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Sunday, August 27, 2017

Harvey to clear the industry's excess inventory

Mike Smitka

...the Thu 31 Aug Automotive News morning 'cast gives 300K-500K vehicles, but unfortunately the storm lingers...I hope I am wrong on the 1 million figure...

Harvey will cost insurers billions. Part of that will go towards the purchase of replacement vehicles. Macabre, yes, but that's a timely bump for an industry that has been grappling with excess inventory. Houston proper has 2 million people, and extend out to Harris County and you have almost 4.6 million. Immediately adjacent counties add 1.2 million more. At present the cars of a significant slice of that population are underwater, and will remain so for another day or more. That means they're totaled. Across Texas as a whole that certainly means 1.0 million vehicles, and perhaps more. A week ago the industry was awash with excess industry. Now it's not.

...for the auto industry Harvey is not a disaster but a turn of good fortune...

As sales fell over the past 9 months, the US industry built up inventory. A healthy level is around 60 days of sales. But by June 2017 dealers had 74 days worth of cars and light trucks on their lots, and pared that level only modestly to [Ward's] 69 days in July, or 4.2 million units. Of course this hides significant variation, with GM holding 104 days (0.98 million units) and Ford 76, while Subaru had only 40. Now much of the excess is in sedans, as demand shifted towards light trucks – the latter sold at a 10.8 million unit rate in June, while sedans sold at only a 5.8 million rate. The industry is responding: over the past year, NAFTA light truck production was [Ward's] up 4%, sedan production down 11%. That won't be reversed in the short run – suppliers can't spew out extra parts overnight – so sedan inventories were already set to keep falling.

Now Texas is truck country, as CNN's videos of Houston neighborhoods indicate. So Harvey won't be as big a boon for sedan sales, though Texans who find they're underwater on their loans may be forced to downsize to a mere car. The impact remains: 1.0 million units represents 16 days sales, and will help the industry draw down inventories to closer to 50 days. For the auto industry Harvey is thus not a disaster, but a turn of good fortune.

The US Bureau of the Census tracks the dollar value of automotive retail inventories. The most recent data – $68 billion in June 2017 – do not separate detail new versus used vehicles, or parts and tires versus vehicles. In contrast, the biggest purely retail sector, drugs and druggist sundries, comes to only $60 billion.