Beyond Beijing: The Recovery in U.S. Autos

“Feb. auto sales jump 27 percent, top expectations,” the Reuters headline screamed to readers. Sitting here in China, of course, headlines like this are the rule, not the exception. China’s auto industry has been on a tear, with sales ratcheting up well beyond what anyone could have imagined just a few years ago.

The interesting point about the headline, though, is that it referred to auto sales in the U.S market, not to sales here in China. In fact, passenger car sales in China were flat in February, which is a story for another day.

The February spike in U.S. auto sales was the topic that Thomas Rippe and Xu Qinduo at Beyond Beijing, the English-language arm of China Radio International, wanted to discuss with Tim Dunne, Director of Global Automotive Operations at J.D. Power and Associates, and me. They wanted to know: “Are the February sales numbers an indication that a permanent recovery of the U.S. auto industry is underway, or are they a flash in the pan?”

You can listen to our one-hour panel discussion by clicking here, and then clicking on “Hour 1.”

To prepare for the discussion, I called John Casesa, my old friend and the “go-to” guy for anyone who wants to know about the global auto industry, the day before. Formerly an all star auto analyst at Bank of America Merrill Lynch, John is currently a Senior Managing Director at Guggenheim Partners in New York where he is responsible for the firm’s automotive investment banking activities.

John identified several key developments that have helped to revitalize the U.S. auto industry, the first of which were the financial restructurings of General Motors and Chrysler that have taken place. In the wake of the global financial crisis, the U.S. government bailed out both companies by injecting a total of $85 billion to help them transform into leaner, more competitive operations. Both companies were then ushered through speedy bankruptcies that dramatically improved their balance sheets. As a result of these restructurings, the U.S. government and the labor unions became large shareholders of both General Motors and Chrysler, and Fiat SpA stepped in as a large shareholder of Chrysler.

Following the financial restructurings, the entire industry, assemblers and suppliers alike, downsized to align capacities to the new market reality, according to John. From approximately 16 million vehicles in 2008, U.S. auto sales plunged to 10.4 million vehicles in 2009, before recovering to 11.4 million vehicles in 2010. At one point, auto sales in 2009 were running at an annual rate of 9.0 million vehicles. To illustrate the degree of downsizing that has taken place, we understand that as many as 17 General Motors plants have been shuttered and will be sold in the coming year.

As a result of pent up demand and consumer credit becoming more readily available, the U.S, auto industry has continued to recover in 2011. Last month, the annual sales rate reached 13.4 million vehicles. Moreover, prospects for the industry remain positive. Pent up demand is high because the average age of the vehicle population in the U.S. is now 10 years, older than it has been since World War II.

With higher sales levels and streamlined financial and operating structures, the “Detroit Three” are all much healthier financially.

Ford is the sentimental favorite because it did not take government money, and it has fared the best in many ways. The company made a $6.6 billion profit in 2010 on $126 billion of revenues, and its stock is now trading at $14, giving it a $50 billion market capitalization. In the depth of the financial crisis, Ford’s shares traded as low as $1.43. (How could I have missed that buying opportunity?)

On November 17, 2010 General Motors re-emerged from bankruptcy as a public company by pulling off the biggest initial public offering in U.S. history and raising $20.1 billion in response to huge investor demand. As a result of the offering, the U.S. government’s stake in General Motors dropped from 61 percent to about 33 percent. In 2010, General Motors made a $4.7 billion profit on $136 billion in revenues, and the company’s market capitalization is only slightly less than Ford’s at $49.5 billion

Even tiny Chrysler, the perennial underdog in the U.S. auto industry, is doing better financially. Chrysler’s market value has increased nearly fivefold during its first eighteen months under the management of Fiat and its top executive Sergio Marchionne. According to a valuation provided by the company to the U.S. Securities and Exchange Commission, Chrysler was valued at about $4.8 billion as of December 31, 2010. This is sharply higher than the company’s estimated value of $996 million in June 2009 when it emerged from bankruptcy. The numbers represent an early glimpse into the potential valuation of the company as it lays the groundwork for an initial public offering, possibly in the second half of 2011. Fiat owns approximately 35 percent of Chrysler.

John also told me that all three U.S. companies are now investing in new products, a positive sign for the future. With improved product lines, market shares are stabilizing. General Motors remains the leader with approximately 18 percent of the U.S. market, but Ford is not far behind at 16.5 percent. Chrysler is third at 8.5 percent.

How much of the February sales increase was due to cash incentives — putting “cash on the hood” as Tim referred to it — and how much was due to an increase in real demand? Will the Detroit Three take advantage of the sales rebound to continue to improve profitability, or will they revert to their old ways of doing things? What will be the impact of higher gas and oil prices on the recovery? These are just a few of the issues that we discussed on our panel.

No comments yet... Be the first to leave a reply!