The tide is finally turning

on Jul4

Photo credit: DAVID PHILLIPS

It’s not just that June sales fell. The rate of decline was relatively modest at 2.9 percent. But once again reality was on the low side of what was anticipated. We’re at the halfway point of the year. Following back-to-back years of record sales, it’s time to take stock of 2017.

The tide has turned.

First-half results, down 2.1 percent, suggest the year will see a significant falloff from 2016’s 17.55 million. The kind of miss that can be felt.

It’s certainly not a surprise, but it’s still a letdown.

The best news out of the first half is that automakers so far are maintaining discipline. As long as nobody triggers a price war or makes an unexpected assault to grab market share, the marketplace can remain stable — and fairly profitable.

The market is beginning to contract, like water starting to reclaim the beach exposed at low tide. Time to start shifting the buckets of clams and tools back toward more solid ground.

So far, the incoming tide has been benign, nowhere as scary as that Bay of Fundy rush of 2008 and 2009.

And however reluctant automakers, suppliers and dealers may be to give up the lucrative clam beds they have been harvesting the past seven years, they appear to be heeding the painful lessons of the Great Recession.

Most have trimmed production as volume has fallen. Incentives are at the high end of the spectrum but just short of dangerous by most analysts’ measure, as automakers try to keep volume relatively high. Average transaction prices are still high, even after those spiffs.

Inventory is running somewhat on the high side, even allowing for General Motors’ decision to build in advance to cover anticipated model changeover shutdowns later this year.

But it shouldn’t be surprising that automakers are putting off hard decisions to cut production more.

Inventory is likely to remain on the high side. Like most businesses — and most people for that matter — those retreating are loath to cut back too much.

There’s two reasons: One is practical. Cutting production is difficult and expensive. You can shut down a factory for a week or two, but if the demand doesn’t pick up eventually you have to lay off a shift. Beyond the direct expense, you are losing valuable employees and all their training, skill and expertise. Maybe they’ll be rehired down the road, but they’ll need retraining and some must be replaced with new and inexperienced personnel who will need even more training.

Your supply chain is in the same situation. And all that expensive equipment is sitting idle or underutilized. Many fixed costs remain and now are amortizing over fewer units, directly eating into profitability.

Then there’s the psychology of layoffs and production cuts. Layoffs hurt morale. They’re bad for company momentum. Layoffs feel like losing.

But there’s another level that’s easy to overlook. Layoffs also are personally more difficult for executives who back in the last dark days were the lower-level managers who had to look veteran employees in the eye and tell them their jobs were gone.

Obviously the brunt of the financial, material and personal pain of layoffs are on those who lose their jobs and their families.

But anyone who has fired somebody remembers it vividly. Ending somebody else’s job feels like a personal failing. Nobody ever wants to repeat that.

We don’t know yet what the near future holds. Many forecasters expect a shallow and fairly brief slowdown in auto sales. But everybody in the industry remembers how bad it can get. This is a period that requires careful analysis and determination.

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