What To Expect From GM and Ford In 2016

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General Motors (NYSE:GM) and Ford Motors  (NYSE:F) both enjoyed an excellent 2015. Both American auto makers benefited from the surge in sales of SUVs and trucks in the U.S. auto market, benefiting as well from the fact these vehicles have higher margins than sedans.  Moreover, these two companies, along with Fiat-Chrysler, dominate in these segments, while Japanese auto makers Toyota, Nissan and Honda dominate in the passenger car market. North America has generally been the most profitable region for all auto makers due to higher margin truck sales, while Europe and Japan have been beset by widespread economic issues. Most of the growth in unit sales has come in recent years from China, the world’s biggest car market and also its fastest growing, but the impact of a currency devaluation, impending credit crash, slowing economic growth and structural changes in the economy will likely show in a slower pace of growth in unit sales in the coming years. Ford and GM have already revised their forecasts for growth in China sales to just 2%-3% for the rest of the decade, compared to the much more aggressive 10% annual growth to 30 million units by 2020 most people were expecting earlier. Moreover, these sales are expected to come from tier 2 and tier 3 cities, which will most likely be driven by first time buyers who prefer hatchbacks and compact cars over more profitable sedans and SUVs, so equity income per vehicle is also expected to decline. All these reasons underscore the importance of the U.S. market to the auto industry.

Unfortunately, there are widespread fears that profitability in the U.S. auto market may have already peaked. While a combination of factors such as low gas prices, low interest rates and higher than usual average age of cars, are expected to drive demand in the coming years, profitability might not follow. There are two main reasons behind this:

1) The supply of used cars has been fairly stable over the recent years in the U.S. car market, but it is likely to increase in the coming period. This is because a large number of sales in recent years were driven by leasing and those leases are set to expire. The coming glut of vehicles in the used car market will likely drive down prices in the used car as well as the new car market.

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2) While demand for commercial vehicles is likely to be stable, as commercial and Government demand is likely to be strong, the demand for passenger vehicles is facing a number of retarding trends. These include the impact of on-demand and ridesharing services like Uber and Lyft on consumer habits and the consumer preparedness for new technology in vehicles such as self-driving features and electric batteries. The impact of the first of these factors is visible in the declining number of licenses given out in recent years in the United States as well as the decline in the average number of miles driven per car. Consumers are now preferring to think of transportation on a per-ride basis as opposed to a per-car basis. This means that demand for passenger vehicles might shift from individual buyers, who tend to prefer high level of customization, to fleet buyers, who prefer reliability over comfort. This might result in a decline, at least in the margins of vehicles, if not in the total number of cars sold.

In the face of all these factors, it is worth considering what we can expect of U.S. auto makers GM and Ford in 2016.

General Motors

Perhaps the most important result for the Detroit based auto maker in 2015 was that it outsold Ford in the full-size pick-up truck market. Ford’s F-150 series of trucks had low inventory levels at dealerships in 2015 as the company shut down manufacturing to retool its factories for the new aluminum bodied 2016 version of the model. GM benefited greatly from the low supply and controlled, high-margin sales of the F-150, as its Chevrolet Silverado and GMC Sierra sold like hot cakes. Both these models have been refreshed for 2016, which should keep sales high going forward.

Additionally, muscle cars, the U.S. term for sporty mid-size or full-size cars with large engines designed for four or more passengers, tend to benefit from low gas prices. However, in 2015, GM’s Chevrolet Camaro lost ground to Ford’s Mustang, which had a new 2015 version on the market this year. The Camaro has gotten a 2016 refresh now, which should help it catch up with the Mustang. In the traditional passenger car segment, GM is introducing newer versions of Chevrolet Malibu, Chevrolet Cruze and Chevrolet Spark, which should help the company fetch higher average transaction prices.

Ford Motor

The main trend for Ford in 2015 again was being overtaken by GM in the full-size pick-up truck segment. However, Ford’s F-150 is now back to full inventory levels and the company reported double digit sales gains in the final two months of the year. We expect the company to be able to sell significantly more number of pick-ups in 2016. Additionally, the company has redesigned its mid-size SUVs Explorer and Edge for 2016. Both vehicles posted double digit year-over-year sales gains in 2015, 14% for the Edge and 18.7% for the Explorer, and the low gas price environment should help them continue the strong growth momentum in 2016. [1]

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Notes:
  1. 2015 sales of mid-size SUVs/Crossovers, GoodCarBadCar, January 2016 []