The Auto Industry Is Cruising on Slow but Steady Demand

cars trucks lot
cars trucks lot

Though vehicle sales have underperformed some analyst expectations in recent months, results are much improved compared to those of a year ago. The industry is seeing a broad trend that is benefiting nearly all automakers.

"Improved sales are not limited to one or two healthy companies, but rather represent growth for the entire industry," says Jeffrey Anderson, director of consulting and analytics for Experian Automotive, an industry-information supplier. "This slow, steady upward trend isn't bolstered by one or two hot models or artificial stimulants such as 'cash for clunkers,' but rather an improvement in overall consumer demand," Anderson says.

In a report issued Thursday, Experian said that new-car registrations in the U.S. rose for the third consecutive quarter during the three months that ended June. Compared to the second quarter 2009, new registrations rose 13.5% to 2.93 million units in the second quarter, a level recently eclipsed only by those recorded in the third quarter of 2009, which were boosted by the federal 'cash for clunkers' rebate program.

Production Slowly Gears Up

It isn't just that automakers are selling more cars than they did in 2009, it's that the economy, despite a less-than-robust recovery, is looking brighter. That has manufacturers on a bit of a hiring binge, with General Motors, Ford Motor (F), Toyota Motor (TM), Volkswagen and others in recent months committing to hiring more workers, and opening new plants or reopening idle ones.

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One example is GM's decision last week to begin building a compact Buick sedan, to be called the Verano, along with a yet-unnamed Chevrolet subcompact car at a dormant former Pontiac plant in Orion Township, Mich. The move means employment for more than 1,600 unionized autoworkers who might otherwise remain unemployed. The Orion plant is expected to employ workers on two shifts, building about 160,000 vehicles a year, after production gets underway. Expectations are that the new Buick sedan will debut next fall as a 2012 model.

Beyond selling more cars, automakers are also making money. Under the leadership of former Boeing (BA) CEO Alan Mulally, Ford returned to profitability last year and fully expects to be profitable again this year. In the U.S. auto market, Ford has outsold perennial No. 2 car company Toyota every month this year with the exception of March.

GM, after succumbing to a government-backed bankruptcy last year, turned the corner during the first half of 2010, recording two consecutive quarters of profits. Further, the nation's No. 1 automaker plans to once again become a publicly traded company, when it floats an initial public offering of stock next month.

Polishing Tarnished Brands

Both GM and Ford have substantially improved their corporate image and their bottom lines, says Arthur Wheaton, who analyzes the auto industry for Cornell University's ILR School. Compared where the companies were two years ago, Wheaton says, "they're doing much better."

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GM benefited from being able to erase much of its debt under restructuring, while Ford, which several years ago went so far as to mortgage its famous blue oval logo to finance its turn-around, has made significant strides in paying down its substantial debt, Wheaton says.

Even Chrysler Group, which is struggling to overcome last year's bankruptcy and the lasting effects of a failed merger with Germany's Daimler, is doing better under the management of CEO Sergio Marchionne, who is also chief executive of Italy's Fiat. While a complete revamp of Chrysler's lineup is months if not years away, Marchionne's commitment to overhaul 75% of the Auburn Hills, Mich., automaker's cars and trucks by the end of 2010 has largely been met with accolades by critics who have seen the results.

Upon inspecting and driving a number of new Chrysler products last month, Consumer Reports reported that the automaker's re-engineering efforts have produced laudable accomplishments. The buying guide noted, for example, that the Chrysler 200 midsized sedan has a nicer interior, and rides and handles better than the the underwhelming Sebring it replaces.

Cornell's Wheaton says the U.S. government's insistence that Chrysler be taken over by Fiat was a good decision and made sense. "Chrysler on its own didn't have a very good portfolio. They didn't have a lot of strong [assets] other than the Jeep nameplate," he says. The partnership with Fiat gives Chrysler a small car -- the Fiat 500 -- to draw customers, an offering otherwise missing from its lineup. And Fiat gains by being able to reintroduce Fiat as well as Alfa Romeo models to the U.S. market.

But the Competition Isn't Sitting Still

Toyota, meanwhile, despite its recall woes, will continue to see increased sales, Wheaton predicts. The Japanese automaker has proven it can essentially "buy" sales by offering generous incentives, such as cheap financing and leases, and heaping on perks, such as two years of free maintenance.

Toyota's plan to boost U.S. sales by 30% to 2 million vehicles annually by 2013 relies more on the health of the overall auto industry than it does on consumer perceptions, Wheaton says. With sales down by as much as 6 million units compared to just a few years ago, he says, "nobody can tell you when the market is going to try to get back to normal."