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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.

November 2009, by Cindy Brauer & Grace Lauron

The future is bright for the Detroit 3 - Ford, General Motors, and Chrysler - says automotive industry analyst John McElroy.

A 30-year veteran journalist, McElroy hosts the online Web cast "Autoline Daily," and the weekly television program "Autoline Detroit," a half-hour discussion program featuring automotive executives and journalists.

A car enthusiast at heart, McElroy "found that the industry that makes the cars is more interesting than the cars themselves. So I've tried to figure out what makes this industry tick for the last 30 years. Every time I think I have it figured out, there's always something new to learn about it."

The following interview is based on a keynote address McElroy presented at the recent Automotive Fleet & Leasing Association (AFLA) annual conference in Phoenix.

Automotive Fleet: New-car sales in the U.S. have been inching up in the last few months. Do you see this trend continuing?

McElroy: I do. I think we're going to see a very slow and very weak, but ongoing recovery in both the new-car and fleet markets. We're seeing a little more travel on the part of business people. They're going to need to rent cars; the daily rentals are going to be back in the market to a degree. Corporations are going to be replacing their fleet vehicles going forward. This should bode well for all automakers, but again, new-car sales are still going to be very weak.

AF: What is the near-term future - over the next five years - for the domestic automakers?

McElroy: For the first time in a long while, the Big 3 are in fighting shape for several reasons:

  • Their debt levels have been slashed.
  • Labor costs have been reduced dramatically.
  • Work rules have been fixed.
  • Job banks have been eliminated.
  • Excess capacity has also been eliminated.

The EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for the OEMs means they can break even at a 10-million SAAR (seasonally adjusted annual rate).

The Detroit 3 now have the capability to at least break even, even at disastrously low sales levels. And so for the first time, in arguably 30 years, they now have a level playing field when it comes to competing with foreign automakers.

This assumes, of course, the economy does come back.

As we know in the last 30 years, the Detroit automakers have done nothing but lose market share. That's going to change the dynamics in the American market. Now they finally have a chance to defend that part of the market they still hold.

This market is perfectly aligned for the car OEMs. They will need to strain to meet demand. There will be no need for incentives to produce bigger sales and profits. The industry should record profits in about three years, with Ford leading the way, then GM and Chrysler.

I am bullish about the new car industry in the next few years.

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