Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

United states Automobiles / Thematic (Sector/Industry)

September SAAR shot up to 18.57m units, which is the strongest selling rate seen YTD and significantly above consensus analyst expectations for the month.  YTD average SAAR now stands at 17.3m units, which would nonetheless represent a 1.3% sequential decline. The hard question investors face now is whether the strong SAAR represents replacement demand or whether the underlying strength of SAAR (which has been significantly above long term trend demand since 2013) is being sustained by rising incentives to the detriment of OEMs' profitability.  <div class="content-highlight">Here are some observations about the September sales figures:1. D3 was quick to draw investor attention to what they saw as hurricane-related replacement demand vs. a robust underlying retail demand that is independent of the Harvey-Irma related replacement demand.  Ford indicated in rough terms that if the hurricane related losses in the Houston area added up to about 4-500k units, and assuming that about 20% of that lost volume will be replaced with new models, investors should be expecting about 80-100k units in new car sales over the next several months as Harvey-related impact. 2. Industry-wide incentives are up 4.1% sequentially and 5.4% YoY.  While car incentives saw a 0.8% sequential rise and a 1.3% YoY rise, light truck incentives saw a 5.8% MoM jump and a 8.6% yoY jump.  This was something that was not discussed in detail in the monthly sales calls which is the amount of incentives that are being paid by the industry to generate the incremental demand we have been seeing in the U.S.  3. Incentives as a percentage of transaction price rose to 11.2% in September, the highest seen in this decade.4. Days inventory has come down in September for the industry, but production through August on seasonally adjusted basis has been coming down as well.  Averages production SAAR is down 7% YoY through August, suggesting OEMs may be under higher cost pressures than what retail unit sales figures may tell.</div>

September SAAR shot up to 18.57m units, which is the strongest selling rate seen YTD and significantly above consensus analyst expectations for the month.  YTD average SAAR now stands at 17.3m units, which would nonetheless represent a 1.3% sequential decline. The hard question investors face now is whether the strong SAAR represents replacement demand or whether the underlying strength of SAAR (which has been significantly above long term trend demand since 2013) is being sustained by rising incentives to the detriment of OEMs' profitability.  Here are some observations about the September sales figures:1. D3 was quick to draw investor attention to what they saw as hurricane-related replacement demand vs. a robust underlying retail demand that is independent of the Harvey-Irma related replacement demand.  Ford indicated in rough terms that if the hurricane related losses in the Houston area added up to about 4-500k units, and assuming that about 20% of that lost volume will be replaced with new models, investors should be expecting about 80-100k units in new car sales over the next several months as Harvey-related impact. 2. Industry-wide incentives are up 4.1% sequentially and 5.4% YoY.  While car incentives saw a 0.8% sequential rise and a 1.3% YoY rise, light truck incentives saw a 5.8% MoM jump and a 8.6% yoY jump.  This was something that was not discussed in detail in the monthly sales calls which is the amount of incentives that are being paid by the industry to generate the incremental demand we have been seeing in the U.S.  3. Incentives as a percentage of transaction price rose to 11.2% in September, the highest seen in this decade.4. Days inventory has come down in September for the industry, but production through August on seasonally adjusted basis has been coming down as well.  Averages production SAAR is down 7% YoY through August, suggesting OEMs may be under higher cost pressures than what retail unit sales figures may tell.

U.S. September Auto Demand: 18.6m Unit SAAR Beats Analyst Expectations, but at What Cost?