Slower Production Starting to Impact Excess U.S. Inventory

After several months when sales expectations failed to dent bloated inventory on dealer lots, there was a sign in July that slowdowns in North American light-vehicle production were beginning to have a positive effect in paring stocks.

WardsAuto estimates July 31 LV inventory still to be about 15% higher than necessary to meet current demand. Each of the major categories inside the LV total, including car and truck, and the splits between domestically made and imports all could use some trimming.

July 31 inventory totaled 3.86 million units, 9.4% above year-ago, and equivalent to a 69 days’ supply. July’s days’ supply was a welcome, though not unusual, drop of five days from June, but significantly above like-2016’s 61. A days’ supply in the high 50s is optimal for July.

Albeit faint at this point, the signs automakers are seeing some relief from excess stocks fell into the domestic LV category. July 31 domestic inventory was 8.7% above same-month 2016, down from June’s 9.1% gap, and the first time since February the year-over-year margin did not increase from the prior month.

July 31 days’ supply of domestic LVs was 70, a decline from June’s 76 but well above like-2016’s 63.

Combined with further slowdowns in production, and the likelihood sales incentives rise through September, a narrowing gap for domestic LVs could be the beginning of a trend.

Inventory relief could more heavily rely on production cuts if U.S. sales don’t improve on the past two months.

Initial modeling pegs August’s sales at a seasonally adjusted annual rate of 16.7 million units, not much better than the 16.6 million combined total of the past two months. Worse still, the initial look in recent months consistently has overstated the final figure, meaning price discounting – whether spiffs to customers or dealer incentives – will need to significantly increase or production cuts will be even steeper than expected.

Greater pressure on domestic LVs also is coming from import inventory, which surged to 12.3% above year-ago in July. In June, import stock was a lesser 5.7% above same-month 2016 and July’s year-over-year gap was the highest since November. Import day’s supply of 62 also was much higher than the year-ago total (53) and below the prior month’s 66.

After garnering market share from domestic LVs in the past two years, the higher import inventory comes when sales penetration of overseas-built LVs has started to decline in the past four months. Some of the inventory increase is due to more import volume of LVs that are sourced both domestically and from overseas, including the Honda Accord, Honda Civic, Toyota Camry and Toyota RAV4.

Offsetting import sales increases from the aforementioned dual-sourced vehicles are domestic replacements for previously imported vehicles, such as the Audi Q5, Kia Forte, Mazda3 and Subaru Impreza. Also, the new extended-length version of the Volkswagen Tiguan and the all-new Volkswagen Atlas are replacing import volume in VW’s lineup.

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