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Bumper to Bumper
The automotive industry finished the first half of 2010 on a disappointing note, as sales in the U.S. slowed amid concerns over the economy. Simultaneously, it was a busy week for the group heading into the July 4th holiday, one which included a highly anticipated IPO, a shift in the global sales dynamic, and another recall. Whether the auto recovery gets back on track in the latter half of the year, though, remains to be seen.
On a year-to-year basis, domestic auto sales climbed 14% industrywide. But this does not tell the whole story, given the ease of the comparison, as the industry was in the midst of a low point in mid-2009. Instead, we look at the double-digit sequential decline as a bit more worrisome. Sales have been up and down throughout the early months of 2010, so far, but the latest setback seems to have signaled a larger hiccup in the auto recovery. Especially since a sizable portion of the improvement earlier in the year can be credited to elevated promotions and discounts, as the carmakers took aim at Toyota Motor’s (TM) disgruntled recall drivers.
Detroit’s three, General Motors, Ford Motor (F), and Chrysler, all experienced sequential sales declines of 10%-15%. For their Japanese counterparts, the story was much the same, with advances over last year, but down from May. Toyota sales slipped nearly 14%, while Honda Motor (HMC) dropped just under 10% and Nissan Motor (NSANY) suffered the steepest setback, falling more than 20%. Hyundai was the rare exception in the 30-day period, being the only automaker to register a sales advance from the prior month.
We are still anticipating a full-year overall increase, considering 2009’s tally represented a likely trough in this cycle. That said, there is still much uncertainty as to the size of the improvement. As it stands, we are calling for a gain of over 1% from last year’s 10.4 million vehicles sold. But the challenging economic picture, painted by disappointing employment, housing, and manufacturing results in June, may lead to heightened lethargy on car lots down the stretch in 2010.
And as sales hit the brakes in the U.S., GM has reported an interesting shift in its geographical makeup. Indeed, for the first time in its history, the auto maker sold more cars in China than at home in the six months through June. The 1.21 million vehicles purchased in the world’s fastest-growing market outpaced the U.S. total by a noticeable amount. This should send a signal to the rest of the industry, not that it was necessary, to take notice of the vast opportunity in China. Sales in the country were up almost 50% last year, and another 15%-20% increase seems probable in 2010.
China is not the only region with a bulls-eye on its back. This week, GM also announced a joint venture with Chinese firm SAIC to produce cars for the growing Indian market. This initiative takes aim at Tata Motors’ (TTM) Nano, which continues to experience strong demand behind its label as the world’s cheapest car.
In other auto news, Toyota cannot seem to shake the recall bug. The latest wave of problems stems from engine malfunctions causing vehicles, primarily sedan models, to stall while in motion. This recall, of over 270,000 vehicles, can be tacked on to the over eight million cars that have already been called back since October. The company has already paid the record $16 million fine, but its reputation continues to be tarnished.
For Toyota’s other major American counterpart, there was some positive news to celebrate this week. Indeed, Ford recently took another step toward improving its capital position, paring a small chunk of debt off its highly leveraged balance sheet. Indeed, the company will pay $3.8 billion in cash to the United Auto Workers trust fund, which is designed to cover the union’s sizable healthcare obligations. The remaining $255 million will be paid out as dividends to preferred stock and bondholders. These payments had been delayed as Ford worked to improve its financial stature, but the car manufacturer has indicated that quarterly distributions for these securities will resume.
This is Ford’s second sizable debt payment in 2010, and the auto business has trimmed its leverage by over 20% this year. Further, Ford has cut its obligation to the UAW trust fund by more than half, as it now has a little over $3.5 billion due 2022. The company seems adamant that it will pay off this debt early, though no time frame has been given.
Finally, the automotive industry welcomed a new stock on the public market, with the high-profile IPO of Tesla Motors. The company outdid even its own earlier estimates, raising $226 million with its initial offer of 13.3 million shares. The electric car maker has a long road ahead of it, but it has clearly stirred up interest. Shares traded up sharply from their initial $17 per-share price tag to $30. However, the stock’s instant popularity was tamed somewhat, and the issue slipped back down to $20, all in the span of a few days.
What a week it was.