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Tuesday, February 25, 2014

Slowing Down

With US dealership inventories at 88 days on February 1st – 60 days is healthy – we are seeing a possible mismatch of sales relative to production. Yes, there's been bad weather across much of the US, and that kept shoppers away. This past week, though, I visited a half-dozen dealers while car shopping and used that as an opportunity to listen to them. What I heard suggests this is not a temporary blip.

...deals are on the way: if I could put off buying a car, I would...

First, the factory is hiking dealers' sales targets, and getting pushback: late 2013 is as good as it's going to get, and no, we aren't likely to do better. Of course every dealer wants a lower target, and they rightly fear the "ratchet effect" of overperforming leading to higher targets, even if their success was a result of idiosyncratic factors, such as hiccups at a local competitor or a sales blitz that worked in volume terms but not in profitability so won't be repeated. Still, my reading is that dealers aren't seeing the same sort of foot traffic, and they don't think it's just the weather. Furthermore, that is consistent with other macroeconomic indicators such as wage growth, interest rates and housing. Growth is anemic.

Second, supply is up both because new capacity is coming onstream (Honda and Mazda in Mexico, for example) or is available because of the weak yen (Toyota is again making money on exports from Japan, and has a lot of capacity there relative to the current size of the domestic Japanese market, which is also facing a big hike in sales taxes). That's bad news if there's in fact a slowdown, or at least not an increase, in sales. Oh, and neither Honda nor Toyota has seen any uptick in their market share this past year.

...[other indicators likewise show] growth is anemic...

Then there are new models, with incentives to make way for the old. As a result a quick scan of Automotive News headlines suggests a number of OEMs in that position. That's an argument for part of this rise in inventories reflecting model changeovers, but that will vary from firm to firm and ought to ease quickly.

Overall, though, my sense is that firms will have to either trim their production plans, and soon, or really beef up the inventories. And if we start seeing more vehicles coming off-lease and out of fleets, then tradein values will make moving the metal a bit more difficult.

So deals are on the way: if I could put off buying a car, I would. Now in my own case I can't, and what I'm seeing suggests I'll opt for a new vehicle over a used one. Yes, if I wanted to spend $23K there are many attractive larger cars out there, lots of BMWs and Volvos and the like at Carmax. But all I need is a car to get me to and from work, and my wife has nixed a relatively inexpensive Porsche Boxster that would do the trick, or even a coupe: with a 2-week-old granddaughter a couple miles away the ruling decree is that I need the option of putting in a car seat...