January 2009 Global Auto Sales Continue to Be Depressing

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February 7, 2009

January 2009 sales data has been reported and the results are discouraging with all the major markets down at least 25%.  Financial reports are beginning to come in for the last three months of the year and the downturn is hitting the bottom line.  With a sharp downturn in the US and now in their home market, Japanese manufactures are feeling the pain.  The problems at the Detroit automakers are well documented but not production cuts are hitting the supply base.  Sales in Western Europe also took a big hit in January and they seem to be following in the footstep of the US and Japanese market.  The outlook for the industry remains negative in that the global economy may not have hit bottom and more troubles await.

Japan

Vehicle sales in Japan for the month of January were at a 35 year low.  Excluding minicars sales fell 28 % to 174,281 vehicles in January.  Toyota sold 81,985 vehicles excluding its Lexus brand, down 22%, and sales at Honda dropped 31% to 22,087 units. Furthermore, sales at Nissan fell 31% to 30,786 vehicles last month.

There are 10 Japanese auto manufacturer that export over 6.5 million vehicles a year with North America its largest market importing 2.5 million, followed by Europe at 1.5 million in 2007 (JAMA Motor Vehicle Statistics 2008).  In 2007, Japanese manufacturers produced 11.6 million vehicles.

Given how reliant Japan is on exports, particularly to the US market and how fragmented the home market is, if the economic climate continues I expect consolidation.  Just last year last year, Osamu Suzuki, president of Suzuki Japan’s second-largest minicar manufacturer, said in a Nikkei interview:

“The crisis facing the U.S. Big Three will hit Japan later, delayed like a tsunami, probably around July or August next year.”

“Japan’s auto industry, now consisting of more than ten companies, may consolidate into a ‘Big Three.’”

The Japanese auto companies are beginning to release their 3rd Quarter results and end of year forecast.  What has been posted to date has not been encouraging.

Honda for the fourth time this year revised its end of year performance.  Recently it announced the company expects an operating profit for the fiscal year  ending in March of ¥140 billion  ($1.6 billion), down from a record ¥953 billion last year and below its previous profit forecast of ¥180 billion.  The revenue target was lowered by 3% to ¥10.1 trillion from ¥10.4 trillion. Honda expects annual net profit of ¥80 billion instead of ¥185 billion.  For the 3rd Quarter (October-December) operating profit declined to ¥102.4 billion from ¥276.2 billion, while quarterly net profit  fell 90% to ¥20.2 billion from ¥200 billion last fiscal year.

Toyota also revised its financial forecast again and now expects a net loss of ¥350 billion  ($3.9 billion) for the year through March after releasing its latest results.  Last year the company posted a record ¥1.72 trillion profit in the fiscal year.  For the fiscal 3rd Quarter (October through December), Toyota racked up a ¥164.7 billion loss, down sharply from the ¥458.6 billion profit it had the same period the previous year.Quarterly sales plunged 28.4% to ¥4.8 trillion.  Toyota's operating loss will likely widen to ¥450 billion ($4.95 billion) for the fiscal year ending March 31. In December, the company forecast a ¥150 billion operating loss.  As a result the ratings firms S&P and Moody’s downgraded the company’s credit rating one notch and no longer is a triple “A” rated company.

As of September 30th 2008, Toyota stated that it had ¥1.8 trillion in cash, which is approximately $18.5 - $20.0 billion based upon exchange rate fluctuations.  Its cash reserves were at about the same as both GM and Ford prior to the crisis.  Toyota has yet to post its balance sheet with its 3rd Quarter cash position as I write this.

It is being reported Nissan is seeking government aid to make it through the downturn.  Nissan wants to secure a ¥50 billion ($556 million) low-interest rate loan from the state-backed Development Bank of Japan.  The company alleges it does not have a “cash flow problem” however it wants to maintain a strong cash position.  As of September 30th of last year, the company had ¥510 billion and had access to more than ¥300 billion in credit.

US

In the US, the January sales results were catastrophic such that the emerging Chinese market outsold the US (depending on how one counts the numbers).  It is estimated in 790,000 vehicles were sold in China compared to 657,000 in the US. The US market was down last month 37.1% over January, 2008.

GM, Ford and Chrysler saw sales fall 49%, 42 and 55% respectively for the month.  However, much of the decrease at the Detroit 3 can be attributed to sharp declines in fleet sales.  Fleet sales fell sharply because of lack of credit and overall demand.  Fleet sales generally are low margin or no margin sales.  GM and Chrysler stated they experienced an 80% reduction in fleet sales for the month with Ford’s dropping 65%.  All three companies reported that their retail sales drop were in line with the industry average.  GM, Ford and Chrysler’s retail sales dropped, 38%, 27% and 35% respectively.  With the overall US industry down 37%, the Detroit 3’s sales declines look reasonable and in the case of Ford encouraging.  The drop in fleet sales is not a big concern as I have not been an advocate because of the poor quality of return (See: Toyota Could Overtake GM in the US Retail Sales Race).  For the month GM sold128,198 vehicles compared with 117,287 over at Toyota.

Sales declines at Toyota, Nissan and Honda were less than the average mostly because only a small percentage of their sales come from fleet.  Daimler saw a large 35% sales drop compared to BMW, which fell only 15%.  The surprise was Hyundai as it increased its sales for the month up 9%.  This was attributed to a successful marketing that allows consumers to return their new Hyundai vehicles if they lose their jobs within a year.

According to Automotive News, North American (NA) vehicle production plunged 62.2% in January compared with 2008.   NA production was at its lowest monthly total in 18 years.  Only 442,241 vehicles were built last month, compared with 1,170,816 in January 2008.   For all practical purposed GM and Chrysler did not build any vehicles in January and Ford was down about 70% compared to last year.  Furthermore the transplant manufacturers (Daimler, Honda, Toyota, etc.) were also down approximately 50%.

Of the Detroit automakers, only Ford has reported its 4th Quarter results.  For the quarter the net loss was $5.8 billion with revenue down by $16 billion.  The company's cash position now stands at $13.4 billion, down $5 billion from the 3rd quarter.  The company will access a previously established $10 billion line of credit going.  As for GM and Chrysler, both companies appear to be preparing their restructuring plans required when they agreed to receive government loans.  The plans are due by February 17th of this month.

The production cuts in NA have taken a toll on the supply base.  It is likely the US supply chain will be on the cusp of running out of cash by March 1, resulting from the sharply reduced  production in December and January according to the industry trade group.  The problem stems from the manufacturer's payment schedule.  It is expected the Detroit 3's payments to suppliers will drop 70% in March to $2.4 billion from $8.4 billion per month in the 4th Quarter.

With the anticipated cash flow crunch coming, the US suppliers are requesting up to $20.5 billion in bridge loans to survive the severe production cuts from the Detroit manufacturers.  Suppliers are requesting $10 billion in direct loans from the Treasury Department.  The additional $10.5 billion would be directed to the Detroit 3 so that supplier payments could be expedited to 10 days for delivered parts instead of 45.  There is a good chance hundreds of parts makers will close or file for Chapter 11 protection without immediate aid.

Automotive News also reported GM pulled its tooling from 50 parts makers during the year-end holiday shutdown in a series of unusual moves that highlight the turmoil in the automotive parts supply chain.  Given the problems in the industry and steep production cuts, the auto manufacturers are closely monitoring suppliers of critical parts.  It is common for auto companies to remove their tooling because a supplier is not meeting its contracts or is liquidating.

Western Europe

Vehicle sales in Western Europe dropped 25% according to J.D. Power Automotive Forecasting to 903,724 vehicles and further estimates its base-case forecast assumes a contraction of at least 16% in 2009 with only a 2% increase in 2010 (Figure 1).

From what has been posted, VW sales fell approximately 20% in January, compared with 2.9% in December.  BMW had a 24% sales decline and Mercedes dropped 31%.   The situation in Europe continues to deteriorate with the rest of the global industry.  The financial results should drop accordingly.

 


 

Figure 1: Western Europe Historic Sales (Source: Just-Auto)

Of the major Western European markets, Germany, UK and Spain were down 14%, 31% and 42% respectively.  Sales in France appear resilient so far, showing a modesy 8% drop (Figure 2).

 

Figure 2: Western Europe Sales By Country (Source: Just-Auto)

Analysis:

However this all pans out, one thing I am very certain of the product cycles will grow longer and the expansive number of vehicle  models and offering will decrease.  As companies will be forced to cut spending on new product development, greater focus will be placed on core product.   Funds will also be targeted for fuel-efficient powertrains to meet stricter requirements.  To reduce the R&D burden there is a strong likelihood of greater cooperation among manufacturers and straight out consolidation.  A company like Toyota could easily cut its product development and capital expenditure budget to save billions.  However smaller companies like BMW may not be able to afford the vehicle portfolio they currently have.  For them the days of offering cars, crossover and SUVs for every size and market will not be within their means and might have to revert to their basic three core vehicles of the early 1990s.  The dynamics in the industry appears to be on the cusps of changing beyond what most may have thought a year ago.  Governments around the world will be forced to intervene.  Going forward the global auto industry buzzword will be – Survival!

One last thing.  The problems in the US supply industry are real and over the next few months will experience a severe cash shortfall. I hate to say it but the government will probably be getting more involved in that side of the industry.  If or when the Detroit 3 kick off production and orders begin to roll in again, the suppliers will need money to build parts and pay workers. 

 

Additional Source:

UK: West European car sales plunged 25.4% in January, Just-Auto, February 6, 2009

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