By on July 13, 2010

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.

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17 Comments on “Is Detroit Headed For Oversupply?...”

  • avatar

    Even with Cash 4 Clunkers (my clunkers are just fine TYVM) there’s still an enourmous glut of cars here in America.

    Let’s say, somehow, the U.S. got Cuba’ed and was cut off from all automotive production, importation, etc, but could subsist on current inventory held within borders and backyard fabrication…

    We have enough automobility to last us the next 100 years or so (provided a steady enough supply of that petrochemical slurpee our rides mainline.

    Overproduction, hell yeah.

    The future does not look good for your resale values, or your sticker pricing.

    With the inablility to move the metal, the prices are going to have to go UP for companies to survive, as manufacturers decontent the features from the cars (unless we somehow discover limitless free energy and everyone in America becomes a billionaire) to desperately try to stay afloat.

  • avatar

    WHEN will they ever learn?

  • avatar

    I thought GM was going to build cars ‘Americans want’.

    Oh, wait, that’s the Volt.

  • avatar

    Chrysler is already stuffing sales into fleets to (barely) meet its 950k monthly “survival” volume

    Is that figure for Chrysler right? That would be 11.4M for Chrysler in a 12 month period. If the market will only take 11.5M cars, and Chrysler has to sell 99 percent of that number to survive….

    Or am I reading something incorrectly here?

  • avatar

    Still amazed how streamlined Toyotas supply line is.

  • avatar

    Woo hoo, the domestic bashing is at full tilt…

    On another note: The overriding concern in the auto industry for the last several years has been overcapacity. I shudder when I see these car companies and their plans for new plants all over the US (VW, Toyota, Hyundai) when there are plenty of facilities already.

  • avatar

    Isn’t there a world OVERPRODUCTION problem? Has anybody cut back their production ability?

    I understand no one wants to give up production capacity to their competitors but seriously, until production and supply and demand get close to equal, this is what’s going to happen.

    • 0 avatar

      This is a good point: no one wants to cut back production, not when the chips are down.

      Cutting capacity is very painful because entire supply chains, cost structures and fiefdoms are built assuming a certain level of business. Very, very few organizations will downsize dramatically; most will fight a war of attrition with their competitors instead.

    • 0 avatar

      Some production has been taken away. GM has closed plants. Toyota nuked Nummi.

      I think the big issue for the domestics is fuel prices. A modest recovery could mean $4 gas, which would crimp their truck based cash stream.

    • 0 avatar

      “Very, very few organizations will downsize dramatically; most will fight a war of attrition with their competitors instead.”

      True, by the end of this decade, if not sooner, we will know who all the winners and losers are. Unless something dramatic happens to increase demand.

  • avatar

    With this article, it’s now obvious that we should have just let Avis, Hertz and Alamo bail out Chrysler. We could have cut out the middleman and saved taxpayer dollars, too.

  • avatar

    Excluding the C4C period wasn’t 2009 a pretty shitty year for the Automakers, where production was really low? Didn’t I read an article here chastizing the Automakers for claiming such high year to year percantages for 2009-2010 when if you compared 2008-2010, 2010 turns out to be a pretty average year.

  • avatar

    I ask, how will Chrysler survive with current product without relying in fleet sales?

    The only all new product they have now is the AWESOME Grand Cherokee. And I would expect some of that awesomeness to be injected into the “facelifted” or heavily revised models they are going to introduce in Q4.

    When that moment arrives, we will see what they have to play. Right now they have very good product (IMO) in the Challenger, GC, Wrangler, 300/Charger and Ram trucks. I don’t think the Compass/Patriot are that bad and I have said before I’d purchase a Compass if I had the means (if the only of that twin that was available locally).

    They need to cover their B-C segment in which they have nothing (B) or the current product is awful (C with the Caliber). This is were Fiat expertise will help them. If Dodge can get a version of the Punto/Linea and Brava or Giulietta with a trunk, things will get interesting.

    Bashing this company, which is struggling to survive, is like beating a dead horse. It may be fun, but pointless.

  • avatar

    Chrysler does have brand new product that did just come out… sure its an mid size SUV, not a compact car, but it is new product. There is also a slew of Refresh and new products coming out this fall… unlike GM who really doesn’t have much of a pipeline right now, and Ford which has the Fiesta and new Focus to carry on for a couple of years of hype.
    While Chrysler’s new stuff that we think is coming out may be vaporware, they delivered what they said they were going to with the Grand Cherokee… so I think their may be a wait.
    Out of that list that surprises me (well other than GM, that many Cruze are going to be sold?) Honda’s forecast is quite optimistic…. where are these sales going to come from? From what new products? Have they not looked at recent sales?

  • avatar

    It doesn’t really matter.

    GM no longer needs to worry about profits. As long as BarryO holds the purse strings, he can just pump more tax payer into his UAW pet project.

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