CNBC: June sales car companies producing in Mexico
transcript, courtesy of CNBC:
we have just one word to capture auto sales headlines, and that is, wow.
Phil Lebeau, this is a fourth of July week and a banner day for the automakers, no? one that I think a lot of people in the auto industry are saying will we ever get back to 16 million? looks like they will get there.
We’ll get the official number in the next hour, but I want to show you where the sales pace is expected to come in and a little bit of historical perspective about where we were. it’s expected the sales pace for the month of June, again, the pace, not total sales, will be 15.9 million or 16 million of you’ve got to go back to 2007 to see the last time that the auto industry was at a rate of 16 million vehicles, so what was driving it?
Clearly the improving economy is a big factor but another factor is what’s happening when it comes to pickup trucks. that’s why when you look at all the June auto sales they are all above estimates between 3% and 5% depending on the automaker but key in on the big three because ford, and Chrysler also huge gains of more than 20% when it comes to pickup trucks, and that’s being driven by the rebound in the housing market, small contractors who have decided you know what, I’ve had this old truck for a while, it’s not as fuel-efficient as the new models, it’s time to restock the fleet.
That’s why we’re seeing pickup sales gain more than 20% for each of the big three in the month of June. what does this do for production rates? they have been steadily increasing in the last couple of years. we’re likely to see that continue in the second half of this year, not hug gains, but gains nonetheless, and, remember, all of the big three for the most part, on almost all of their plants, they have eliminated the two-week summer shutdown or they have scaled it back considerably, and that’s why when you take a look at the shares of the automakers, not seeing a huge pop because a lot of people have already factored in these greater production schedules.
Mandy, nonetheless, but a move to the upside for all the auto stocks, a lot of people are wondering will we ever get back to 16 million. looks like the industry is finally there. certainly good news. let’s ask the question, so goes the US auto industry so goes the US economy.
Let’s bring in our guests. Lou Ann, to Phil’s point, are all the positive factors driving auto sales in the first half going to remain in the second half? it’s a little too early to tell right now but you look at consumer confidence and construction starts and look at the dow and say things are going in the most positive way, and the dow really has a factor on the luxury buyers, whereas Phil said the construction really shows the pickup sales. consumer confidence shows how many people really think they are going to keep their jobs and can either finance with a subprime loan four to five years out and still feel good about it.
It’s a vicious cycle, isn’t it, Steve, because if you’ve got a job, can feel secure about a job, more secure about buying a car and then more cars means more jobs because we’re seeing the short shortened summer shutdowns. I’ve seen the jalopy you’re riding. a bicycle, by the way. why is 16 million important? any time in this economy we can get back to the level we were in 2007, be it in housing, be it in lending or any aspect of the economy, that’s a huge victory. what is very interesting though about the production here is while auto production is getting back to that level employment is not. employment has actually lagged.
In fact, Phil, I’m not even sure how they are building the cars unless they bought a whole bunch of new machines to build them, but when I look at the growth rate of auto production compared to the growth rate of auto employment, it’s really lagging behind. and you won’t see those jobs come back, Steve. the bottom line is that those jobs that were in the auto industry, you had too much capacity building too many vehicles that were not being sold. right. and that’s why when you compare what we’re seeing now with 2007, different worlds. back in 2007, you would go to a dealership, they were greasing the deal with several thousand in incentives because they had to move the metal. that’s not the case anymore. production is matched with demand, and as a result, the dealers are not having to goose the deals as much for people coming in.
There’s that natural demand, so those jobs in the auto industry, I know people don’t want to hear this, by far, most of them are not going to be coming back, a slight increase, but you’re not going to see most of the comeback. and here’s the other double-edged southward, great news what’s happening with the automakers and the double-edged sword is this. got a number of the plans cranking out cars and vehicles at 24-hour capacity. if there is more demand beyond what we’re seeing right now, do they invest in new plants in the united states or do they ship those jobs and those vehicles out to places like Mexico which is a much cheaper place to do business and I believe they have great quality in terms of car construction?
Odds are, Mandy, you won’t see them add a plant any time soon. got a little bit of wiggle room when it comes to capacity, not a lot but a little bit of wiggle room. if they get to the point where they do need to add even more production for greater sales in the united states, they might add an assembly line if there’s a facility that has enough space where they can add one. they don’t want to add a whole plant, if at all possible, and, yes, you will see increased production in Mexico because that’s become the favored target for all automakers, not just the big three, but all automakers look at Mexico as a prime place for manufacturing, and that growth is likely to continue.
While we’re way on that subject, Lou Ann, what degree do you feel Mexico and other areas will be a threat to u.s. production? one of the reasons is not because it’s low wage but because NAFTA has an agreement with Mexico which means that we get to import those without a tariff, but also Brazil has bilateral agreement with Mexico which means that they get to import cars without a tariff as well, and that’s unheard of anywhere else because if you — if you produce in Brazil, you can sell in Brazil. if you don’t produce in Brazil, there’s a 90% import duty.
There’s not that duty if you get — get the cars from Mexico to Brazil. that’s an excellent point. last word to you, Steve, because people have been freaking out about mortgage rates going up, what about auto loan rates? the auto loan rates have been very, very competitive. part of a derivatives market, bundled auto loans that have come back and come back strongly. they will be a little bit more expensive. people out there buying cars, I don’t know how much the interest rate at the margin, what’s more, interesting to me is the extent to which production is equal to demand and companies have pricing power. right.
They are not going to price themselves out of the very competitive market. the pricing power out there, it’s a big change, and I think Phil, I don’t, but the stocks look better when a company has pricing power than what they don’t. absolutely. and look at the average transaction price right now, 31,663, the price being paid at a dealership, Steve, and that’s an increase of 1.2% compared to June of last year, just a smidge below the all-time high. I see that increasing because you have the match between sales
