Friday, August 28, 2009

(BN) Small-Car Output May Outstrip Consumer Demand as Fuel Costs Fall, CSM Says

Bloomberg News, sent from my iPhone.

U.S. Automakers' Small-Car Output May Outstrip Demand

Aug. 28 (Bloomberg) -- General Motors Co., Ford Motor Co. and Chrysler Group LLC, primed by government incentives to make fuel-efficient models, plan a 63 percent boost in small-car production capacity by 2015 that may outstrip demand.

The U.S. automakers will be able to assemble 2.71 million small cars annually in North America in six years, rising from 1.66 million now, according to consulting firm CSM Worldwide in Northville, Michigan. Industrywide capacity for the segment will rise to 7.5 million vehicles from 4 million, CSM estimated.

Consumers may not be ready for that many small autos. Based on projections for small-car purchases from consultant IHS Global Insight, U.S. auto sales by 2015 would have to surge to almost twice the current annual record to absorb all of the possible new output.

"Unless the government is doing something we don't know about to raise the price of gasoline, we don't think there's going to be a lot of demand for small cars," said John Wolkonowicz, a Global Insight analyst in Lexington, Massachusetts.

The small-car push is being driven in part by the U.S. requirement that auto fuel efficiency rise about 40 percent to an average of 35 miles per gallon by 2016. Small-car sales climbed to 18.1 percent of the U.S. market last year from 15 percent in 2007, as gasoline prices surged to record highs.

Automakers also are tapping sources such as the Energy Department's $25 billion loan program to develop more fuel- efficient vehicles.

Sales, Gas Prices

This year through July, small cars accounted for 18.5 percent of U.S. sales, according to Autodata Corp. of Woodcliff Lake, New Jersey. Gasoline for the period averaged $2.17 a gallon, a 39 percent drop from $3.53 a year earlier, according to motorist group AAA.

Global Insight estimated that small cars' share of U.S. sales may rise to 22.3 percent in 2015.

At that percentage, the total U.S. auto market would have to exceed 33 million to absorb the annual production capacity of 7.5 million small cars projected by CSM. The record for total sales of cars and light trucks was 17.4 million in 2000.

"Fuel prices are the No. 1 issue," said Jeff Schuster, an auto analyst at market research firm J.D. Power & Associates in Troy, Michigan. "If they remain in the range we're at, this product push and capacity change is certainly at risk. American buyers tend to prefer larger things and larger spaces."

In the next six years, small-car production capacity will rise 58 percent to 1.35 million at GM, 61 percent to 870,000 at Ford and 83 percent to 495,000 at Chrysler, according to CSM.

By 2013, there will be 46 compact and subcompact car models in the U.S., up from 36 this year and 28 in 2005, according to J.D. Power.

'Betting the Company'

Rising fuel prices will justify the small-car buildup, said Michael DiGiovanni, GM's chief sales analyst.

"That's what we're betting the company on," DiGiovanni said in an interview. "We think it's better to err on the side of high oil than to err to the side of low. Consumers were burned big time in 2008 and they are not forgetting."

When the global economy recovers, U.S. gasoline prices may meet or exceed the record $4.11 a gallon of July 2008, said George Pipas, sales analyst at Dearborn, Michigan-based Ford.

Small cars are "the linchpin of our growth strategy," Pipas said in an interview. "We made this bet three or four years ago before gas even crossed the $3 mark."

Ford rose 6 cents to $7.73 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have more than tripled this year, giving Ford the fourth-largest gain in the Standard & Poor's 500 Index.

'Clunkers' Boost

Small cars got a boost the past two months from the U.S. government's "cash for clunkers" program, which offered credits of as much as $4,500 to new-vehicle buyers who traded in older, less fuel-efficient models. Small cars from Toyota Motor Corp., Ford, Honda Motor Co. and Hyundai Motor Co. accounted for the top five models purchased through the program.

The segment rose to 22.2 percent of U.S. sales in July, according to Autodata. In the year's first half, small cars accounted for 17.7 percent of U.S. auto sales, a decline from 18.8 percent a year earlier.

"Cash for clunkers is an unnatural distortion that doesn't give us any indication of what people really want," said Wolkonowicz, of Global Insight. "People are buying the deal."

To contact the reporters on this story: Keith Naughton in Southfield, Michigan at Knaughton3@bloomberg.net Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net

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