Tight inventories set the stage for U.S. auto industry rebound

By Rachit Vats

U.S. automakers are facing a problem most forecasters and industry executives did not expect when the pandemic slammed the economy this spring: Strong demand and lean inventories at dealerships.

Automakers report September U.S. sales on Thursday, and forecasters expect the annualized sales pace will exceed the August rate of 15.2 million vehicles. Consumer demand for high-profit SUVs and pickup trucks has recovered rapidly since the spring.

Detroit automakers say their plants are now running at close to full speed in order to re-stock showrooms.

"We are running full out," said Gerald Johnson, General Motors Co's <GM.N> head of global manufacturing.

Even so, North American production is about 2 million vehicles behind last year, said Charlie Chesbrough, senior economist at research agency Cox Auto. "The consumer demand after the shutdown ended was very strong and it continues to outpace the ability of the industry to stock the shelves,” he said.

The third quarter is usually when the industry starts building new models, and piling up inventory for the holiday season. That transition is way behind the normal schedule this year.

“The share of MY2021 inventory is only about 2.7% of all of the available inventory so far in 2020," said Chesbrough, referring to model year 2021. "In comparison, it was almost 22% last year. Consumers are not finding the new models as automakers are still making the older stuff.”

REBUILDING PROFIT

The sales recovery is driven by customers such as Michael Dean, a 58-year-old real estate agent in North Carolina. He bought a new seven-seat Toyota Land Cruiser Prado equipped with a diesel engine for $62,500 (48,570 pounds), to help him expand his online swimming pool business, Pool Research.

Dean’s original first choice was a Mitsubishi Pajero, another sport utility vehicle with a more affordable price tag. A $3,000 discount, however, lured him to stretch his budget by $12,500 and buy the Prado, a rare diesel variant that some dealers in the United States still import and sell.

“My online business is doing rather well and I'm optimistic about my future income ... and the dealer discount let me justify the extra expense to myself,” Dean said.

Cox Auto and J.D. Power expect 2020 U.S. auto sales will fall by about 15% from a year earlier, but earlier in the year the forecast was for sales to decline by more than 30%. Supplies of used vehicles are also tight, sending wholesale used vehicle prices up nearly 20% compared with August 2019, Moody's Analytics said in a report on Monday.

The combination of better-than-expected sales and lean inventories should rebuild profits at the Detroit automakers.

(Graphic: U.S. auto inventory position in 2020 - https://graphics.reuters.com/USA-AUTOS/ygdvzkbwopw/chart.png)

Analysts expect General Motors to report a third-quarter profit of about $1.8 billion, according to Refinitiv data. Rival Ford Motor Co <F.N> is expected to earn $638.9 million, and Fiat Chrysler Automobiles <FCHA.MI> 469.5 million euros (424.33 million pounds).

“Most automakers have not projected huge losses and the rebound is stronger than what most forecasts suggested months ago,” said Kristin Dziczek, vice president, Industry, Labor & Economics at the Center for Automotive Research in Michigan.

CAR’s 2020 sales volume forecast is 13 million units in the United States, down about 24%. In comparison, the industry volumes were down 40% during the 2008-09 financial crisis.

U.S. dealers could have fewer vehicles to choose from for the rest of the year. J.D. Power estimates dealers will have about 3.1 million vehicles in stock by year-end, down 400,000 from 2019.

“Industry is seeing about 50% of the vehicles turning in under 20 days,” said Tyson Jominy, vice president of data and analytics at J.D. Power.

(Reporting by Rachit Vats in Bengaluru; Editing by Joseph White and Matthew Lewis)