Last September, we published an analysis titled “Auto Industry: Pace of Growth Slows, Dangerous Turns Ahead”, and our characterization has proved to be an understatement. Over the past year, the Detroit Three (D3)--Ford, General Motors, and Chrysler-parent Stellantis--have had to internalize the substantial wage increases that the UAW won (up by $2,000 or more per unit sold), significant increases in interest rates and tighter credit terms that depressed affordability and access to a new car, high-rates of depreciation of vehicles sold in 2021-2022 which has resulted in owner negative equity which is depressing trade-in purchases, a crack of the Western Electric Vehicle (EV) industry, a surge of Chinese EV vehicles into Europe and Latin America, and essentially an implosion of Western auto manufacturers' (OEMs) previously high-margin business in China. Over the past month, Volkswagen, BMW, and Mercedes have all lowered their annual profit outlook due to fierce competition from Chinese OEMs and the weaker Chinese consumer. For context, 37% of Mercedes-Benz unit sales were in China in 2022, and profits from the region were far higher. In that year, its autos business delivered $9.1B in profits; for 2024, analysts expect the business to report a $5.9B loss – a negative $15B swing.
These dynamics are highly impactful to U.S. auto manufacturers as well. The D3’s profits from Europe, Latin America, and China are under threat, which puts more focus on their U.S. profit generation. The European, Japanese, and Korean OEMs are also focused on the U.S. consumers. What that means in the near- to medium-term, is better cars and prices for U.S. consumers. In the medium- to long-term, it could also mean tariff rattling and consolidation. All of this has the potential to impact franchise dealerships. In the near-term, the dealers are also contending with the hurricanes and supply chain shortages for certain brands like BMW, Toyota. And so, the D3 (and other OEMs) must be desperate for some good news--more on that in a minute.
Stellantis (Chrysler/Dodge/Jeep/Ram) is the most challenged of the D3. For September, new vehicle sales for these brands were down -11% year-over-year with car unit sales down a whopping -70% per Motor Intelligence. Moreover, dealer inventories are well above pre-pandemic levels. Looking at the important Los Angeles market, there are five large and growing active consumer segmentation groups (using Experian Mosaic definitions): Family Union, Cultural Connections, Singles and Starters. Significant Singles, and Golden Year Guardians. During Q2 2024 Chrysler's dealerships saw the mix of its trade areas decrease for these segments, while the combined D3 saw a high-single-digit increase. The trend for Q3 is likely worse.
As it relates to GM, this week they held an investor day and the following two slides sparked our interest: GM is winning EV share and its EV offering is bringing in a new customer. California has the highest EV penetration in the US and Tesla is the incumbent.
Looking at just Los Angeles, immediate cross-shopping data (prior- and post-visit) between Tesla and other brands has gone from 7.9% of Tesla’s visitors to 8.7%, or around 10%.
Onto the good news (kind of). With the Federal Reserve's pivot on interest rates, auto financing rates have also moved. Since January, the average new car rate has declined from 7.00% to 6.34% as of June per the Federal Reserve Bank of St. Louis (FRED). Since then, it’s reversed and bounced a little higher. Looking at the publicly-traded franchise dealership groups, Placer shows improving traffic through May, thus tracking lower interest rates Note: June was impacted by CDK outage. The franchise dealerships also reported improved results for Q1 and Q2.
Since July, financing rates reversed and moved higher. Traffic also tracks that reversal with the franchise dealership visitation trend moderating into October, as shown in the chart below.
Looking forward, market expectations is for a further 150 basis points in interest rate cuts (per CME FedWatch); should that translate into the average new car financing rates, it would lower the monthly payment by $50 per month, using a $45K purchase price with 10% down. Said differently, $50 is kind of small potatoes. To really spark demand, we’d need the $45K purchase price to decline and more than 150 basis points in interest rate cuts.
As it relates to U.S. EVs, both Tesla and Rivian reported shortfalls in Q3 unit sales. Readers will recall concerns about high depreciation and repair costs, affordability challenges given high interest rates, and recessionary fears resulting in a significant deceleration in EV adoption and new unit sales in staring in the 2H’‘23. Moreover, many potential buyers chose hybrid over EV because of range anxiety and uncertainty about whether they were ready for full electric. (New EV sales were up +5% YoY in September per Motor Intelligence and hybrids were up +16%). For Q3, Tesla reported deliveries up +6% globally, driven by China; for the US, YTD they are down. Rival Rivian reported deliveries down -36% YoY for Q3 with results hampered by production disruptions. Placer shows measured activity at its plant in Normal, IL down -32% YoY, along with a weak exit rate from September. To conclude, while interest rates should help the D3 the Tesla / Rivian over the next year, many “dangerous curves” in the road ahead remain.
