Why is 2011 important for the auto business?
Consider that Detroit's Big Three (General Motors, Ford and Chrysler) each whittled down their "break even" point (the amount of industry sales at which they move from red ink to black) to around 10 million to 10.5 million new cars and trucks. It used to be about 15 million. Sales should finish this year at about 11.5 million. And forecasts for sales in 2011 are for consumers to buy about 13 million new vehicles. That means fatter profits, higher stock valuations and jobs for auto assemblers, parts makers and everybody else who makes money off new cars and trucks being sold.
It should be said that 2010 was a significant year in its own right. GM had its post-bankruptcy initial public offering, paid back government loans and made a sizable dent in buying back the Federal government's ownership of the automaker. Chevy launched the Volt extended range electric sedan, the first of its kind sold by a major automaker. Nissan launched the Leaf electric vehicle, the first fully electric, highway worthy vehicle offered on a wide scale by a major automaker. Toyota endured a drawn out year of recalling more than 10 million vehicles worldwide, and a serious hit to its once stellar reputation. Chrysler launched the first vehicles with significant changes under ownership and management control of Italian automaker Fiat.
But it is more useful for us to look ahead rather than backward. Here are five of the most significant stories we should see in 2011 and why they matter to consumers and the U.S. economy.
Chrysler has studied GM's IPO and has learned the lesson that under promising and over delivering beats the reverse situation every time. The expectation for Chrysler has been that Fiat would take Chrysler public in the Fall of 2011. And that still holds. But there are rumblings now that Fiat may try and refinance the U.S. government's majority ownership of Chrysler as early as the Spring.
Chrysler would borrow money to repay the U.S. Treasury in the first quarter, consolidate with Fiat during the second quarter and hold an initial public offering in the third or fourth quarter, according to the plan under consideration. The move would raise Fiat's ownership of Chrysler from 20% to 51% before the IPO expected in the second half of the year.
There are differences of opinion over whether U.S. consumers are deterred from buying a U.S. branded vehicle because of the 2008 government bailout of GM and Chrysler. What's certain, though, is that CEO Sergio Marchionne is anxious to change the narrative when it comes to Chrysler. Reducing government ownership to less than 50% before an IPO could be one way so long as the deal does not adversely affect Chrysler's balance sheet.
Consumers might see a much revitalized and repositioned Chrysler before a flock of completely new vehicles debut in 2012 and 2013 from the Fiat-Chrysler partnership. Chrysler held a 9.5% market share in November, slightly below Honda's. Not bad for having gone through bankruptcy, and having three separate owners in four years.
Will Toyota Bounce Back?
Toyota is down, but certainly not out. The Japanese automaker has had its "annus horribilis." It recalled more than ten million vehicles worldwide, and paid almost $50 million in fines levied by the National Highway Traffic Safety Administration for failure to comply with the regulatory agencies requirements for reporting suspected vehicle defects.
The avalanche of bad publicity has affected Toyota's sales and reputation. Toyota fell from second to third place this year behind resurgent giants Ford and market leader GM. Toyota reported a 7.3 percent sales drop in November and its market share could fall by 17 percent to just over 15 percent in 2010, according to IHS Automotive.
J.D. Power reported in its 2010 Avoider Study that 19% of new-vehicle shoppers surveyed said they avoided the Japanese automaker because of "bad reputation," a startling 17 points higher than a year ago. Toyota has been spending tens of millions to market its technology and corporate generosity. But only a decline in recalls and a quieting of the drumbeat of negative headlines is going to rebuild falling confidence in the brand.
Ford did not go through bankruptcy as General Motors and Chrysler did, so it did not get a court-ordered reduction in its debt owed to bond-holders.
But the automaker has been on such a tear the last two years, with some consumers apparently rewarding Ford for not cueing for a taxpayer funded bailout that it could well achieve zero-net-debt by the end of 2010. That means its debt would equal its cash on hand, a very desirable state of its balance sheet.
Ford recently said it paid down its revolving credit line by $2 billion, which brings the debt load on Ford's automotive operations to $26.4 billion as of Sept. 30. It also plans to pay $3.5 billion it owes to a trust for retiree health care, ending its obligation to the fund and further lowering automotive debt. The company said the debt-reduction measures should reduce annual interest expenses by $800 million. That's more than enough to refresh an existing model or modernize a factory. The debt reduction is part of an effort to lift Ford's credit rating out of "junk" territory to investment-grade. That would enable more investment funds to put money in Ford and may lower Ford's borrowing cost.
Ford's share price has risen from about $1 in the depths of the economic meltdown in late 2008 to more than $16 today. Consumer Reports and J.D. Power have both cited Ford's quality for being at parity with leading Japanese automakers. While the company's performance to date has solidified its comeback from nearly a decade of financial losses, 2011 could be a break-out year for Ford, driving its share price north of $20 for the first time since 2001.
The Car Buying Consumer
Auto companies are looking for consumers to come back to the showrooms in greater numbers.
The rate at which consumers are scrapping their old cars is about 15 million per year. Sales, on the other hand, have been between 10 million in 2008 and an expected 11.5 million this year.
Consumers who have been hammered by falling home values, unemployment, underemployment and devalued retirement accounts have been burning off the excesses of the last decade.
What does that mean? When industry sales were running between 15 million and 17 million in the earlier part of the decade, consumers were buying more cars than they were sending to the scrap-yard: buying third cars for two-car families. Many were tapping soaring home values to pay for them. That has all come home to roost.
Economists are leaning toward a double-dip recession not happening in 2011 and 2012. The stock market is widely anticipated to increase by the low double digits in 2011--between 10% and 15%. Unemployment is expected to decline albeit at a glacial pace.
It is all meant to encourage consumers who have been holding on to their vehicles longer than they would normally to belly up to the sales desk in the new-car showroom. The average age of a vehicle on the road today is more than 10 years, the highest level since the 1995.
The good news is that carmakers have the highest quality vehicles on the road in their history, enabling consumers to keep them on the road longer. But no they need them to buy a lot more new ones.
More Small Engines
Sure, we have more hybrids vehicles and now extended-range electric vehicles and full-on electrics. But the internal combustion engine is far from dead heading into the future.
Consider that the four cylinder Hyundai Sonata gets practically the same fuel economy as the gas-electric hybrid in real-world driving.
More car companies are offering vehicles with four cylinder engines with power and efficiency boosted by direct-fuel-injection and turbo charging. Those time-worn technologies are cheaper than batteries required for hybrid vehicles and electrics, while significantly boosting efficiency.
Car companies were loathe to put them into vehicles before, because with gas prices between $2.00 and $3.00 per gallon, consumers were more interested in vehicle size and power. Engineers could't justify adding the cost of the additional fuel efficiency add-ons if consumers weren't interested in paying for them.
Many of us love the roar of a V8 engine in muscle cars like the Ford Mustang and Dodge Challenger. But V8 engines are quickly becoming a thing for those who must have them for practical reasons, rather than for those who merely want them for reasons of vanity.
Today, though, in part because of the high fuel economy of hybrids like the Toyota Prius, consumer expectations for fuel economy have increased. Thirty-miles-per gallon on the highway is all but demanded by consumers for mid-sized sedans like the Ford Fusion and Honda Accord. And high-performance, high efficiency four cylinder engines are a cheaper way to achieve that than hybrid powertrains.
Besides direct injection and turbo charging, more vehicles will be seeing "stop-start" technology, further increasing fuel economy. Those systems stop the vehicle's engine when stopped, such as at a stop-light. The engine restarts when the driver touches the accelerator pedal. Not every driver is comfortable with the engine shutting down at a stop light, but if they want higher fuel economy ratings to talk about at their backyard barbecues to impress their friends, they will need to learn to adapt.