Detroit is leaner and greener and ready to meet the pent-up demand of consumers driving aging gas guzzlers.
This article originally appeared in the August/September 2012 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000.
Morningstar’s equity analysts think that auto
stocks are poised for their long-awaited rebound
and that now is a good time for investors
to start easing their way in. The industry is
certainly still full of risks, but we think that
patient investors should be amply rewarded. To
learn more about an industry that hit rockbottom
in 2008 and 2009, I sat down with
analysts David Whiston and Richard Hilgert.
Our discussion took place June 4.
Philip Guziec: Let’s talk about the drama over the past decade in the U.S. auto industry to set the stage for where we’re at now and where the opportunities might be.
David Whiston: Readers who have followed the U.S. auto industry may recall that right after 9/11, GM GM announced its Keep America Rolling promotion. The company threw a ton of incentives into the market and gave everyone employee pricing, escalating a price war that was already under way. U.S. new light-vehicle sales peaked at about 17.3 million in the early 2000s, and we rode that 17 million-plus until things started to slow down in 2007 and ’08. Guziec: So, up until 2007-08, we were selling a ton of cars, but the domestic manufacturers weren’t making any money.
Whiston: Very little. Then housing slowed. People couldn’t use their homes as an ATM machine anymore or buy that Ford F150 as a personal vehicle to take the family to the movies. But the real spark that started the fire was when gas prices went through the roof. In real dollars, gas prices peaked at $4.27 in June 2008.
Guziec: At the same time a recession started.
Whiston: Yes. This was the worst-case scenario for the three Detroit guys because they were so pickup and SUV reliant. They made lousy small cars. Toyota Corolla, Honda Civic, and then Hyundai, came in and ate Detroit’s lunch in that segment.
In the summer of 2008, used Priuses were going for more than new Priuses, which is still amazing to think about. The hybrid technology of GM and Ford F was pretty primitive. It probably still is today relative to a Prius, but it’s much better in 2012 than it was in 2008. Same with small cars. In 2007–08, there was the Chevy Cobalt. Now, there’s the Chevy Cruze. It’s finally a car that can go head to head with the Corolla.