As '09 Inventories Deplete, Who Will Blink First - Carmakers or Customers?
By Michelle Krebs November 20, 2009After the sales plunge in the auto market began in earnest in the fall of 2008, automakers scrambled to reduce production schedules, sell off swollen inventories and otherwise deal with a drastically contracting U.S. market.
Now, after months of production cutbacks orchestrated by many automakers and the summer's outsized demand from the $3 billion Cash for Clunkers rebate program, bloated inventories are a thing of the past. Now, data researchers at Edmunds.com say the coming months may be a tug of war between still-cautious buyers and right-sized-but-cash-strapped automakers anxious to hold the line on pricing.
It could be a battle that sees winners and losers on both sides as uncommon market and industry forces collide in what will be an unpredictable sales environment.
Edmunds.com CEO Jeremy Anywl believes there is looming trouble as auto sales have yet to establish a firm foundation and deals dry up for the value-seeking customers that seemingly are driving a large portion of industry sales.
He said that as 2009 inventories are depleted and automakers seek to withdraw from the discounting customers expected for last-year's models, buyers either will choose to pay up for the new 2010s on dealer lots or automakers will have to continue discounting despite the apparently stronger pricing power their more level-headed inventories present.
"It's almost a battle of who's going to blink first," as the industry moves into 2010, said Anwyl. Yet because of the still-sputtering economy, "I don't think consumers are going to cave," he added.
2010 To Be Tough on Either Side of the Transaction
Examining sales data from October, researchers at Edmunds.com determined many automakers with large 2010 inventories currently are at the highest discount levels in the industry. The data analysts determined the average discount percent for each automaker by subtracting customer discounts for 2010 models from Edmunds' proprietary Typically Equipped True Market Value (TMV) price for those vehicles; that figure was divided into each maker's Typically Equipped MSRP price to determine the discount percentage.
At the high end of the scale are Ford and Toyota, both of which have largely depleted their stocks of most '09 models; in October, Ford was discounting 2010 models by 12 percent, Toyota by 8 percent. Ford, for one, was in the midst of a large truck-selling promotional event, however.
At the other side of the industry-average discount for 2010 models of 8 percent are Honda, GM, Chrysler and Hyundai, most or all of which had larger stocks of '09 models to sell, thus value-seeking buyers seemingly gravitated to those vehicles rather than 2010 offerings.
Source: Edmunds.com
"Because of the recession, people are seeking value and deals more than usual," commented Edmunds.com Senior Analyst Jessica Caldwell. "New car sales volumes may dip when there are no 2009 model year bargains to be had."
And as industry-wide stocks of '09 models are depleted further, automakers and customers will have tough decisions to make -- particularly as the already struggling industry copes with what are historically the year's weakest selling months, October, November, January and February.
In October, manufacturers like Ford and Toyota were selling almost all 2010 models, while GM and Hyundai were still selling off 2009 models. That trend is continuing this month.
Who Blinks First?
Most automakers are banking on at least a slight uptick in industry sales in 2010, with many forecasts settling into the 11.5-million-unit range.
But if Americans don't get better signals from the economy and buyers remain reluctant, after the slow winter selling months automakers may have little choice but to rely on new incentives, despite the fact many of the traditional drivers of industrywide discounts -- particularly large inventory levels -- won't be as prevalent as in the past.
But many automakers have resumed standard production schedules and even boosted the production plans for some in-demand models. While all seemingly are closely trying to align production with demand, if consumers pull back strongly in the coming months, inventories will begin to climb again.
The situation may lead to "spot" areas of over- and under-supply in the market, highs and lows dictated either by what's popular with customers or what's being discounted in segments of either high demand or heavy competition.
As can be seen from the chart developed by Edmunds data researchers, in October discounting for 2010 models varied widely according to segment. Large trucks, currently in low demand and backed by heavy promotions at Ford, GM and Toyota, carried an average discount of 13 percent -- well in excess of the industry average. The midsize-car segment also saw an average discount of 10 percent.
But discounts in several other segments ran below the industry average, most notably subcompact cars -- presumably still in demand and with low inventories still being rebuilt after the Cash for Clunkers draw-down. 
Source: Edmunds.com
As this year winds down and 2010 begins, inventories and pricing power metrics will be closely scrutinized as both automakers and customers joust to maximize their opportunities. -- Bill Visnic, Senior Contributing Editor
LEAVE A COMMENT
It's going to pass by, just out of reach. I'm talking about a golden opportunity to restructure the retail business model. After a very damaging recession to all sectors of the economy, particularly housing and autos, it is disappointing that more isn't being done to streamline the new car merchandising process.
I've commented before on the costs associated with the status quo. http://www.autoobserver.com/2009/09/soft-sales-test-automakers-resolve-to-restrain-incentive-spending.html
But now, with back-to-back-to-back dismal SAARs, tight credit, and terminated or consolidated dealerships, it seems like a good time to amend The Way It Is.
-Is it possible to sell off the 1-10 acre lot or expand used sales, and pay cash for a small, 5-20-unit new vehicle "Demo" inventory, and sell from all factory orders?
-Could more cash be laid on the trade-ins from the savings in new-unit floorplan & real estate expenses/taxes to make up for the inconvenience in waiting for the unit to arrive?
Can an OEM, doing the majority of production as single orders, be better off than when tens or hundreds of thousands of units sit idle because of factors outside of their control?
What's more, if the automakers have aligned their costs to break even at 10 million units, they probably will be able to keep marketing costs very low and still make decent profits at a low 11 million SAAR.
I agree fully with Fulcrumb's concepts and rationale about selling cars in a different manner. My current vehicle was a factory order. I knew what I wanted and could not find it in a dealer's inventory. So I went around to various dealers to find one that would mutually agree on a price. The dealer had a small no-frills building on a small lot with a small inventory. His price was invoice+$500, the process was quick and matter-of-fact, no haggling or frustration. I thought it was fair given that I got exactly what I wanted at a price deeply reduced from MSRP, and all he had to do was place the order. Not buy, store, advertise, and hope that someone would eventually buy this car, all the while watching his expenses grow. It's a shame that this is the exception and not the rule.
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