NEW YORK ( The Deal) -- Automakers reported blockbuster sales for the month of May, but the news barely registered among investors. It's a sign markets want the companies to start thinking about what comes next when the cycle inevitably turns.
U.S. seasonally adjusted annual rate of sales hit 17.8 million units in May, crossing a threshold previously unseen during this recovery. The sales figure, which was aided by a five-weekend month and the Memorial Day holiday, illustrates how far the industry has come since the bailout years: In 2010, SAAR figures bottomed out at a mere 9.1 million units.
Despite criticisms over increasing incentives and worries that auto companies are fueling sales with ever more risky long-term loans, the rally is expected to continue. Morgan Stanley analyst Adam Jonas notes that "the best predictor of U.S. auto sales is the growth in capacity," and with automakers racing to bring new production online or canceling planned summer breaks, the domestic market is heading for 20 million units made. The strong dollar could add further capacity to the U.S. system by making it more attractive for foreign production to be shipped to the market.
But Wall Street by and large was not in a celebratory mood. The Global Auto Index Fund (CARZ) global auto ETF was flat on the sales announcements. Analysts say investors in the business have come to see a figure near 18 million sales as a good excuse to sell, with Barclays' Brian A. Johnson warning "don't extrapolate too much from month-to-month volatility ... just know we've plateaued."
Should sales plateau even as capacity continues to flood into the market, the question becomes whether the pressure would be enough to create a sense of urgency inside executive suites. The calls by Fiat Chrysler Automobiles NV (FCAU) for the industry to consolidate have so far fallen on deaf ears, but the industry's high fixed costs and substantial need to invest in new drivetrains and cabin technologies could make M&A or other strategic alternatives a more attractive option in the event the sales surge flattens.
Jonas believes General Motors (GM) in particular would benefit from a change of direction. GM, according to the analyst, is "weighed down by the continued burden of organizational complexity and low brand consideration by consumers" and the company's response to industry trends "could foster a greater level of dialogue with investors" in the coming quarters.
GM management in recent months had repeatedly ruled out doing a deal, and for now a large transaction like a merger with Fiat still seems highly unlikely. But the company could consider other options, including seeking out global alliance partners to cut research and manufacturing costs, or plotting an internal overhaul and potential divestitures.
The Cadillac luxury brand last year moved its headquarters to New York from Detroit in hopes of making a fresh start, and potentially to lay the groundwork for an eventual spinout from GM if the brand can reverse sales declines. General Motors could also seek to shed its long-troubled Adam Opel AG European unit, a move the company considered while under government control in 2009 but eventually backed away from.
Looming in the background is upcoming labor negotiations with the United Auto Workers, with union members hopeful of winning back some of the concessions made to keep the industry afloat during the recession. Some in Detroit worry the Big Three will struggle to keep costs in line with sales near record highs, and the outcome of the negotiations could force GM, Chrysler and Ford Motor (F) to look more aggressively for ways to tighten the belt.
The case for consolidation laid out by Fiat Chrysler CEO Sergio Marchionne was largely met with both praise for its logic, and considerable skepticism over whether rival automakers focused on growth would heed the call. Recent days have both validated that focus on growth, and provided a hint that it is time to start considering what will happen when those sales gains fade.
It's time for a sense of urgency to grip Detroit.
Originally published on TheDeal on June 5, 2015