Is Detroit Headed For Oversupply?

Third quarter North American auto production is headed for the 11.8m mark, even as analysts at IHS Automotive revise their sales projections downwards to 11.5m, once again raising the specter of oversupply which haunted Detroit for much of the last decade. GM, which is forgoing a Summer plant shutdown this year, is expected to increase its Q3 production by 32 percent over last year, as its market estimate ranges from 11.5 to 12m units according to Automotive News [sub]. Though that’s on the high end compared to the IHS number, and though GM’s market share has been anything but stable, the firm is keeping a steady hand on the tiller to maintain a sense of normalcy headed into its forthcoming IPO. And with inventories in far better shape than they’ve been in years, automakers reckon they can always get rid of extra cars when the market rebounds next year. In the meantime, however, the risks of overproduction are very real.

Chrysler, for example, has the highest inventory level in the industry at 60 days of supply. That’s considered the industry “ideal” for supply, but the fact that Chrysler’s competition is keeping supply even lower is a sign that a rapid sales recovery isn’t in the cards. Meanwhile, IHS’s Mike Jackson points out that Chrysler is only maintaining that volume through fleet sales.

Chrysler is relying pretty heavily on fleet sales. You have to play the cards you are dealt. They have to make sure they maintain volume

At the price of even greater resale weakness, brand degradation, and the perpetuation of Chrysler’s rental-car image. In short, Chrysler is already stuffing sales into fleets to (barely) meet its 95k monthly “survival” volume, keeping the lights on at the expense of future brand equity. With a wave of facelifts and refreshed product hitting the market soon, Chrysler can ill afford to keep up its fleet sales binge, let alone actually increase production volumes.

GM’s production increase is likely due at least in part to a ramp-up to Cruze production, while Ford’s 22 percent production bump is tied closely to the release of the new Fiesta. If both of those products make big initial plashes, the production increases associated with them could be worth the risk. Chrysler, on the other hand, is still months away from releasing new product, and there’s not much to indicate that a sales increase of its existing product is in the offing.

Meanwhile, with IHS revising its sales estimate from 11.8m to 11.5m, and talk of a double-dip recession bubbling away, it’s not impossible to imagine US-market sales falling lower still. If that happens, look for fourth quarter production to more than make up for the summer glut, and expect end-of-year sales to cut into razor-thin profit margins. After all, even Hyundai, which has several brand-new and red-hot products on the market is keeping its inventory down to a 35 day supply, or nearly half of Chrysler’s level. After all, the way for a brand to make a comeback is to build great cars and sell every one they build at full price. Chrysler already tried the volume-über-alles approach under Cerberus, and we all know how that turned out.