February U.S. Auto Demand: Lower Incentives for Lower SAAR?

March U.S. Auto Sales: SAAR Strength Beats Expectations - But Is It Fleet Effect?

Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

United states Automobiles / Thematic (Sector/Industry)

<p>FY2018 light vehicle demand in the U.S. came in at 17.3m units, vs. what we had been forecasting since 1H18 to be mid-high 16m unit SAAR range.  Simply put, we had an overly conservative wage growth assumption in 1H18 that we did not revise and update into our forecast model in 2H18, when we took a hiatus from contributing to Smartkarma.  While we were off by 3.3%, wage growth assumptions closer to actual would have brought our expectations to 17.2m units, less than 1% off from actual FY18 light vehicle demand.</p><p>Looking to 2019, here are some preliminary thoughts:</p><ul>
<li>In our forecast model, we look at wealth effect from housing prices, income effect from wage growth and credit environment effect from interest rate movements.  While 2018 provided two tailwinds in the form of wealth and income effect, we are likely to see tailwinds from housing prices turn into headwinds in 2019 with continuing headwinds from the interest rate environment, assuming two more rate hikes from the Fed.</li>
<li>We estimate that in 2018 close to 780k units added to full year demand from wealth effect that kept U.S. light vehicle demand above long term trend for the fifth year in a row. Assuming this tailwind turns into a headwind in 2019, the implied loss alone would take FY19 SAAR to mid-16m unit range. With 2 rate hike assumptions built into our 2019 forecast, the implied 2019 SAAR in our model is 16.1m units.</li>
<li>Continued buyer migration to SUV/Crossovers could come at a price, which has been a key message from us to investors in 2018, which will continue to hold true in 2019.  We have been pointing to faster incentive rise in light trucks in 2018 so while we concede that this migration has provided a lot of tailwinds for D3, from a profitability perspective this dynamic will need to be paid attention to in 2019.</li>
<li>Nothing revolutionary in technological terms has happened in the past 6 months that would alter our view that EV penetration and Driverless cars remain beyond the investment horizons of virtually all investors.  We also continue to subscribe to the view that Tesla should be viewed as an IT stock, not an auto stock, with focus on capital raising capabilities of management.</li>
</ul><p>Given the uncertainties, we would shift away from D3 with a skewed product portfolio to Asian OEMs with a more balanced product portfolio between cars and light trucks in 2019.</p><table class="table table-striped"><tbody>
<tr><td colspan="3" style="text-align: center;"><strong>Macro Factors Affecting U.S. Auto Demand</strong></td></tr>
<tr>
<td><strong>Macro Factors</strong></td>
<td style="text-align: center;"><strong>2018</strong></td>
<td style="text-align: center;"><strong>2019</strong></td>
</tr>
<tr>
<td>Wealth Effect</td>
<td style="text-align: center;">Tailwind</td>
<td style="text-align: center;">Headwind</td>
</tr>
<tr>
<td>Income Effect</td>
<td style="text-align: center;">Tailwind</td>
<td style="text-align: center;">Tailwind</td>
</tr>
<tr>
<td>Credit Environment Effect</td>
<td style="text-align: center;">Headwind</td>
<td style="text-align: center;">Headwind</td>
</tr>
</tbody></table><div class="content-caption">Sources: Author's Estimates</div>

FY2018 light vehicle demand in the U.S. came in at 17.3m units, vs. what we had been forecasting since 1H18 to be mid-high 16m unit SAAR range.  Simply put, we had an overly conservative wage growth assumption in 1H18 that we did not revise and update into our forecast model in 2H18, when we took a hiatus from contributing to Smartkarma.  While we were off by 3.3%, wage growth assumptions closer to actual would have brought our expectations to 17.2m units, less than 1% off from actual FY18 light vehicle demand.Looking to 2019, here are some preliminary thoughts:
In our forecast model, we look at wealth effect from housing prices, income effect from wage growth and credit environment effect from interest rate movements.  While 2018 provided two tailwinds in the form of wealth and income effect, we are likely to see tailwinds from housing prices turn into headwinds in 2019 with continuing headwinds from the interest rate environment, assuming two more rate hikes from the Fed.
We estimate that in 2018 close to 780k units added to full year demand from wealth effect that kept U.S. light vehicle demand above long term trend for the fifth year in a row. Assuming this tailwind turns into a headwind in 2019, the implied loss alone would take FY19 SAAR to mid-16m unit range. With 2 rate hike assumptions built into our 2019 forecast, the implied 2019 SAAR in our model is 16.1m units.
Continued buyer migration to SUV/Crossovers could come at a price, which has been a key message from us to investors in 2018, which will continue to hold true in 2019.  We have been pointing to faster incentive rise in light trucks in 2018 so while we concede that this migration has provided a lot of tailwinds for D3, from a profitability perspective this dynamic will need to be paid attention to in 2019.
Nothing revolutionary in technological terms has happened in the past 6 months that would alter our view that EV penetration and Driverless cars remain beyond the investment horizons of virtually all investors.  We also continue to subscribe to the view that Tesla should be viewed as an IT stock, not an auto stock, with focus on capital raising capabilities of management.
Given the uncertainties, we would shift away from D3 with a skewed product portfolio to Asian OEMs with a more balanced product portfolio between cars and light trucks in 2019.
Macro Factors Affecting U.S. Auto Demand

Macro Factors
2018
2019


Wealth Effect
Tailwind
Headwind


Income Effect
Tailwind
Tailwind


Credit Environment Effect
Headwind
Headwind

Sources: Author's Estimates

US Autos: Looking Back on 2018 and Musing on 2019