Detroit’s second quarter sales were terrible, but does it matter?

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Headlines could get ugly in the coming days for Detroit automakers Ford Motor F 0.34%

in particular. Quarterly sales are no longer the wake-up call they once were, but investors could benefit from a more cautious stance anyway.

Data provider Edmunds expects Ford’s share of light-duty vehicle sales in the United States to be just 10.7% in the second quarter, the lowest since at least the 1960s. semiconductors forced the company to drastically cut production, which limited inventory at dealerships. The company was more dependent than its peers on Japanese auto-chip supplier Renesas, one of whose factories was damaged by fire in March.

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Production has held up better at General Motors, but Edmunds still expects a market share of just 15.4%, the lowest since the start of its quarterly records in 2002 and equal to Toyota for the first time. GM releases its figures Thursday, followed by Ford on Friday. For Chrysler, now owned by Stellantis, U.S. market share is likely back to 2017 levels, according to Edmunds.

Balancing these losses are gains from foreign brands. The combined market share of South Korean sister companies Hyundai and KIA could exceed 10% for the first time in the second quarter. Honda and Volkswagen,

also, seem to have gained ground.

There are individual stories to tell, but a common thread in Q2 sales seems to be product availability. The pickup trucks and large sport utility vehicles that Detroit is known for have been in high demand, which ironically became a problem as inventories fell and prices skyrocketed. Consumers may have given competing models or old-fashioned sedans a different look just because they could find them at a reasonable price.

GM improved its earnings forecast for the second quarter this month.


Photo:

David Paul Morris / Bloomberg News

This unusual momentum is one of the reasons why investors have largely overlooked market share figures lately. While sales say more about supply than demand, they are not a great indicator of profit. GM and Ford improved their second-quarter profit forecasts this month in light of the higher prices consumers pay for vehicles. Automakers currently don’t need to offer big incentives to drive sales, and they’re also benefiting from soaring used prices through their rental guns.

Investors were more interested in the investments of automakers in electric vehicles and software. Despite Ford’s production cuts and uncertain near-term prospects, the stock is up 23% since late March due to a welcome new tech strategy. Electric vehicles, notably Tesla’s, accounted for just 2.3% of U.S. sales in May, but their share is growing rapidly.

Ignoring current market share statistics makes sense to a point. The risk for US manufacturers is that some of the recent gains made by rivals this year remain as consumers shift to the second-best brands they have ended up buying.

While the picture is far from bleak for Detroit, it looks like now is the right time for investors to pocket some of the quick wins made during the pandemic. GM’s valuation, in particular, is well above its post-bankruptcy average, and the last quarter is a reminder, albeit for exceptional reasons, that the order may change. The 2010s were a period of unusual competitive stability in the US auto market. As more global brands master American-style vehicles and electric vehicles become cheaper, the 2020s could be different.

A global chip shortage is affecting how quickly we can drive a car or buy a new laptop. WSJ visits a manufacturing facility in Singapore to see the complex chip-making process and how a manufacturer is trying to overcome the shortage. Photo: Edwin Cheng for The Wall Street Journal

Corrections and amplifications
Automakers benefit from higher vehicle prices through reduced sales incentives. An earlier version of this article incorrectly stated that auto manufacturers’ contracts with dealers entitle them to a share of profits on sales. (Corrected July 1)

Write to Stephen Wilmot at [email protected]

Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the print edition of July 1, 2021 under the title “Detroit’s Outlook Merits Caution”.


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