American auto profits showing signs of beating 1990s’ best

‘Real Demand’

The last time the auto industry had 16 million in annual sales, there were excess assembly plants pumping out models consumers didn’t want. U.S. automakers dumped cars into rental fleets to keep factories running because labor contracts at the time required them to pay workers even if they were idled. The result was high sales and low or no profits, which drove GM and Chrysler into government-funded bankruptcies in 2009.

“In 2007, we were achieving that sales level by giving cars away because the auto companies had too many factories,” John Casesa, senior managing director at Guggenheim Partners LLC, said yesterday on Bloomberg Radio. “Today, there’s real demand for that product. It’s a fundamentally different industry.”

Unlike the previous auto boom, demand for Detroit’s models is no longer concentrated on sport-utility vehicles and pickups. Car buyers are coming to showrooms to kick the tires of cars such as the redesigned Chevy Impala and the Ford Fiesta, which saw sales rise 61% last month. GM said it sold 18,982 Cadillacs at retail for its best August on that basis since 1989.

‘New Environment’

“This is a new environment for Detroit, which is balanced growth,” Schuster said. Previously, “the concentration had been so heavy on the truck side. Now they’re participating in the market gains on both sides of the business, which goes right to their bottom lines.”

And while total economic growth “has been uneven and slow,” auto sales are a primary driver, Ellen Hughes-Cromwick, Ford’s chief economist, told analysts and reporters on a conference call yesterday. Auto output has contributed more than 15% to the U.S. gross domestic product since the second quarter of 2009, she said.

“The sales pace appears to be galloping ahead as it compares to some of the consumer fundamentals,” she said. Job growth, the recovery in the housing market and the oldest vehicles ever on U.S. roads “should give us some good support going forward.”

Old Vehicles

The new models on the showroom floor also are convincing consumers it’s time to trade in the old jalopy. The average age of cars on the road has reached a record 11.4 years, auto researcher R.L. Polk & Co. said last month.

“We expect that more and more people that delayed the decision to buy will keep coming into the market,” Mustafa Mohatarem, GM’s chief economist, said on a conference call yesterday. The 16-million annual sales rate is “here to stay.”

Technology that improves fuel economy and enables buyers to connect their smartphones to the car stereo are also enticing buyers to upgrade, said Jim Farley, Ford’s senior vice president of sales and marketing.

“The fuel economy gain compared to a five- or six-year-old car now is probably the highest gap it’s been in my career,” Farley, 51, said in an Aug. 21 interview. “So when you do the math, the rational side of buying a car is very compelling.”

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