Inventory Strategy to Determine U.S. Sales Volumes in 2017-2018

Bloated dealer inventory remains the white elephant in the room for the U.S. market and will have a near-term impact on both sales volume and production.

Assuming the industry does act to bring inventory in line with declining demand, it will be a question of how much light-vehicle sales are goosed through retail incentives that will determine whether deliveries in 2017 end above or below 17 million units. That also will have a bearing on how far sales and production fall in 2018.

Even with automakers starting to ease off aggressive production schedules in Q2, the inventory picture worsened between April and the end of May.

Compared with usual declines of 2% to 3%, May 31 inventory fell less than 1% from April and now is an estimated 600,000 units (14%) above the optimum level for current market conditions, based on WardsAuto’s estimates.

WardsAuto is forecasting U.S. sales this year of 17.1 million units. The outlook assumes an automaker-induced sales surge sometime over the summer through more price discounting or other means to trim a big portion of the excess inventory. If inventory is not cut by 400,000 to 500,000 units by September, another sell-off is possible in Q4, probably December.

Without such a surge, sales are heading to 16.8 million units for the year.

Whether the industry undertakes some kind of sell-off will have a bearing on next year, too.

In part due to pull-ahead volume in 2017, LV sales are forecast to decline 4% in 2018 to 16.4 million units.

How much sales actually decline next year largely depends on the amount of pull-ahead into 2017 through increased incentive spending. Somewhat perversely, if the industry carries heavy inventory into 2018 without some kind of fire sale, volume next year will be higher than forecast but pricing will be more competitive and less profitable.

The effect also would pull sales from 2019, and possibly 2020, as well as negatively impact production, which is the other part of the equation that includes slashing excess stocks.

It does appear automakers are backing off the aggressive production scheduling originally planned for 2017.

Based on WardsAuto’s most recent survey, after initially slating Q2 production above the same year-ago level, the industry is looking to cut Q2 LV output 1.1% from same-period 2016 and scheduled Q3 production is 4.8% below year-ago. WardsAuto is forecasting both periods to be slightly lower than industry plans, with Q4 also declining from like-2016.

May 31 inventory totaled 4.11 million units, 9.3% above year-ago’s 3.76 million. Days’ supply ended the month at 68 – 57 to 59 is typical – compared with year-ago’s 59 and April’s 76.

Inventory of domestically produced vehicles totaled 3.30 million units, 10.5% above year-ago. Day’s supply was 70, compared with year-ago’s 61. Import stocks totaled 804,000, 4.7% above year-ago, and equated to a 62 days’ supply vs. like-2016’s 54.

Initial modeling for June indicates sales for the month should total a seasonally adjusted annual rate of 16.9 million units, which would be an improvement on the previous three months but still not enough to make a dent in inventory without severe production cuts.

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