Automakers’ Product Pipeline Is Rich, But Will Buyers Keep Coming?

Merrill Lynch predicts long, slow decline after a record 2018

David KileyWriterThe Manufacturerphotographer

Share prices of General Motors, Ford, and FCA have been suppressed by investors who think that the U.S. auto market is peaking this year at nearly 18 million units. Not so fast, says Merrill Lynch's annual "Car Wars" report, which is sticking to last year's prediction that we'll see 20 million in sales by calendar year 2018.

A new twist is that the 2016 "Car Wars" report suggests that automakers selling in the U.S. had better fatten up on profits from those coming record years. Demographic shifts and the rise of car-sharing will drive down demand steadily after calendar year 2020 to sales of a mere 14 million by 2026, according to Merrill Lynch analyst John Murphy. That 30 percent drop would lower car sales to levels not seen since 2012, when the industry was still clawing back from the cratering of the economy in 2009.

General Motors will do the best in the next few years, Murphy believes, with 88 percent of its showroom turning over by 2020 as it keeps up with an industry skewing toward crossovers, SUVs, and pickup trucks. Murphy's upbeat projections about GM seem to be gaining traction with other analysts.

"In total, we expect product activity to support market share and pricing, proving the skeptics wrong," Murphy says in "Car Wars."

GM shares were nudged north in value after the release of the 2016 "Car Wars", as Morgan Stanley upgraded the automaker's stock to "neutral." By last Thursday, five Wall Street analysts rated GM a "strong buy," one a "buy," one "neutral," and seven a "hold." By comparison, four analysts rated Ford Motor Company a "strong buy," seven a "hold," and one a "sell."

GM's showroom turnover with new designs, the leading catalyst for getting consumers to the showrooms, is ahead of the industry average of 81 percent, the report says. Ford, Fiat Chrysler, and Toyota, among the major companies, also have turnover rates above the industry average, while Nissan and Honda are below 81 percent.

Historically, that level of turnover is a bit high. But Murphy pointed to the niche-ification of the market and the addition of more hybrids, electric vehicles, and luxury-car derivatives. The average age—the amount of time the latest design has been on the market—of all cars and light trucks in a typical showroom is forecast to decline from 3.3 years in 2017 to 1.9 years by 2020.

Profit margins look good because there has been above-average growth among automakers' most profitable models. The report expects that about 31 percent  of new launches between 2017 and 2020 will be crossovers, up from 28 percent between 2007 and 2016. Light trucks are expected to make up 27 percent of launches, up from 21 percent. Trucks and SUVs can typically fetch five and six times the profit that cars do. And small cars are often money losers, or barely break even.

The trend of cutting slow-selling, low-margin passenger car models should continue. Fiat Chrysler will stop building the Dodge Dart/Chrysler 200, two cars that will not be replaced if CEO Sergio Marchionne cannot find a suitable partner to build them. Buick is killing off the Verano. Look for more deaths of traditional three-box sedans, displaced by subcompact and compact crossovers with direct-injected four-cylinder engines and hybrid drivetrains to both match what consumers want and meet stiffer fuel economy regulations.

The most challenged automakers for market share in the next few years will be Kia, Hyundai, and Volkswagen, according to Murphy's report. That makes sense given the emphasis on trucks and crossovers, where those companies' lineups are very thin.

"Car Wars" Highlights by Major Automaker:

  • Honda will lag the industry's replacement rate through 2020, but the following two years will be flush as the company launches a new CR-V, Odyssey, and Accord.

 

 

  • Ford has an all-new Expedition and Lincoln Navigator for 2018, along with new versions of its small cars, the Focus and the Fiesta. The Lincoln Aviator and a new Ford Explorer get added in MY19, along with a new Escape, Lincoln MKC, Ford C-Max, and the return of the midsized Ranger pickup. The 2020 model year will bring new CUV nameplates—the subcompact EcoSport and the Ford Bronco—plus a new F-Series truck and Transit Connect van.

 

  • Fiat Chrysler has nine CUV launches spread across the brands, plus a new Ram pickup and Wrangler in MY18. Cars, by design, are becoming an afterthought for the company as it stays in niches such as those for the Dodge Challenger and Charger. It will probably change the Chrysler 300 to a front-drive platform.

 

  • Toyota's replacement rate lags those of its rivals, bringing in new versions of the Camry (MY18), Corolla (MY20), Highlander (MY20), RAV4 (MY19), Tundra pickup (MY19), Lexus LS (MY18), Lexus GX (MY19), and Lexus LX (MY20). Of 21 replacements at Toyota, 11 are trucks, SUVs, and crossovers, and nine are Lexus models.

 

  • Nissan's slow replacement rate in 2017 and 2018 might cause it to lose market share or force greater price incentives as it tries to maintain share. Ten of 21 replacements between 2017 and 2020 are cars. This year and next, the only SUVs and crossovers seeing replacement or introduction are the new Infiniti QX30 and a small crossover based on the Nissan Micra, both for model year 2017. In MY19, the company rolls out a new Altima, Pathfinder, Juke, and NV200 on the Nissan side and a new QX60 and QX70 on the Infiniti side. The new Infiniti QX80, Nissan Rogue, and Nissan Quest minivan follow in MY20.

 

  • Volkswagen has the oddest replacement cadence of anyone. It will see introductions of a new Tiguan and Touareg, an all-new CrossBlue CUV, as well as a new VW CC and Jetta, all in the 2018 model year. The company's Audi division, already solid with crossovers and SUVs, will launch a new Q5 for the MY17, followed by a new A8, A7, and A6 in MY18. A Q6 and Q8 follow the next year. It's a very balanced product cadence.

 

  • Kia launches an all-new Sportage and its new Niro compact hybrid crossover in MY17, and that's it for SUVs. Hyundai's next SUV/crossover launches come in MY19 with a new Santa Fe and the Santa Cruz small pickup. On the volume side, Hyundai won't get a new Sonata and Elantra sedan until MY20.

 

  • BMW unveils a new 5 Series in MY17, with a new X3 in MY18. Model year 2019 is a bonanza with a new X7, 6 Series, 3 Series, and Z4, with a new X5 following in MY20.

 

  • Mercedes-Benz launches a new E-Class soon as a 2017 model and the CLS sedan in MY18, followed by new GLE and ELC crossovers in MY19.

 

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