award the loans. For that reason, these funds will not be available immediately and given the frozen credit market, money will be tight.

As I write this, the US Congress is still debating the Wall Street bailout, the credit markets are frozen and there is much uncertainty over the state of the global economy. For all the reasons above, I believe the future of the US industry is bleak and the viability of specifically GM, Ford and Chrysler is put further into question because the current economic conditions will hit them the hardest.

*Note: Not adjusted for selling days.


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