Recent Falloff in U.S. Demand Could Trigger a Clearance Sale
Executive Summary
How GM and Toyota deal with their excess inventory could determine whether a fire sale happens.
A lack of inventory relief is increasing the likelihood that over the spring or summer the industry will undertake some kind of fire sale aimed at lopping off unwanted stock from dealer lots.
However, it does not appear the industry is panicking. Most of the excess inventory comprises domestically produced vehicles, yet North American automakers are planning Q2 production at 1.5% above the year-ago period. That’s after U.S. sales of domestically made light vehicles declined 3.0% year-over-year in Q1 – and are relatively flat in Canada and Mexico combined; the two markets accounting for most of the remainder of North American production.
March had the earmarks of a seventh consecutive month above a 17 million-unit SAAR: Record February inventory, a double-digit increase in incentive spending and solid economic fundamentals, including rising business and consumer confidence. But demand dropped to the lowest monthly SAAR since late 2014.
In hindsight, the downturn could have been foreseen. Following a pattern similar to a year ago when the March SAAR slid to 16.6 million units after the previous six months averaged a robust 17.8 million, last month’s SAAR dropped to 16.5 million after tracking at 17.7 million since September. The sudden shortfall simply could be a balancing-out, and sales will resume a 17 million-plus pace in April, albeit with continued big increases in incentives.
WardsAuto is forecasting 17.3 million units for the entire year. The last nine months of 2017 will have to average just above a 17.3 million SAAR to meet that total.
Initial modeling shows April rebounding to a 17.5 million-unit SAAR. Even if sales attain the preliminary outlook, which would top April 2016’s 17.3 million total, actual volume will fall below year-ago due to the month having one less selling day than last year.
Heading into April, LV inventory totaled 4.145 million units, the third straight month stocks topped the 4 million mark. The only time that previously happened was in 2004, when five consecutive months surpassed that level.
March LV days’ supply, which normally drops by seven to 10 days from February, fell to 72 from 74. Year-ago’s days’ supply was 66.
Car inventory, in the face of sliding demand, climbed 0.7% above the year-ago total to 1.569 million units. Days’ supply was 72 vs. 63 last year. Truck stocks were up 13.9% from March 2016 to 2.577 million units, with days’ supply rising from the prior month – typically they decline from February to March – to 73 from 71. Year-ago days’ supply was 67.
Using the 2017 LV sales forecast of 17.3 million units as a baseline, inventory is 400,000 units above what WardsAuto estimates to be an optimum level for this time of year, and domestically made cars are the biggest chunk of that.
General Motors accounts for a large part of the excess, although some of it is a buildup of certain CUVs slated for production slowdowns later this year to retool for new designs.
As in December, when GM made a sales push to pare inventory, causing others to follow as the industry posted one of its highest SAARs (18.3 million) ever, a fire-sale likely will start with the industry leader. But it’s worth noting No.3 Toyota is in the same boat and in a more precarious position, because its sales have been falling while GM’s are rising. Thus, Toyota arguably has more impetus to clear out unneeded inventory.
Like the industry, GM and Toyota have excess in the Small, Middle and Luxury Car groups. However, among the market leaders, Honda is struggling with extra stock in the same groups, with Nissan hurting in Small and Luxury.
Some pockets of bloated stocks are popping up in trucks.
Sudden sales declines in the Small CUV segment have left GM, FCA US, Honda and Nissan with excess inventory in that segment. Ford, Honda and Toyota are experiencing increases in Small Vans, where demand is spiraling downward with cars.
There is some inventory buildup in Small Pickup, mostly from Nissan, which has the oldest product in the segment.
Small Pickup sales in March, after surging for over two years thanks to fresh product from GM and Toyota, recorded its first year-over-year loss in 31 months. Excluding the front-wheel-drive-based Honda Ridgeline, which was redesigned last year, the rest of the segment, composed of traditional rear-wheel-drive-based pickups, declined each month so far this year.
In Large Pickups, Toyota has work ahead to bring down stocks of the Toyota Tundra.
If it happens, how much of a clearout sale occurs also hinges on how much production automakers are willing to cut. Even though automakers are planning increased output in the April-June timeframe, WardsAuto forecasts a 2.1% year-over-year decline in Q3.
