Topics in this section: - Auto market turn's $3 billion toll forcing tough R&D choices - Fight to buoy demand in U.S. as income slips - Declining R&D spending to delay ambitious projects - U.S. brands cede truck share with nowhere to grow - Lease boom forces competition with former sales
These analyses are by Bloomberg Intelligence analysts Kevin P Tynan and Michael Dean, and contributing analyst Kieran Ryan.
Waning profits are forcing U.S. automakers to narrow their investments next-generation technology as the most-profitable vehicles -- light trucks -- face tougher competition and slackening demand. Price and margin concessions aimed at extending a multiyear post-peak sales plateau have combined with unprofitable new technology to sap almost $3 billion in operating profit from automakers in the past 12 months.
Fight to buoy demand in U.S. as income slips
U.S. automakers have been helped by loading their product portfolios with -- and then influencing a consistent sales shift to -- higher-margin pickup trucks, SUVs and crossovers, though the counterpunch from foreign brands is forcing shorter lifecycles and increased investment in new designs. Combined operating profit for Fiat Chrysler, Ford and General Motors declined 11% in the trailing 12 months, amounting to a $2.8 billion shortfall compared with the same period ended 1Q18. Operating profit will erode further as competition ramps up and expenses inflate for unprofitable electric drivetrains and autonomous technologies.
The U.S. sales mix of the three automakers combined is 85% light truck in 2019, as the industry tilt to truck sales elevated to 70% from 65% in 2017.
Declining R&D spending to delay ambitious projects
Research and development spending as a percentage of net sales for several global automakers peaked with global new-vehicle demand and proved unsustainable as operating earnings declined. Initial cuts will be to the technology pursuits with the longest payback periods, such as fully self-driving vehicles. Even Telsa's R&D percentage at 7% is the lowest level in its history after explosive revenue growth from Model 3's delivery ramp-up.
BMW's 2018 R&D spending relative to net sales led global automakers at 7.1%, and was higher than Tesla's, as German manufacturers invest in new drivetrain technology to offset declining diesel demand. Ford also spent more in 2018 than during its best volume year of 2016. Fiat Chrysler, General Motors and Toyota all peaked R&D spending in 2013-14, before global demand crested in 2016.
U.S. Brands Cede Truck Share With Nowhere to Grow
The shift to light trucks from cars that has masked a softening of overall demand will pressure margin as U.S. automakers lose market share to competitors ramping up their SUV and crossover portfolios. Adjusted pretax earnings are down 11% or $2.8 billion for the U.S. group in the past four quarters. Fiat Chrysler will have a tough time increasing market share as light trucks featured by the Jeep and Ram brands represent 91% of its U.S. volume in 2019. In the volume segments, Volkswagen and Hyundai-Kia have been the most aggressive in adding trucks since 2017.
European luxury and Asian volume brands are all pushing to a heavier mix of light trucks. Among foreign brands, only Subaru, Volvo, Mitsubishi and Jaguar Land Rover -- all niche brands -- had a light-truck mix greater than the U.S. industry average of 70% in 2018.
Lease boom forces competition with former sales
Lease penetration above 30% in the U.S. every year since 2016 has greased the wheels of demand while creating a price and margin problem that will continue to intensify as long as aggressive programs are used to create demand. The flow of off-lease vehicles will top 5 million units for the first time this year, a feat likely to be repeated in 2020 and 2021 that will force retail price adjustments through discounts and incentives. Manufacturers will take the bigger hit to revenue and earnings as consumers answer rising prices with declining demand.
A record 17.5 million light vehicles were sold in 2016 at a lease-penetration rate of 30.7%. Most of the 5.3 million new-vehicles leased that year will enter the used-vehicle market in 2019-20, considering an average lease term of 33 months in the U.S.
