With pent-up vehicle demand finally being realized, in combination with low interest rates, 2013 will be a busy and very profitable year for automakers. Much to investors' relief, this is happening with record high transaction prices and low incentive costs. Sedan and truck segments are expected to fuel the sales growth this year; however, those vehicles mean two very different things to automakers. Sedans and trucks have a distinct impact between market share and the bottom line; it just depends on each automakers' strengths. Toyota (NYSE: TM ) and Honda are consistently strong in the sedan segment and are rewarded through market share, while Ford (NYSE: F ) and General Motors (NYSE: GM ) dominate truck sales, bringing in a large portion of profits from the segment. Let's look at both segments and see how each automaker is making noise in 2013, and what potential risks are out there.
First off, let's look at how January sales turned out.
|Model||January 2013||% Change From January 2012|
|Toyota Corolla / Matrix||23,822||32.4%|
Even with the F-Series and Silverado owning the top two spots, sedans still make up a majority of all units sold. Sedans will fuel growth in automakers' market share, because of the segment's high sales volume. There is no shortage of heavy hitters making noise in 2013. Ford has to eager to see a full year of sales from its popular and recently remodeled Fusion. Toyota's Corolla and Camry were both in the top 5 in January vehicle sales and will continue selling well. Honda will rely on its Civic and freshly remodeled Accord to keep pace with its competitors.
There's a common theme with those vehicles -- more so than just being top 10 in sales. They're all fuel-efficient, and right now consumers are demanding to save money at the pump. It might surprise you to hear there's a difference between fuel-efficient and environmentally friendly. When consumers buy a Fusion, rather than a Focus electric, they're opting to save money at the pump to later spend on groceries. Consumers would make the opposite purchase to be environmentally friendly. The latter are less worried about saving money, as evidenced by the high price tag paid, and more about reducing their carbon footprint. The important note here is, for the next five to six years, fuel efficiency will dominate consumer behavior, and these vehicles will sell accordingly.
Sedans represent market-share gains for automakers, especially those well positioned in fuel efficiency. Now, sedans don't have nearly the same influence on the bottom line as trucks do. Let's look at that impact for automakers.
This year will be no less exciting in the truck segment, with more heavy hitters making noise. GM is releasing new models of the Chevy Silverado and GMC Sierra this year. Toyota just unveiled its 2014 model of the Tundra at the Chicago Auto Show yesterday, hoping to have more success than it did with the previous version. Trucks bring in a higher price tag and higher margins per unit than sedans. It's no secret that the U.S. truck segment is what drives profits for Detroit's big 3 automakers. Morgan Stanley analyst Adam Jonas estimated that trucks represent up to 70% of Ford and GM's profit, a strikingly high number. If you're looking to bump Toyota from its No. 1 automaker spot, it won't be done through trucks. The volume lies in other segments. If you're looking to keep the lights on and bring the profits home, the truck segment is where the party's at.
Risks in 2013
While 2013 seems destined for greatness, in the auto industry, there are naturally risks we must keep our eyes on. For one, the U.S. economy unexpectedly shrank in the fourth quarter for the first time since the 2009 recession. If you dig into it, it doesn't appear to be a worry for automakers, as the main reason was that Uncle Sam didn't spend as much. Consumers, however, kept up their end, and that's what matters for the auto industry.
Another thing to watch is how consumer confidence reacts to the payroll tax increase and gas prices. Both can have dramatic effects on spending and could dampen the strong demand we see now. With interest rates to remain low, I think the demand will stay strong. Take it from John Garff, CEO of Garff Enterprises, who sells 23 vehicle brands. "I'm optimistic about what 2013 will bring," Garff said. "It's a cautious optimism because there are so many unknowns out there."
All three automakers have different needs and goals for 2013. Ford will be focusing on increasing its sales volume, as its operating efficiency and margins are up to par. GM will be doing the opposite. It has the sales volume and needs to make sure it translates to the bottom line in 2013, unlike prior years of poor margins and profits. It will also be focusing on the numerous rollouts of new models over the next 18 months, which will define its success over the next few years. Toyota will be aiming to smooth over its backlash in China from last year's territorial dispute and maintain its global No. 1 sales position.
Investors want to see their company perform well in the booming segments, and these automakers are doing just that. If automakers can strike the balance between gaining market share and bringing home juicy margins, the rewards will be directly passed on to loyal investors. Stay tuned: The next few years look to offer a wild ride for those invested.
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