The Millennium Force ride at Cedar Point Amusement Park in northern Ohio (a.k.a., "America's Roller Coast") features an 85° drop that inaugurates riders into an eyeball-blistering two-minute ride at speeds reaching 93 mph. Interestingly, many people—over 2.9-million in 2009—have voluntarily paid $20 to $40 for experiences like this, which certainly have to take some years off of your life due to the two minutes of exhilarating terror. The auto industry didn't need to pay for any amusement park rides for its thrills and chills in 2009 as these were delivered free to the factory door. The chart showing North American light duty vehicle production since 1970 and looking ahead to 2015 shares similarities with thrill rides: The period from 1970 to the early 1990s was like the Blue Streak, Cedar Point's classic wooden roller coaster circa 1964, with a top speed of 40 mph and a basic out-and-back design. From 2007 to 2009, it was Millennium Force all the way.
The comparison between these two periods is illustrative of why the past two years have been so painful and unhealthy for those involved with this industry. From a peak of 15.1-million units in 1978, light vehicle production in North America fell to 8.7-million units in 1982, a 42% decline over a four-year period. More recently, we experienced a decline of the same magnitude in half the time: between 2007 and 2009 production was once again down 42%, but it was the result of a stunning 24.5% yearly drop, not the "moderate"12.9% of the '78 to '82 tumble.
We believe that going forward it is unlikely that the industry will enjoy anything like the 20 years of relative calm and prosperity that lasted from 1985 to 2005. The conditions that made that possible—including macroeconomic factors and the automakers' practice of propping up sales with incentives to justify production—are no longer present. The recent downturn was a harsh reminder that auto is fundamentally a cyclical industry. That said, we should have a few smooth years ahead. IRN's Autofutures forecast calls for a gradual return to a more "normal" production level of about 14-million units, edging up toward 15-million in 2015. The quarterly production chart (right) provides a closer look at where we have been and what is ahead.
The chart showing the quarterly vehicle production between 2008 and 2011 reinforces the horrors of the recent past, showing a 30% decline in production from Q1 to Q3 2008, and a 57% decline in North American production in the first quarter of 2009 compared to the same period in 2008. In the second half of 2009 and first half of 2010, we see the effects of the carmakers working to refill the pipeline that they had substantially cleared out last year. Between the "Cash for Clunkers" program, other incentives, and plant shutdowns, the dealer lots became fairly bare. Now that they have been replenished, the focus will shift. In the second half of 2010 and first half of 2011 it will be all about managing inventory and carefully balancing production with demand.
The automakers have embraced a more conservative approach to vehicle assembly, particularly as the economic recovery is proceeding with fits and starts rather than smoothly. The effects of their efforts have been apparent in the companies' financial performance this year.
- Chrysler CEO Sergio Marchionne has renounced what he refers to as "the cheap practices of volume acquisition" and is keeping a tight rein on incentives to make sure that inventory remains slim and trim.
- Ford has been making progress on its plan to operate profitably at the current demand, and has said in press releases that its third and fourth quarter production schedule is "lower than the first half but consistent with the company's strategy to match supply with demand" [emphasis added].
- GM has been very consistent in its production scheduling and appears to be moving away from the product-push manufacturing strategy that was so destructive to the company for years. One of GM's shortcomings is a tendency of declaring victory way too soon, so we hope they adhere to this philosophy.
Honda, Nissan and Toyota are similarly controlling days' supply of cars and light trucks, keeping inventory levels in the band of 50 to 65 days-on-hand (DOH), which is considered good practice. Hyundai is running even leaner than that, with June figures of 33 DOH for cars and 40 DOH for trucks, but its sales are also up 28% year-over-year for the first half of 2010.
While we believe that there will be less OEM-induced craziness in production schedules and that the overall trends are positive, suppliers should not be lulled into a false sense of security. We see a likelihood of volatility in input costs (e.g., raw materials, logistics) and perhaps some issues with materials availability that suppliers will need to manage their way through. Consumers are still nervous, and there could be risk for 2011 if there is too much bad press about unemployment levels, the national debt, and the like. Generally speaking, though, we predict that the volatility going forward will be within narrower bands, not of the same dramatic level of 2008-2009. It will be like a ride on the Woodstock Express kiddy roller coaster at Cedar Point's Camp Snoopy, something that most adults can handle.