Dealer Insight Newsletter January 2012

2011 Year in Review: You Haven't Seen this Movie Before

2011 Year in Review: You Haven't Seen this Movie Before At we have a soft spot for a good Hollywood story. We can't help it, really. Our Santa Monica headquarters, after all, is located just a few miles from the heart of Tinseltown. It's a place where everyone has a pilot to screen or a script to pitch.

We mention all this because when you think about it, the auto industry in 2011 played out like a classic Hollywood screenplay:

ACT 1 - Hero struts along the path to success, when he's knocked down by a sudden, tragic event.
ACT 2 - Hero hits rock bottom and starts digging his way out.
ACT 3- Hero overcomes his obstacles and emerges stronger than before.

So, we got to thinking: what would the 2011 year in the auto industry actually look like as a movie treatment? Well, to start, it begins with a catchy title. So without further ado, submits for your consideration...


Act One: The Japanese Earthquake
It's January and the auto industry is getting back on track. After the 2008economic crash, car sales dwindled to 10.4 million units in 2009 before building their way back up to 11.6 million in 2010. But 2011 kicks off at a 12.6 million unit pace and is followed up by a 13.2 million seasonally adjusted annual rate (SAAR) in February.

Back to the Barracks on IncentivesYes, there are some issues early on. The industry is left scratching its head at General Motors' remarkably aggressive and unseasonal early-year push in incentive spending. The prospect of Detroit returning to undisciplined spending leaves some wondering if the industry is on the verge of a price war. But those concerns will be quickly settled within the next two months, when GM's spending returns to normal levels again.

Minor skirmishes aside, the industry is in a good place through the first two months. Nobody's popping champagne, but sales are on pace to reach's projected 12.9 million vehicles in 2011.

Quake Aftermath Severe, Deep Auto Sector ImpactSuddenly, all hell breaks loose. On March 11, earthquakes and tsunamis strike Japan, leaving thousands dead and throwing the country into turmoil. As Japanese automakers address immediate concerns with the health and safety of their employees and their families, they soon have to deal with the crippling interruption to their manufacturing and supply infrastructures. Major Japanese automakers are forced to suspend operations in several key production facilities across the region with no clear idea when they'll be back online. Even U.S., European and Korean manufacturers are left scrambling to identify the impact on their supply chains. The industry is in chaos.

Back in the U.S., the immediate sales impact is numbed by smart consumers rushing to dealer lots to buy new cars before inventories shrink and prices soar. The consumer "pull-ahead" keeps the Ford May Top GM In March Salesindustry floating slightly above a 13-million SAAR through April, even as anomalies start popping up in the market. In March, Ford briefly overtakes GM in total monthly sales for just the second time since 1998. Small fuel-efficient cars capture their largest market share since Cash for Clunkers, thanks mostly to rising gas prices that approach $4.00/gallon. And in April, average incentives hit their lowest levels since 2005.

As Japanese plants stay shuttered and supply chains remain broken, the inevitable impact on U.S. car sales draws closer. Within a month after the quake, automakers have shut down an estimated 13 percent of global automotive production. And by the end of May, automotive sales have plummeted to a monthly SAAR of 11.7 million vehicles, virtually wiping out almost a year's worth of progress.

Act Two: A Summer of Discontent
Spring air gives way to the summer heat, and automakers have plenty of reasons to sweat. Sales bottom out to a SAAR of 11.5 million vehicles in June. The burden of lost sales falls mostly on the shoulders of Japanese automakers, which are slowly seeing market share melt away thanks to anticipated inventory shortages and ensuing price hikes. Toyota sees the biggest percentage point drop, falling from 14.3 percent of the market in February to 10.2 percent in June. Honda's share slides from a peak of 10.8 percent in April all the way down to 7.6 percent in July. And Nissan slides from 9.7 percent in March to 6.8 percent in June.

May Sales Bring Back Big ThreeBut Japanese misery turns into an opportunity for American automakers, who claim much of their counterparts' lost market share for themselves. The biggest winner is Chrysler, who in May and June briefly overtakes Toyota for third place in the U.S. market for the first time since 2006, and by August, sees its U.S. market share has grown more than 40 percent since the beginning of the year. Korean brands Hyundai and Kia also benefit from the Japanese downfall with their footprints on the American market peaking in May and holding on to those levels through the summer (Note: this is the iconic part of the movie where Humphrey Bogart tips his cap to an Optima and says "Here's looking at you, Kia").

By July and August the SAAR has climbed to over 12 million vehicles - moving the needle from where the industry stood at the beginning of the summer, but still a far cry from the pace anticipated at the beginning of the year. Political and economic strife outside the auto industry only complicate matters as the Euro threatens to collapse and a Congressional stalemate on the U.S. debt ceiling stirs fears of an "economic apocalypse." The stock market yo-yos from one extreme to another almost every day for a few weeks in August, which only tosses more fuel on the fire of consumer uncertainty. That uncertainty keeps potential car buyers out of the market, even as news trickles out that U.S. market production for each of Japan's top automakers will return to 100 percent by the end of the summer.

As the fall season approaches, an estimated 300,000 new car purchases have been deferred, and revises its 2011 forecast down to 12.6 million light vehicles.

Act Three: Leaves Fall and an Industry Rises
Summer fades away, and despite the government's best efforts, the American economy is still intact. The stock market is still volatile, but it's clear that a complete crash is not imminent. Meanwhile, car inventories are returning to normal, with Toyota, Honda and Nissan dealers replenishing their lots at pre-earthquake rates. Prices start to moderate, and the environment is ripe for consumers to return to the market.

Thai Floods Prolong Honda's Uphill RecoverySo, like an underdog prizefighter picking himself up off the canvas, the auto industry starts punching back. Sales returned to an annualized pace of 13.1 million vehicles, followed by 13.2 million and 13.6 million SAARs in October and November. Toyota and Nissan each start climbing back toward their pre-earthquake market shares. Honda, too, shows progress, although they hit a bump in the road when floods in Thailand interrupt production yet again.

All told, the industry recovers about one-third of the nearly 300,000 deferred sales from the summer by the end of November, with even more expected in December. And while the industry won't meet's original forecast of 12.9 million sales, it's almost certain that the momentum from the final few months of the year will carry annual sales well over the revised forecast of 12.6 million sales.


Car Sales Mini-Bubble Should Last Into 2012So how's that for a heartwarming underdog story? The best part is that the sequel is already a work in progress: next year is expected to start strong as more deferred purchases return to the market while buying conditions improve and more sub-prime lending slowly resumes. And with all-new versions of popular mid-size cars like the Chevy Malibu, Toyota Camry and Ford Fusion all poised to hit the market, sees 2012 auto sales growing to the mid-13 million range. But in an election year where political surprises are no surprise at all, and economic issues will remain under intense scrutiny, the auto industry knows that the biggest threat to growth... is still unknown.

Wow. Sounds like a great flick to us. Maybe we'll call it "The Carshank Redemption." Chief Economist Lacey Plache contributed to this story. 

Aaron Lewis, Corporate News Producer

Aaron Lewis,
Corporate News Producer

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