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This time, automakers approach 16 million units responsibly

By: Nick Bunkley
AUTOMOTIVE NEWS

January 9, 2014

Sixteen million is back—and it's likely to stick around for quite a while.

New U.S. light-vehicle sales are widely expected to surpass 16 million in 2014 for the first time since 2007, the culmination of a long recovery from the disastrous recession. But little else about the auto industry today resembles the last 16 million-unit year, when auto makers regularly overproduced and artificially raised demand by throwing blowout sales to get rid of the excess.

"Back in 2006 and 2007, the industry was on illegal drugs—doing steroids," said Jesse Toprak, who closely tracks industry sales as president of Toprak Consulting. "This time, the industry is reaching its goal all naturally—on the merit of the product. It's not being fueled by irresponsible lending or outrageous incentive spending."

The Automotive News Data Center estimates that the U.S. auto industry will post light-vehicle sales of 15.6 million units in 2013, which would be an 8 percent gain over 2012. So to reach 16.0 million, sales will need to rise 3 percent in 2014.

The end of the automotive steroid era means more profits for auto makers—especially the slimmed-down Detroit 3, which lost a combined $42.6 billion in 2007—as well as for dealers.

The disappearance of nearly 4,000 dealerships since 2007 means many of those that made it through the recession now are selling more cars and trucks than ever. An industry-wide total of at least 16 million would result in an average sales per U.S. dealership of more than 900 vehicles in 2014, up from about 521 vehicles in 2009 and a prerecession peak of 785 in 2005.

"The guys that survived are going to do well," said Steven Szakaly, chief economist for the National Automobile Dealers Association. "We mourned the losses, but we also have to look at the situation as it is now. It's going to be a good year."

As U.S. sales return to an annual rate of 16 million, dealers are selling more vehicles than ever before on average.

IHS Automotive, in a forecast released this month, said it expects U.S. sales to stay above 16 million units annually through at least 2019. It estimates 16.03 million in 2014.

Other forecasts for the year ahead include 16.2 million by LMC Automotive, 16.3 million by Kelley Blue Book, 16.4 million by Edmunds and 16.5 million by Toprak, who previously represented TrueCar.com. LMC recently upped its 2014 total and retail sales forecasts by 100,000 units after demand rose at the end of 2013 and the nation's unemployment rate declined.

Ford said this month that it expects industry sales of 16 million to 17 million, including about 300,000 medium- and heavy-duty trucks.

The National Automobile Dealers Association has not issued its official 2014 forecast yet, but Szakaly said "16-plus" seems a safe bet.

He said auto makers need to avoid the temptation to push sales even higher by ratcheting up discounts; more flexible contracts between the Detroit 3 and the UAW mean there's no pressure to build more vehicles than the market can support naturally.

"We're talking about a sustainable, profitable market above 16 million, which is wonderful. That's what you want," Szakaly said. "You don't want to get into an incentive war which gets you to 17 million and wins you sales but sacrifices profitability."

Peter Nagle, an analyst with IHS, described 2014 as "a bellwether year," as the nation's economy continues to improve. He said consumers' need to replace older vehicles should keep dealerships busy despite any negative factors such as auto loan rates beginning to rise.

Nagle expects sales to increase in 2014 at the slowest rate since the recession ended—but said that shouldn't be interpreted as a worrisome sign.

"You start to run into the law of large numbers, where you can't really squeeze that much more growth out of it," Nagle said. "Replacement demand is really what's driving sales. As consumers feel more confident in the economy, they're going to be looking to trade out of those vehicles into something newer."

With memories of the recession fading further into the past, auto makers and suppliers should feel more comfortable with adding the production capacity they need to keep up as consumers keep buying, Nagle said.

"As we keep hitting these 16 million numbers, they're going to have to build new capacity to meet demand," he said.

Toprak said a resurgence in leasing, which accounted for just 11 percent of sales in mid-2009 but 25 percent this year, is more reason for executives to be confident in the future, as lessees come back into the market every few years.

And Toprak said lower gasoline prices—the average price has fallen closer to $3 a gallon after approaching $4 multiple times in the past three years—should help sales of larger vehicles, particularly the pickups that still generate a huge portion of the Detroit 3's profits.

"We see growth in most of the segments that manufacturers rely on," he said. "Everybody will be happy."