U.S. Market Suffers Disastrous June as Sales Plunge 18.3%

The U.S. auto industry had its worst month in 15 years in June, with sales plummeting an astonishing 18.3% to just 1.190 million units for the month. The disastrous sales month for nearly every automaker in the market pushed the year-to-date totals down 10.1% compared to the same point of 2007, ringing in the total at 7.414 million units through the first half of the year. All automakers predicted that the seasonally adjusted annual selling rate (SAAR) would ring in at roughly 14.0 million units; however, Global Insight's calculations have put the number at 13.6 million units in total. This is considerably lower than most analysts' expectations at the beginning of the month, including GI's, which was in the mid 14-million range.

General Motors (GM) pulled out something of a late-stage rally with a 72-hour sale that helped boost the automaker's numbers during the last week of the month. As such, GM's drop was less than anticipated, but still clocked in at a significant 18.2% reduction year-on year (y/y) to 262,329 units (down 16.3% to 1.589 million units YTD). Sales of the company's trucks continued to plummet, with the exception of the largest of its sport utility vehicles (SUVs). While overall GM's numbers were down, the company made a point of stressing that its retail passenger car sales are way up, and that it is actually running into supply problems of its most popular and small car models. Chevrolet passenger car sales saw overall numbers drop 18.8% for the month, but posted a 24% gain for retail sales, led by a 95% increase in Malibu sales and an increase of 37% for Cobalt sales.

Ford was not so fortunate, as overall numbers slid 29.5% y/y to 173,462 (that figure includes the loss of Land Rover and Jaguar, which now belong to Tata and are not reported by Ford; with Jaguar and Land Rover removed from the year-ago numbers, Ford's slide improves marginally to a 28.1% fall, to 167,090 vehicles). Ford's sales analyst George Pipas reported that the company is actually running into production constraints on the new Focus, which saw sales actually fall 5.5% for June as Ford struggled to keep up with demand (the Focus is up 27.6% YTD). Coming from a strong month in May, where the Focus sold over 33,000 units, Pipas reported that dealers sold any excess inventory, and that the company has been hard pressed to keep up with the astonishing new demand. Sales of the venerable F-150 fell again, contributing to a 35.6% slide for Ford Trucks that could not be overcome by the company's popular crossovers.

Toyota proved that its quest to become a full-line automaker has officially turned around and bitten it rather seriously. The seemingly bullet-proof Japanese automaker had a bad June, dropping a stunning 21.4% to 193,234 units, good for second place but far from posing a challenge to market leader GM, as many analysts had predicted. But Toyota's issues did not come solely in the truck categories—the company saw sales declines for its Yaris subcompact (down 7.5%), Camry sedan (down 10.8%), and even the Prius hybrid (down 33.7% y/y). Lexus took a beating in June as well, falling 30% y/y as sales of nearly every model came in lower for the month.

But the true disaster happened at Chrysler, which posted a series of statistics that positively stunned the industry. Overall sales were down 35.9% versus June 2007. The Chrysler brand sold just barely over 27,000 units in total, falling 43%. Jeep plummeted 40%. Dodge was off 30%, saved the precipitous fall of its sibling brands by an unusual jump in Caravan minivan sales, which were up 52% for the month. Chrysler struggled with sales across the board, with declines not limited to its trucks and SUVs. The company attributed a 50% fall in Sebring sedan sales to fleet reductions, but the same cannot be said for the 62% decline in Chrysler 300 numbers. The new Wrangler, which had been selling out at dealers due to its popularity, was down 39% y/y, with the Liberty falling 42%, and the big Commander SUV plummeting 68% to just 1,961 units for the month. Yet despite what can only be called a disastrous performance from Chrysler, company president Jim Press remained upbeat and on-focus during the company's sales call, claiming that the automaker is still on track, meeting and even exceeding its financial goals, and is right where they want it to be.

Of the major automakers, only Honda posted relatively flat sales, an increase of just 1.1% y/y for the month. The company posted gains for nearly all of its passenger car models, but like the rest of the industry, posted a drop in volume for its light trucks. "Staying true to our core values is allowing Honda to weather the storm of rising gas prices and help consumers find shelter in our products," said executive vice president of American Honda Dick Colliver, in a statement. Sales of the company's Fit subcompact hit an all-time record, breaching the 10,000 unit mark, while the company also racked up gains for the Accord and Civic models.

Outlook and Implications

It is debatable which is the more astonishing development—the bottom falling out of Chrysler's sales, or the dramatic drop seen at Toyota. That Honda managed to eke out a flat gain from the market is not difficult to understand; it is not as heavily invested in the light truck segments as any of the other top automakers, and as such, declines in those segments affect Honda proportionally less than other automakers. This becomes evident when we look at Toyota, which entered the last untapped segment in the light truck market in full force just in time to see the market take a nosedive, leaving it with one very expensive and increasingly idle new pick-up truck plant in San Antonio (Texas). Toyota's truck sales plunged 39.1% for the month, but its car sales took a hit too, falling 7.2% y/y as well. Most astonishing, the company saw declines in nearly every one of its passenger car models, even the most fuel-efficient Yaris subcompacts. One possible explanation for this is competition. Toyota no longer has many of these segments to itself, nor is it the dominant player in many of these segments any more (Honda is selling more Fit subcompacts than Toyota is selling Yaris, and even Nissan's Versa outsold Yaris by 400 units). Toyota's RAV4 CUV has been a segment leader, but took a 34.6% crash in June to 9,597 units, well behind Honda's 15,794 CR-Vs and 400 units behind Ford's Edge. Simply put, Toyota is no longer considered immune from the market forces at work in the United States, and the competition seems to have finally caught up with the juggernaut.

Chrysler is suffering mightily from having the wrong product to sell, as it is still heavily invested in trucks and rear-drive cars, but the numbers for June also prove that despite the company's statements about how Chrysler products are "connecting with consumers," those consumers simply are not buying Chrysler's passenger car products. Chrysler claims that despite the drop in sales, the company is actually ahead of its plan in terms of achieving its financial targets. President Jim Press finally explained this seemingly impossible incongruity by saying that the company established where it felt it would perform for the year in terms of "wholesales," or vehicles produced and shipped from the plants, and not the actual sales of the vehicles from dealer lots (a normal practice in the auto industry, and not remarkable in itself). But because the wholesales shipments are relatively close to or slightly ahead of where the company thought it would be by this point in the year, Chrysler is actually over-achieving its financial targets. However, one result of this "shipping to plan" scenario is that dealers have higher inventory levels of cars and trucks than they had planned on having. So while Chrysler may be "achieving its targets" in terms of booked revenue, a higher than anticipated level of unsold vehicles essentially pushes the effects of having those unsold vehicles off to later quarters for reporting purposes. It is a remarkable bit of number-crunching logic, but it does allow Chrysler to report that its performance is actually ahead of plan, despite selling fewer Chrysler brand vehicles (of all types) than Honda sold Civic compacts in June. What it boils down to is that despite recent massive cuts to production that have truly helped Chrysler reduce the scale of the company's overproduction problem, Chrysler is still producing more vehicles than it can sell, booking the revenue when the vehicles leave the plants, and suffering through a higher-than-anticipated dealer inventory level in order to say that it is achieving its plan. Which is, in fact, what Chrysler has essentially done for the past 20 years, albeit on a much larger scale. Eventually, this overproduction is likely to catch up to Chrysler as well, perhaps when the 2009 models begin filtering into dealerships, and the company is again forced to place massive incentives on inventory in order to clear out stocks.

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