On the cusp of……slipping the needle in.

Last week the auto industry reported US sales and what a great report it was!  Just scan the headlines:

“Out of the Doldrums, Automakers Post Strong U.S. Sales.”  —New York Times 12/3/13

“Brisk Demand Lifts Car Sales”  —Wall Street Journal 12/4/13

“Auto Sales for November Hit Fastest Pace in Almost Seven Years…Industry Bullish on Growth”    —AdAge 12/3/13

“Industry rides toward 2014 on a high” Automotive News 12/3/13

“Strong US sales boost Detroit Three Car Makers”Financial Times 12/3/13

Just this morning Automotive News reported:

“Likely from Santa: Soaring SAAR for December, big ’14”

So the march out of the recession continues for the auto industry, some forecasters are even predicting that in 2014 the industry could retail 17MM units again.  Forgive me, but I find these predictions a bit unsettling. I’ve seen the boom and bust of cycle of the industry a few times and each time we go through it, I quietly say to myself, “Ok now we’ve learned our lesson.”

It was just a few years ago that the country was thrown into the worst recession most of us can remember. Auto industry sales collapsed to 10.4MM units in 2009 and Chrysler and GM went through bankruptcy. Bankruptcy gave the domestic manufacturers an historic opportunity to rid themselves of excess production capacity and correct one of the industry’s long term bugaboos, we were simply making more cars than people wanted to buy.  Too much production led to inflated inventories which in turn led to marketing that relied heavily on incentives and made price virtually the only criterium for purchase. We taught consumers to ‘buy the deal.’ Promotions are a necessary part of any business and there will always be times when incentives need to be used, but using incentives became the SOP of the industry (particularly the domestics) and made it impossible for anyone to make money.

For the last couple of years, with the recession just behind us, the industry has shown restraint. Production and inventories were kept under tight control, fewer incentives were used and low and behold, margins increased! This has been great for the industry and things are really on firmer footing than anytime in recent memory.

But, will the industry become a victim of its own success……again?!

Virtually every manufacturer is forecasting sales growth. Where will these sales come from? The category as whole will not grow much beyond 16-17MM units.  There will be winners and losers.  If the losers have manufactured too many cars, and inventories have swelled, they will use incentives aggressively. The winners will respond in kind to defend their positions and we will be right back where we were; too much inventory, heavy use of incentives and no one making much money.

Already, there are signs that old habits die hard:

“Inventories highest since 2005, which will test automakers’ pricing discipline” Automotive News 12/2/13

“GM, Ford Stocks Wobble on Worries About U.S. Market Price Cutting.”Wall Street Journal 12/4/13

I suspect that we will find out mid way through 2014 if the industry has learned its lesson, or if the old habits are too hard to break and we start mainlining incentives again.

What a shame it will be if we resort to the same old tactics and miss the historic opportunity to do things differently.

There is an alternative. Look what Audi has accomplished by building their brand and giving consumers a reason other than price to buy their vehicles.  Audi will sell more than 150M units in the US this year (highest volume ever) with the lowest level of incentives in the industry and among highest margins in the business.

Ten years ago, Audi had the needle in deep as well, but they quit.

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5 Responses to “On the cusp of……slipping the needle in.”

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