Dark Times for the Auto Industry

The first quarter of 2014 is drawing to a close for most public companies as they have had to release their financials.  For the auto industry, the financial statements read very grimly as sales did not meet estimates and the future does not look bright.  There are many reasons for the lack of sales in the first quarter including problems with access to credit, increased taxes on luxury vehicles, and appreciation of the USD in exporting nations.  The lack in performance for the auto industry comes at a time when the markets have been steadily improving, which in turn makes the poor sales and production look that much worse.  The economist points to a combination of foreign and domestic changes in the marketplace that have lead to a hostile and barren environment for auto manufacturers.  The US government implemented an increase of taxes on imported luxury vehicles, which obviously lowered demand domestically.  Further, interest rates are rising in the US as the fed begins to slow its quantitative easing.  The increasing interest rates present a barrier to credit access for those car consumers who rely on loans to purchase or lease an automobile.  Also, the USD recently appreciated against the currencies of South America, where several important importing car manufacturers are located.

The result of the culmination of all of these negative factors has been a large decline in production and sales of automobiles that is likely to have far reaching negative consequences in the near future.  The auto industry (which includes suppliers and OEM’s) has seen its production drop by nearly a fifth compared with its output in the first quarter of 2013.  By and large, car production (OEM) represents one of the largest segments of the industry that has been negatively impacted with a drop of 23% (of this small cars took the largest hit and commercial vehicles the least).  Dealers have also been hurt rather significantly in the first quarter with inventories growing and cars remaining on lots far longer than normal.  The drop in sales and production by all facets of the auto industry (dealers, suppliers, OEM’s) is likely to lead to higher unemployment.  Firms can no longer afford to pay its variable costs given the much lower sales/production volumes and will have to lay off workers.  As the article points out, the direct producers and sellers of automobiles will not be the only ones to feel the effects of this slump.  Workers in the fields related to the auto industry such as steel or aluminum plants that supply to Ford’s aluminum bodies (etc) will have to lay off workers as they see less demand from their customers.  The article seems to paint a rather bleak picture as for the current state of affairs within the auto industry.  Hopefully the downturn is only temporary, and the improving world economies will provide the demand stimulus needed to get the auto industry back to its estimated production quotas.

http://www.businessinsider.com/the-automotive-industry-is-in-a-major-crisis-and-its-only-getting-worse-2014-5

5 comments to Dark Times for the Auto Industry

  • reed

    Although those all sound like very legitimate concerns, I think its also possible that this quarter is merely a blip caused by the historically cold winter we just experienced in the states. It would be hard to say without knowing whether domestic sales specifically were affected as opposed to global sales. At the very least, Ford’s global economics team seems to think the blame is attributable to the cold and the extra inventory will be bought up in the coming quarters.

  • reed

    Although those all sound like very legitimate concerns, I think its also possible that this quarter is merely a blip caused by the historically cold winter we just experienced in the states. It would be hard to say without knowing whether domestic sales specifically were affected as opposed to global sales. At the very least, Ford’s global economics team seems to think the blame is attributable to the cold and the extra inventory will be bought up in the coming quarters.

  • This article does indeed sound off-mark, inconsistent from everything we heard from industry insiders. One little item: rebates / incentives haven’t disappeared, but neither are they surging. And as long as volume stays high, well, auto firms spin off cash when times are good.

  • heardd16

    I agree that this is odd considering the optimism expressed by our hosts in Detroit and from other readings. At the Fed, we saw that the Detroit economy dipped this winter due to sever weather conditions. I wonder if this affected productivity in the auto industry.

  • Michael Barry

    This may be because I have become much more aware of news from the auto industry since the class started, but it seems like there has been a disturbing trend of vehicle recalls. Speaking for myself, this has decreased my level of trust in the auto industry.

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