The U.S. Automotive Slowdown Is Here And Now
The U.S. automotive market seems to have plateaued after six consecutive years of strong growth rates, following the recession. The re-filling of fleets took place aggressively over the last several years, and now the consumer demand has slowed down, as expected.
The pent up demand that has now played out means that automakers such as GM, Ford, Toyota, and Volkswagen AG (OTCMKTS:VLKAY) will shift focus to increasing their market share, providing incentives, and managing inventory in the country. Volkswagen is already struggling in the country, where its namesake brand of passenger cars continues to lose sales. The aftermath of the dieselgate scandal, which involves ~500,000 U.S. vehicles, is also weighing on Volkswagen’s delivery numbers. However, the group’s luxury troupe comprising Audi, Porsche, Bentley, and Lamborghini is still posting positive numbers in the country, and growing by more than the overall light-duty vehicle market.
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The fact that the unit sales of Audi and Porsche exceed that of their biggest competitors in the U.S. bodes well for Volkswagen. Audi and Porsche combined formed 15% of the net volume sales, 37% of the top line, and ~60% of the operating profit for Volkswagen last year. This is because the average unit pricing of a luxury car is somewhere close to $44,000, compared to just over $20,000 for the average price of vehicles overall. Given the high fixed cost of manufacturing and distributing a car, a higher purchase price is the biggest guarantor of profitability.
However, Volkswagen’s luxury brands form only 1.6% of the U.S. passenger vehicle market as of now, and the weak performance of the much larger Volkswagen Passenger Cars division continues to drag down the group’s U.S. revenue and profit. The slowdown in the overall market will make it tougher for the German automaker to extract revenue growth from the country. Incentives and discounts will reduce the average vehicle prices, hurting profits. Volkswagen also faces stiff competition from GM and Ford, the American automakers, and Toyota — Volkswagen’s closest global competition. North America formed 16% of Volkswagen’s sales revenue through the first half of the year, but only 9% of the vehicle deliveries. This means that the average revenue per vehicle is more for North America for the company. Lowering model prices in the face of tepid consumer demand will hurt this metric.
S&P Global Ratings cut its estimate for automotive sales in the U.S. in 2016 to 17.5 million vehicles from 17.8 million, citing slowing customer demand and the impact of the U.K.’s vote to exit the European Union on the country’s economy. [1] S&P cut its estimate for growth this year in the U.S. economy to 2% from the previously estimated growth of 2.3%. Automotive sales are expected to fall this year from the record-breaking 17.5 million sales in 2015, and this trend could continue into the next couple of years. For reference, Ford expects its vehicle sales to fall in 2017, as compared to 2016 levels. Slowing U.S. demand will negatively impact Volkswagen, which is already underperforming in the U.S.
Have more questions on Volkswagen? See the links below.
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- Rundown Of How Volkswagen’s 2015 Results Were Impacted By The Dieselgate Issue
- How Significant Will China Be For Volkswagen By 2020?
- Where Volkswagen Stands Relative To Its Competitors In Crucial Markets
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- How Has Volkswagen’s Revenue And EBITDA Composition Changed Over 2012-2016E?
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- Why Premium Brands Are 3x As Valuable As Non-Premium Brands For Volkswagen
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- How Much Does Volkswagen Make On The Sale Of One Porsche, Audi, Skoda And Volkswagen Vehicle?
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Notes:- S&P Cuts U.S. Auto Sales View on Slowing Demand, Brexit Effect, bloomberg.com [↩]