8/5/2010
By David Silver, Research Analyst

Right after General Motors released its monthly figures for the month of July, there was that sense that something was turning in the industry.  I had expected a weak result for the month as the weaker economy and the summer heat likely kept consumers out of the showroom.  However, that sense turned quickly when later in the day Ford reported a modest gain, which was quickly followed by declines for Toyota and Honda, and a 5.0% increase for Chrysler.  Comparisons were much more difficult as the segment was cycling the beginning of the cash for clunkers program last year.  Interestingly enough, there was only a little more than a week of July of 2009 that had the cash for clunkers program in place.  Ford did announce that its market share increased for the 21st time in the past 22 months.  Sequentially, the month was slightly skewed to the positive as most (save for Ford) automakers saw an improved figure compared to June of 2010.  August and September will continue to be tough for the auto industry as it is cycling the full scale of the cash for clunkers program, a higher savings rate, and an economy that threatens to weaken further. 

The headlines for General Motors don't really do it justice, as sales performed much better than the 1.5% sales increase leads one to believe.  There was one more selling day during July 2010 than in July 2009, and plus there were four brands included last month that are being sold or wound down.  Somewhat impressive is that Saturn still sold 30 vehicles during the month, while Pontiac sold 20; Hummer sales declined almost 75%, but still sold 210 vehicles during the month.  Only counting the Core 4 Brands (Chevrolet, Cadillac, GMC, and Buick), sales would have increased a strong 20.0% year over year (taking the extra day into account).

Looking at the strength from Buick makes blatantly obvious the power of the General Motors' marketing dollar.  Buick, and specifically the LaCrosse, was lying by the wayside, not receiving many innovations or marketing dollars as management seemed content with Buick becoming basically a Chinese luxury car.  However, over the past year, General Motors has remade the Buick image and now has it competing directly with Mercedes and Lexus.  It seems that Buick will be the luxury image for General Motors while Cadillac will attempt to regain that status symbol it once had.

General Motors was also in the spotlight this morning following news that some dealers are charging almost a 50% premium for the Chevy Volt.  The suggested price is $41,000, and some dealers have indicated they may charge more than $60,000 for the vehicle.  According to Edmunds.com, one dealership in California is asking for "MSRP plus $20,000.  We are expecting only to receive 9 Volts all of next year." In another display of sound management (insert sarcasm here), General Motors only is producing 10,000 Volts during 2011.  Management announced it would increase 2011 production by 50% to 45,000 units; however, the Volt was scheduled to be released one month before the Leaf.  Both the Leaf and the Volt are scheduled for targeted release by state.  However, Nissan began taking reservations for the new Leaf on April 20 and by July it had received more than 17,000 orders. Nissan reported that about 75% of U.S. reservations were for the SL trim, the premium model, and more than 55% of the reservations were from its primary launch markets in California, Washington, Oregon, Arizona, and Tennessee.

So much for higher gasoline prices ruining the demand for light trucks, both General Motors and Ford reported a strong month for light trucks.  The F-150 saw sales increase 38.9% during the month and is up 34.7% for the year. 

As we said earlier, the next few months are going to be difficult for the auto industry as it will be cycling the cash for clunkers program, however, any growth (sequential or year over year) should be met with some positivity. Ford lost some momentum during the month, and we expect to see additional incentives in the next few months to try to generate demand.  Ford indicated it was able to charge a higher price in its most recent quarterly earnings release, however, if sales remain weak over the next few months, that pricing power is likely to erode. 

Auto sales around the world are likely to continue to be strong, led by growth in China and India and a rebound in Russia.  Europe, which has been at the center of the market's turmoil, has not been as big of a sore spot as many had expected (yours truly included) over the past few months, however, austerity plans and a lack of government incentives are hitting in the next few months.  So looking ahead to August, I expect that U.S. auto sales will be up compared to July (albeit minutely), but will see a year over year decline.  Remember that consumers rushed into dealerships to try to take advantage of the $4,500 tax rebate. 

David Silver
Wall Street Strategies