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Good times not yet over for Detroit automakers, despite slowing sales

Oct 29, 2016

Car and truck sales are plateauing in the lucrative U.S. market, but you wouldn’t know it from the big jump in auto profits.

General Motors exceeded Wall Street expectations this week with record third-quarter earnings of $2.8 billion. Ford Motor showed that discipline can have its price. And Fiat Chrysler demonstrated that exiting small-car production may not be as costly as first feared.

Credit John F. Martin / Creative Commons / http://j.mp/1SPGCl0

Bottom line: the good times are not yet over for Detroit’s automakers or their foreign rivals. The difference now is that this town’s auto leaders are more cautious and more disciplined. They’re determined to avoid the mistakes of the past to show investors that Old Detroit is dead and buried.

Good luck with that. GM says it’s on track to post another record year. It says it will invest heavily in its core car and truck business ... will place smart bets on mobility technology ... will generate some $6 billion in free cash-flow.

How are they doing it? Three numbers tell the tale: average prices on GM vehicles sold now exceed $36,000, nearly $5,000 above the industry average. That shows just how much more customers are willing to spend for GM metal.

Second, profit margins are rising to levels this town basically never saw before the global financial meltdown. At GM, North American margins exceeded 10 percent in five of the past six quarters. Yes, that’s huge.

And, third, the more the U.S. market favors trucks and SUVs because of low gas prices, the more North American profits should stay robust. That has major — and positive — implications for the Motor City and Michigan for jobs and hiring, salaried bonuses and profit-sharing payouts, the supplier sector and corporate philanthropy.

Yet another quarter of gangbuster performance still is not enough for investors to jump into the sector. Detroit auto shares closed down on the upbeat financial news, proving again the maxim of Mainstay Capital’s David Kudla that shares in domestic automakers are “under-owned and under-loved.” He says, “We do believe the peak auto cycle is here. The best we can hope for is this plateau.”

Here is Detroit’s conundrum. With gas cheap, a U.S. market plateau of roughly 17 million vehicles a year is a market that delivers larger profits because it sells larger numbers of profitable trucks and SUVs.

But it’s also a market that demonstrates little upside to investors seeking growth. As much as Detroit’s U.S. car and truck business is a hard-won story of profitability, it’s not much of a growth story — outside China, the Asia-Pacific region and the mostly untapped mobility space.

However impressive their rebound may be, Detroit’s three automakers also are burdened by a legacy of denial, mismanagement and capital destruction. And that’s complicated by the indelible fact that theirs is a cyclical industry.

Lurking beneath is a nagging sense there’s no winning a race that will never end. Probably true. Meantime, expect all the automakers to take advantage of steady market demand, low interest rates and cheap gas for as long as they can because this virtuous cycle cannot last forever.  

Daniel Howes is a columnist at The Detroit News. Views expressed in his essays are his own and do not necessarily reflect those of Michigan Radio, its management or the station licensee, The University of Michigan.