The next American car recession has already started

Bloomberg

These should be boom times for Detroit. Unemployment is at a half-century low, gasoline is cheap and auto sales in the US were near record levels last year. Yet American automakers are closing factories, cutting shifts and laying off thousands of workers. The industry is behaving like a recession has arrived.
In one segment of the market, it has. Detroit is in the grips of a car recession marked by the collapse of demand for traditional sedans, which accounted for half the market just six years ago. Buyers have made a mass exodus out of classic family cars and into sport utility vehicles. Familiar sedan models such as the Honda Accord and the Ford Fusion made up a record low 30 percent of US sales in 2018, and things will only get worse.
Sales of the passenger-car body style that’s dominated the industry since the Model T will sink to 21.5 percent of the US market by 2025, according to researchers at LMC Automotive, relegating sedans to fringe products. That leaves automakers with excess factory capacity that can turn out about 3 million more vehicles than buyers want.
And overcapacity is precisely what spurred losses the last time a recession wracked the industry.
“You could classify this as a car recession,” said Jeff Schuster, senior vice president of forecasting at LMC Automotive.
It’s a situation that promises to put a damper on the North American International Auto Show in Detroit this week, the last to be held in the chill of January. In a bid to reestablish relevance, the annual car conclave is moving to June next year and will be reimagined as a chance for show-goers to drive new models in warm weather. The car dealers who organise the show hope the new format will entice notable dropouts—a group that now includes Mercedes, BMW and Audi—to return to an event that once commanded the full attention of the automotive world.
An optimist might seek solace in the better-than-expected profit prediction issued by General Motors Co. But a deeper look at the numbers reveals that the biggest contribution to the company’s rosy forecast were cost-cutting plans—including closing five North American plants—which it said will help boost profit this year by as much as $2.5 billion.
The overcapacity plaguing US automakers is the equivalent of 10 excess plants, which would account for at least 20,000 jobs directly, and thousands more as it ripples through the suppliers and support services to the massive industry. “GM has taken some actions, but they still have some well-underutilised plants,” Schuster said. “So we may not be done with this yet.”
One strategy for dealing with the collapsing car market in the past has been to stuff unwanted sedans into rental lots and other commercial fleets. That has only delayed today’s capacity crisis. Those lower-profit fleet sales have inflated market, keeping US vehicle deliveries above 17 million for the last four years, even as sales to individual retail customers peaked three years ago.
“The car recession and the retail recession have already arrived in the sense that retail sales peaked in 2015 and have gone down ever since,” said Mark Wakefield, head of the automotive practice at consultant AlixPartners. “Cars have just been crushed.”