2017 could challenge automotive industry on supply, demand

Detroit, Michigan – Auto makers are on pace to build more new cars and light trucks in 2016 than in any other year, but efforts to reduce bloated inventories next year could lead to North America's first production decline since the Great Recession.

Record sales paces in the US, Canada and Mexico have kept plants busy. About 15 North American plants reportedly were running overtime through last week, nearly four times as many as the same period a year ago, according to the Automotive News data centre. Most of those plants build trucks.

But auto makers are already preparing for a production reckoning in 2017. Ford Motor Co., General Motors and Fiat Chrysler last week announced downtime beyond the traditional year-end break at multiple plants. GM also said it plans to lay off nearly 3,300 workers in January and March as it eliminates production shifts at three car factories in Michigan and Ohio.

Joe Langley, principal analyst of North America light-vehicle production for forecasting firm IHS Markit, likened 2016 to the start of a roller coaster ride.

"We've been going up the track, and now the fun begins," he said. "We have different passengers experiencing different things."

Some auto makers, such as Ford, had already taken action. Anticipating softer demand in 2017, the auto maker temporarily shut down production lines at five factories in October. As a result, Ford's production levels through November were down slightly from the same period a year before. Its 83-day US stock as of 1 Dec 2016 was up slightly from 81 days a year earlier.

By comparison, GM's production levels were up significantly.

"GM has let this swell to a point where they have to take more considerable actions leading into the new year," Langley said.

According to Automotive News' estimates, GM's inventory has surged to a nearly nine-year high, up 28% between 1 Aug 2016 and 1 Dec 2016. GM's inventory at the start of December was 873,200 vehicles, an 86-day supply, up from 70 days at the same time in 2015.

As of 1 Dec 2016, the industry had a 73-day supply of vehicles, the highest mark for that date since 2013, according to Automotive News' figures.

"2016 is a story about pent-up demand and sales," said Steven Szakaly, chief economist for the National Automobile Dealers Association.

But as the year winds down, Szakaly said, "We've pretty much gone through that pent-up demand."

During a similar time before the last economic downturn, auto makers increased incentives and fleet numbers to force cars out of dealership doors, even as demand fell. This time around, analysts say, the industry's in a healthier place.

Industrywide, incentives are up 14% in December compared with the same time a year ago, according to AutoData Corp. Fleet sales among the seven largest automakers selling in the US were down 2% in November but up 4.8% through 11 months.

Still, Langley said, the Detroit 3 are in a better position than they were in the past to minimise the financial toll of production cuts because of more-flexible labour contracts. "There's no need to take some of these measures we've done in the past; we don't have to dump vehicles willy-nilly into the marketplace," Langley said.

Plant capacity has increased in the form of third shifts and increases in overtime to the point that auto makers can shut down a line temporarily when they need to pare inventory. The Detroit 3 had 72 plants in North America in 2000, according to IHS Markit. They now have 42. Output per plant, however, has increased nearly 20%, IHS says.

"The industry discipline seems to be much better than it was in the past," Szakaly said. "We've seen a greater willingness to idle plants, or take out a shift, in order to better adjust supply with demand rather than use incentives just to keep plants running. That, of course, is a very good change."

IHS Markit forecasts North American production will drop from 17.85 million units this year to 17.6 million in 2017. Of that, about 600,000 will come from new capacity and new plants.

Subaru is localising the Impreza in Indiana. Volkswagen is expanding in Tennessee, launching production of its Atlas sport utility vehicle on 16 Dec 2016.

Audi is building the Q5 at a new plant in Mexico, and Tesla says Model 3 production could begin in California, although many expect that product will be delayed.

Analysts say the key in 2017 will be how automakers continue to handle market demands for cars vs. light trucks. Car plants will likely struggle while light-truck plants will continue to run at high levels.

Despite auto makers' good practices so far, NADA's Szakaly said, their commitment to discipline will be tested.

"The pressure is going to increase," he said. "Eventually, you look at capacity utilisation, and you want to be using those facilities that cost billions of dollars. But our outlook is that they'll remain disciplined, just based on what they've done so far this year."