Carmakers enter 2016 facing slower growth after record year

With record US vehicle sales now on the books for 2015, automakers are propelling into the new year with a sense that even more growth is ahead. They just may have to work harder to make it happen.
Carmakers dialled up discounts in 2015’s second half to win market share as Americans surged into showrooms amid cheap gasoline and a growing job base. The gambit paid off: Full-year sales beat the standard set 15 years ago, rising 5.7% to 17.5mn cars and light trucks. Analysts and executives alike project another record this year - although with slower growth - provided that the dealmaking keeps pace.
“The gains were quite extraordinary in 2015 and they will be harder to come by this year,” said Mark Wakefield, managing director and head of the automotive practice for consultant AlixPartners. For sales to rise by the 300,000 he projects for 2016, it would be “on the back of higher incentives and a tougher market in which to compete.”
Look no further than last month’s results for the power of incentives: Though the industry results set a record for a December, sales didn’t rise as much as analysts predicted for General Motors Co, Ford Motor Co, Fiat Chrysler Automobiles NV and most other rivals. One reason for the shortfall, Ford said, is that automakers kept their incentives even with November after pulling the trigger early on year-end dealmaking. Most automakers’ stocks fell on Tuesday except for Nissan Motor Co, whose sales led the pack with a 19% gain for the month.
Americans were more flush in a US economy that had the lowest unemployment rate since 2008 and added more than 200,000 jobs in each of the past three months, if estimates for December hold true in this Friday’s monthly jobs report. As a sign of confidence, the Federal Reserve raised its benchmark interest rate from near zero last month. Regular gasoline cost an average $1.99 a gallon as of January 4, down about 9.5% from a year earlier, auto club AAA said.
Even with the missed December estimates, there is no shortage of superlatives for the month and the year it capped: “December’s sales rose 9% to deliver a 17.3mn annual pace”; “Full-year sales topped the previous pinnacle of 17.4mn set 15 years ago. It was the sixth straight year of growth, the longest run since World War II”; “Fiat Chrysler logged a record 69th straight month of rising sales”; “Total sales for the year were more than two-thirds better than in 2009, the year the Obama administration led GM and Chrysler through bankruptcy restructurings.”
Even if automakers keep the deals flowing to sustain growth in 2016, the companies still will be in better shape than in the last record year in 2000, when labour contracts and other fixed costs forced them keep plants producing and required deep price cuts to move the metal.
“The automakers are far healthier financially than they were back then,” said Michelle Krebs, a senior analyst with AutoTrader.com who estimates incentives rose to about $3,000 per vehicle from July to December, reaching pre-recession levels. “Even if sales dip a little below 2015 or stay about the same, we don’t see that as unhealthy. That is still a very strong market.”
Investors still didn’t reward the automakers equally. Fiat Chrysler and Nissan each gained more than 20% as the best-performing stocks among seven major automakers in 2015, based on US shares or American depositary receipts. Pulling up the rear were Volkswagen AG, whose US shares plummeted 28% because of a cheating scandal, and Ford with a 9.1% decline.
Ford investors have been disappointed there hasn’t been a bigger profit payoff in 2015’s second half, once the factory changeover was complete to build its aluminium-bodied F-150 pickup. The company fell short of analysts estimates in the third quarter and forecast a less profitable fourth quarter because of higher expenses and marketing costs. Slowing growth and rising incentives may add pressure on profits industrywide, said Jeff Schuster, an analyst with LMC Automotive in Southfield, Michigan.
“This will be the year that will really test the discipline of the manufacturers,” Schuster said. “When the industry is growing at the pace it’s been growing, it’s easy to have everyone succeed. As it slows, you’ll start to see some separation between those that are performing well and those that are not.”