U.S. sales of cars and light trucks are on pace to exceed 17.5 million in 2015, finally surpassing the industry sales record of 17.4 million set in 2000. With sales hitting a record high this year, many pundits seem to think it will be all downhill from here for U.S. auto giants like Ford (NYSE:F) and General Motors (NYSE:GM).
However, industry conditions remain very strong, and both Ford and GM are well-positioned from a product perspective to post even higher profits in 2016 in the critical North American market.
Three things to cheer about
From an industrywide perspective, there are three key factors that should keep auto sales growing in 2016.
First, gas prices are even lower heading into 2016 than they were a year ago. The average price of regular gasoline in the U.S. has been hovering around $2.00/gallon for the past week, down from about $2.30/gallon a year earlier. Cheap gas is putting money into drivers' pockets and allowing them to afford bigger vehicles.
Second, despite steady auto sales growth in the past few years, the average age of cars on the road hit a new record of 11.5 years in 2015. Consumers have never really "caught up" from the sharp auto sales slowdown of the Great Recession. There's plenty of pent-up auto replacement demand to drive strong sales for the next several years.
Third, interest rates remain extremely low. While the Fed finally raised short-term interest rates this month, it also forecast a very gradual increase in rates going forward. 10-year interest rates have risen a bit since January, but they are still lower than where they were for most of 2014. This means auto financing remains very affordable.
GM can keep the momentum going
General Motors is releasing a slew of new and refreshed vehicles that should drive another year of solid sales in 2016. The highly profitable Chevy Silverado and GMC Sierra pickups have been strong performers this year -- particularly the Silverado, which racked up more than half a million sales through the end of November. Both models were refreshed for the 2016 model year, which should keep consumer interest high.
Muscle cars are another beneficiary of low gas prices. However, GM's Chevy Camaro has lost ground this year to the Ford Mustang, which was updated for the 2015 model year. The Camaro has gotten its own redesign for 2016, which should help it catch up.
Finally, at the other end of the spectrum, GM is releasing new versions for much of its basic car lineup, including the Chevy Malibu, Chevy Cruze, and Chevy Spark. These aren't high-profit models, but GM believes the redesigned Malibu and Cruze will produce $1,500-$2,000 in additional variable profit per vehicle compared to the current versions. That would boost GM's bottom line by hundreds of millions of dollars annually.
Ford poised to bounce back
While GM has been reporting record results in North America this year, Ford is likely to fall short of the peak North American operating profit of $8.8 billion it achieved in 2013.
However, Ford's results for the first half of the year were held back by production constraints for the 2015 Ford F-150. More recently, production and sales of Ford's flagship truck have surged, culminating in double-digit sales growth in November. With inventory returning to normal levels, Ford should be able to sell significantly more pickups next year.
Meanwhile, Ford has redesigned its Explorer and Edge midsize SUVs in the past year. Ford has gotten double-digit sales growth from both models this year, and the low fuel price environment puts it in good position to continue the momentum in 2016. Furthermore, a redesigned version of the popular Ford Escape crossover -- an even higher-volume model than the Explorer or Edge -- will arrive next spring.
2015 was good, but 2016 could be better
In short, the factors that drove strong U.S. auto sales in 2015 -- cheap gas, low interest rates, and an aging U.S vehicle fleet -- seem likely to remain in place for 2016.
GM and Ford, the two largest U.S. automakers, are well-positioned to capitalize on these favorable industry conditions. Both companies will have relatively fresh product portfolios, especially in the lucrative truck and SUV segments. This is a recipe for more sales and profit growth for GM and Ford in their largest market in 2016.