October Results Highlight How U.S. Automakers Are Regaining Their Competitive Edge

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Having lost market share to Japanese automakers over the years, American automakers are once again regaining their competitive edge. While General Motors (NYSE:GM), Ford Motors (NYSE:F) and Chrysler’s sales in October were up 15.7%, 13.9% and 11.0% respectively, Toyota Motors (NYSE:TM) and Honda Motors‘ (NYSE:HMC) sales were up 8.8% and 7.1% respectively. Industry-wide sales were up 10.6% to 1.2 million units. [1]

We have a $18.66 price estimate for Ford, which is about 10% more than the current market price.

A slew of model refreshments by GM and Ford in 2012 and 2013 are helping the companies post strong unit sales. GM’s market share has remained flat this year, but that was primarily because of production constraints related to the Silverado pickup in September. For most of the months this year, the automaker has outperformed the overall market. Similarly, Ford has been a consistent market outperformer, helped by its perennial best seller F-Series. On the other hand, Japanese automakers are barely managing to cling on to their market shares.

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U.S. automakers did lose market share in 2012 but that was primarily because sales of Japanese automakers were unusually low in 2011 (due to the earthquake that resulted in production constraints). But under normal conditions, U.S. automakers are highlighting how the improvements in their vehicle quality (through model refreshments and new introductions) are helping them win back the public’s trust.

Light Truck Sales Benefiting American Auto Companies

The relatively stable gas prices have once again buoyed the demand for SUVs and pickup trucks, a segment that has traditionally been dominated by American manufacturers. Moreover, American automakers have worked hard to improve fuel efficiency of their vehicles and are no longer seen as gas guzzlers. Ford, in particular, has one of the most fuel efficient portfolio of vehicles. In addition, the demand for pickup trucks has been fueled by the recovery in the housing market. Pickup trucks have a strong correlation with the housing market since they are used extensively in construction activities.

Through October, unit sales of light trucks (SUVs, crossovers, pickups, and minvans, among others) are up 14.6% while car sales are up only 6.6%. Sales of GM’s new Silverado jumped 10% after a decline of 11% in September. [2] The company had cited limited supply of the refreshed model as the reason why its sales in September tanked.

Pickup trucks account for a disproportionate amount of North American profits for Ford and GM. Although auto companies don’t reveal the exact figures, the general consensus among the industry experts is that pickups have fatter margins than small cars. Some estimates even suggest that the automakers earn gross profits in the range of $5,000 and $8,000 per pickup (after incentives). Thus, any move that can potentially impact the sales of pickups is bound to dent the companies’ profits. At the moment, however, things are looking good for Ford and GM. [3]

Threats In 2014

Although this has been a pretty good year for the U.S. automakers, we might see the Japanese companies rebounding next year. Toyota debuted the 2014 version of the Tundra pickup in the previous quarter. The refreshed model is more muscular and spacious giving it a distinct American look. [4] An upgrade was long due as the vehicle had not been refreshed in seven years. The current version of the Tundra does not even feature in the top 20 vehicles sold in the U.S. Although toppling either the F-Series or the Silverado looks highly unlikely, the Tundra does offer a good alternative.

Grabbing a foothold in the light truck segment is more of a long-term project for Toyota, something similar to how American manufacturers have made their presence felt in the small car and mid-sedan segments over the years.

Toyota’s refreshed Corolla has resonated positively with the public, but its best-selling Camry isn’t doing great. Sales of the vehicle are flat this year, as opposed to the 20% and 11% gains made by the Fusion and the Accord, respectively. Honda could gain some market share next with the launch of the high volume Fit. Honda has already launched the third generation Fit in Japan, where it has received thousands of pre-orders. It is planning a global launch of the model, including the U.S., over the next twelve months.

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Notes:
  1. U.S. auto sales, wsj.com []
  2. GM Investor Relations []
  3. Silverado, Sierra key to GM’s bottom line, January 23, 2013, www2.canada.com []
  4. First drive: 2014 Toyota Tundra, September 24, 2013, driving.ca []