Car Wars 2015-2018: The Trucks Win

Motor City Blogman

Detroit’s renewed emphasis on attractively fresh product will help pull down the average age of a model design displayed in U.S. showrooms to just 2.1 years by the 2018 model year, says John Murphy, research analyst for Bank of America/Merrill Lynch. An average of 2.5 years since a design’s last significant makeover is considered “ideal” for sales appeal. Murphy presented his full-glass optimism about the state of the industry to the Automotive Press Association at the Detroit Athletic Club on Monday.

Murphy says his prediction that the industry will sell 18 million vehicles in calendar year 2018 is “conservative” and it’s predicated on the estimate that the average car runs 200,000 miles before disposal. The U.S. fleet puts on three trillion miles in a year, which means about 15 million cars per year are scrapped and must be replaced.

It’s solid theory, though it doesn’t account for the notion that we’re becoming a more urban society and that young buyers coming into the market are finding alternatives to the automobile when it comes to sources of transportation. Still, I have no reason to doubt Murphy’s optimism for CY18.

The American market will hover around its natural average of about 15 million more or less in perpetuity, a number it first reached in calendar year 1970. Really good years will top 18 million and recession years may dip below 12 million. As a car market, we’re not China when it comes to possibilities for growth, as there simply isn’t enough economic strength in the middle-class to go much beyond Murphy’s “conservative” estimate.

“The industry has gone through a massive rationalization of capacity,” Murphy says of the U.S. market, including foreign brands manufacturing cars here.

This means that following the General Motors and Chrysler bankruptcies, the production capacity of the U.S. under the North American Free Trade Agreement has been reduced from an estimated 23 million cars and light trucks to an unknown number; but whatever that number is, it’s close enough to actual demand to make it possible for the Detroit Three to finally make money on cars, and not just trucks.

“GM is largely right-sized for its current market share,” Murphy says.

This is big news. It should no longer be necessary for GM or Ford Motor Company – or even Fiat Chrysler for that matter – to discount cars and trucks as a strategy to maintain market share and support the fixed costs of an under-utilized factory. It’s a problem that European manufacturers still face, including Ford’s operations there and GM’s Opel. But while the Detroit Three once were considered too dependent on trucks and truck-based sport/utilities for their profits, Murphy now considers healthy truck sales a good thing. In fact, he’s very bullish on the aluminum-intensive 2015 Ford F-150.

“I think the F-150 is an incredibly important model,” he says. The truck should meet its Corporate Average Fuel Economy (CAFE) standards without any offset from small cars, he says. That is, if Ford sells a lot of them – and Murphy expects it will – the company’s overall fuel efficiency should be sustainable, so that Ford doesn’t have to flood the market with heavily discounted Escapes in order to meet its CAFE standard.

Murphy thinks a high-mpg 2015 Ford F-150 is impervious to oil price spikes because of its efficiency, and that its higher production costs will be offset by higher average transaction prices. Beside big trucks, Murphy sees a lot of growth coming from the emerging b-segment crossover market typified by the Chevrolet Trax and Honda HR-V.

While I’m a bit dubious about Murphy’s thoroughly sunny outlook, he does have a lot of basis for his optimism. The average age of the models in U.S. showrooms from 2015-18 will be about 2.5 years as based on future product information, down from about 3.0 years for the last decade. Back in 1995, after the Gulf War recession, the average age was 3.9 years. In 2009 it was 3.5 years, then dropped to 2.7 years in 2010, according to the Bank of America/Merrill Lynch data. That drop came the year that Pontiac, Saturn and Hummer disappeared from the market.

Murphy is bullish on GM, Fiat Chrysler, Ford, Honda, Hyundai and Kia. He’s somewhat bearish about Toyota because of its aging fleet of designs, Nissan and Volkswagen because of a foggy portfolio of future product designs, and on the smaller Japanese manufacturers in general (though he did not single out Subaru in his assessment).

Wall Street has become uncharacteristically bullish on the automotive segment lately, largely because of reduced fixed costs and rationalized capacity. Of course, new product is good for the market, and good for Murphy’s 2015-18 outlook, but it traditionally comes at the price of profit margin-sapping costs for development and retooling.

As a result, some questions remain. Has the Great Recession and its two automotive bankruptcies really made the sector more friendly to investment from Wall Street? Why can’t European manufacturers do the same? And does the future of the U.S. automotive industry really lie in selling only pickup trucks and small crossovers to rural residents and suburbanites?