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It seems the travails of the automobile industry aren't over yet, especially if May auto sales are anything to go by. While the first quarter saw the Big Three Detroit automakers posting positive quarterly profits for the first time in nearly seven years, boosting hopes of a quick rebound, May auto sales paint a very different picture.
The U.S. auto industry witnessed the lowest rate of sales in the past eight months, as sales fell 3.7% during the month of May. While one month's performance is not a trend, it could be an indicator of a slowly brewing reality setting in.
What slowed down sales?
As always, erratic gas prices are strong-arming the fundamental undercurrents within the industry.
While gas prices wreaked havoc at home, the earthquake and tsunami in Japan caused big tremors in the auto industry abroad, particularly in the manufacturing centers of some of the world's largest car and car parts companies. Owing to supply shortages and rising input prices, some companies were forced to raise prices of their vehicles in the middle of a challenging period, which is certainly not the optimal time to begin pressuring customers. Ford Motor (NYSE: F ) raised prices by an average of 0.4% in May.
For its part, Japan recorded the worst auto sales for the month of May since 1968. Major manufacturers based in Japan faced big setbacks due to a shortage of ready vehicles as well as parts. Toyota Motor (NYSE: TM ) suffered a 33.4% decline in total sales in May as compared to the same month last year, while Honda Motor's (NYSE: HMC ) sales fell by 22.5%.
Along with price increases, companies also cut down on customer incentives. The light-vehicles average incentive was down by 28.9% from May 2010, according to data firm TrueCar. Toyota made the biggest incentive cuts -- a fall of 53.3% from last year. This affected consumer purchases habits, leading to lower sales.
So is it all downhill for the auto sector going ahead? Perhaps not. There are a few reasons to believe that slowing sales may not be permanent.
Small is big
Generally speaking, consumers are choosing smaller, fuel-efficient models these days, and, unsurprisingly, small cars are doing quite well, despite the industrywide plight. In May, small-car segment sales clocked an increase of 2.5%. Even in the light-duty trucks segment, small-sized SUVs increased by 9.6% over May 2010.
Ford's compact Fusion and Focus saw an increase of 10.2% and 31.7%, respectively. General Motors' (NYSE: GM ) Chevrolet Cruze sales were up 40%. Clearly, smaller cars continue to hold demand, and they just may save auto companies from a double-dip crisis.
Interestingly, in spite of price increases and lower incentives, the average transaction price for light vehicles was $29,817 in May, up 2.1% from last year, reaching the highest-ever recorded levels. This is a strange trend within the industry, especially at a time when consumers are being pinched in all sorts of way.
Cutting incentives means more profits per unit for the companies, of course. But TrueCar estimates incentives should go up again after May. That should translate into better absolute sales.
Foolish final thoughts
Industry research house A.T. Kearney estimates 13.2 million cars to be sold this year, and 16 million by 2013 in the U.S. AutoNation (NYSE: AN ) forecasts industry's sales to be around 12.5 million. Ford and GM have maintained their forecasts of 13.5 million and 13 million, respectively. These are pretty solid numbers and investors should take note that all may not be lost -- even after a tough May.
As production and demand improve, auto companies should find their way back. Now if we could only figure out that little gas price problem, we'd be fantastic.