Fleet's In!
Sunday, February 14. 2010
GM's Entry for Miss Fleet Sale, 2010, Ms. Chevy Cruze
Famously, Detroit automakers have historically only been able to focus on one aspect of their business at a time, and often that one thing has been the wrong thing. Sometimes the one “key thing” is volume, sometimes it’s cost, going further back in time, sometimes it’s diversification and sometimes it’s quality. And sometimes there is an emphasis on maximizing the key thing, sometimes to minimize it.
When volume was king, fleet sales were seen as a magic carpet ride to success. Most of the D3 had ownership stakes in the car rental industry as a means of controlling the placement of hundreds of thousands of cars a year. Ford owned Hertz, while Chrysler controlled Thrifty. To be honest, I don’t remember if GM owned a rental firm, but they certainly sold a great deal of cars to rental fleets.
Of course, it didn’t take long for those rental units to find themselves into the resale market, and the Detroit 3 found themselves to have become, essentially, manufacturers of new trucks and used cars.
Newton’s Laws of Motion (momentum, inertia and action/reaction) are not only laws of physics, they are laws of economics and social interaction as well. In this case, the action of over reliance on rental fleet sales led to the over reaction of running away from fleet sales as undesirable. Once again, Detroit pursued the right thing, but got it ever so slightly wrong.
A fleet sale is a sale. Car companies are in the business of selling cars and trucks. The car companies’ success lies in making those sales profitably. There is nothing inherently wrong with selling to fleets, in many ways it is highly desirable business, as long as it is profitable. In the case of the recent past, it isn’t that there were rental fleet sales, nearly as much as fleet sales served as a kind of spleen for over-production beyond the market demand for certain carlines.
Which brings us up to the January sales figures.
January 2010 sales of almost 700,000 were slightly higher (6%) from last January. Ominously, they were still down 36% from January of 2007, the industry’s last “good” year. I am not entirely sure how SAARs are calculated, but 700,000 times twelve yields 8.4 million. According to Justin Mirro’s (of Moelis & Co.) “The Motor Weekly”, last January had a 9.8 million SAAR, suggesting a 10.4 million January 2010 SAAR given a 6% increase.
It is against this backdrop that we see troubled Toyota down by 16% overall, while Ford is up 25% and GM up by 14% according to the latest Automotive News statistics. Troubling, though, was that according to Automotive News (as reported by the estimable Jack Teahen) GM’s fleet sales tripled, while Ford’s fleet sales doubled.
Given that many thousands of Toyota owners are holding their breaths at the moment, it’s not surprising to see a near 25% drop in Camry sales (from 20,782 to 15,792). Fusion in the meantime jumped from a bit over 8,000 to a little over 12,000, and Chevy Malibu vaulted from about 9,300 to 16,439. The Chevy moved ahead of Camry, but the Accord picked up as much as Toyota lost, going from 16,581 in 2009 to 20,759 in the past month. The results are impressive, but my praise is muted as the Ford and GM numbers are not necessarily conquests from Toyota, but part of the fleet sale surge, and the Honda may well have benefited from the incremental sales of the new CrossTour model.
One can only speculate about fleet sales profitability, volume and share until press releases spill the beans, but given the January results a few things can be stated confidently.
Toyota’s in a world of hurt. Its volume drop may well be ascribed to formerly loyal customers holding onto their old Toyotas long enough to see if they should buy from the Toyota dealer down the street, or investigate another OEM’s models.
Given big fleet purchases for Ford and (especially) GM, at least long postponed fleet replacements are finally occurring, the flip side being that retail sales recovery is still a while away. As retail sales tend to be profitable, assuming a continued low level of incentives, this does not bode well for the industry or the economy as a well. Even at a 10.4 million SAAR, vehicle sales are well below replacement volume.
Taking a look at the fleet sales, though, for Ford and GM, the 25% improvement for Ford and 14% for GM in terms of overall sales makes them understandably buoyant (sorry, couldn’t resist). As the firms forecast profitability for 2010, it is not a far-reaching assumption that the current pricing achieved for the fleet sales is not at the distressed levels of the recent past. Or at least at the relative distressed levels. Recent restructuring levels due to bankruptcies, near bankruptcies and grim economic realities mean that several thousands in per vehicle costs have been erased, significantly improving the D3’s competitive position. Thus, even if nominal per vehicle prices to fleets have remained constant, the new post-VEBA and post-bankruptcy realities may mean that what was once an upside down deal is now breakeven if not solidly profitable.
Again, for fleet sales, it is not that they exist, nearly as much as what’s the price vis a vis vehicle cost. As the old joke’s punchline goes, “We’ve established what you are, now we’re negotiating the price.”
In the past fleet sales were suspect in that they served as part of the artificial means the D3 used to float high numbers of volume to keep the plants humming. Besides subsidized fleet sales, there were subsidized leases and purchase subsidies through a fair amount of “cash on the hood” via rebates. These days Ford, GM and Chrysler are no longer simply pushing cars down dealers’ throats, and we’re all the better for it. It is far more likely that this past month’s fleet sales contributed to the bottom line of the D3 and reflected a healthier business model.
But the fleet success, given the paltry overall sales figures, only points out retail sales weakness, and even if overall sales and SAAR picked up a touch, the retail buyer’s dog is still not straining on the leash to get to the dog food. As product offerings continue to improve (“product is king” is one of those “key things” from the past), it isn’t that the product is undesirable, it’s just that buyers are waiting for hope in the retail job market before moving forward. Toyota owners, in addition, are waiting to see how their favorite firm’s engineers respond to the current confidence crisis.
It’s good that a number of fleet sales helped to prop up overall vehicle sales numbers, but until a rising tide of retail sales provides evidence of a growing economy, the U.S. auto industry will remain underwater.
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