November 2009, Automotive Fleet - Feature
Brigher Future Ahead for Domestic OEMs
Automotive industry analyst John McElroy is “bullish” about the future of the Detroit 3, forecasting a “perfectly aligned” market for Ford, GM, and Chrysler and record profits in 2013-2015, if industry-wide sales increase again to 14 million units.
By Cindy Brauer & Grace Lauron
AF: How does this brighter future for the domestic automakers impact fleet sales?
McElroy: The fleet business has been critically important to the Big 3. While they lost retail market share, they did a reasonably good job holding on to their fleet market share. And they used the fleet market to absorb their excess capacity. Now they no longer have excess capacity. So while the fleet market will still be important to them, they'll be able to demand higher prices than they did in the past. At the same time, we're seeing some of the foreign automakers now have excess capacity, and they're going to want to get into the fleet market.
AF: You forecast pent-up demand for new vehicles over the 2013-2015 time frame, can you elaborate?
McElroy: The U.S. fleet of automobiles is shrinking for the first time as the population has been increasing. Demand will build as capacity is reduced. We've seen such a dramatic drop-off in sales in the last year, we know pent-up demand is going to build. People can only postpone the purchase of a new car for so long. While there's no question that millions of consumers have dropped out of the new-car market, probably never to return, there's still going to be a lot of pent-up demand that will drive sales higher than we're at right now, again providing the economy recovers.
When you couple the fact that the Detroit automakers are able to break even at today's sales levels, and when you look at how pent-up demand is likely to have sales grow over the next three years, GM and Ford, to be sure, are in a position where they can be extremely profitable, if the market gets back to, say, only 14 million units a year.
John McElroy
AF: How will foreign-badged OEMs share in the better times you predict for new-car sales?
McElroy: Some of the foreign brands are going to do extremely well. Companies that have been going strong all along, I would expect them to continue to do so - OEMs such as Toyota, Honda, and Hyundai. But some of the more marginal brands are really going to struggle.
AF: What changes do you see in the U.S. car market?
McElroy: A long-term shift in the U.S. car market is occurring. The CAFE and CO2 legislation will force a shift from trucks and SUVs. The question remains, however, will Americans buy smaller cars?
New-car prices must increase to offset lower profits from decreasing sales of the highly profitable trucks and SUVs. In addition, the increasing amount of technology in vehicles because of environmental regulations (hybrid, plug-in electric) will add to vehicle prices, as much as $5,000 to the price of a new car by 2015, not counting inflation.
Can U.S. households keep up with that pace of price increase? I do not believe so.
The question becomes, "Can auto manufacturers in the U.S. survive at 11 million SAAR?" This is where the market will settle.