Headwinds for Ford, GM as Domestic Auto Market Peaks

Rick Tauber: Morningstar Credit Ratings believes the domestic automobile market peaked in 2016 with sales of 17.55 million units. After a decline to 17.25 million units in 2017, we expect to see a second straight year of sales declines in 2018, as pent-up demand coming out of the financial crisis has largely been satisfied, an increasing number of nearly new used cars comes off lease, and higher interest rates negatively impact affordability.

For the OEMs we cover, Ford and General Motors, this represents a headwind as both are highly levered to the domestic market. We estimate both generated well over half of their nonjoint venture sales in the U.S. in 2017. However, both Ford and GM are also levered to the shift toward more profitable light trucks and away from lower-profit passenger cars. Both generated over 75% of their U.S. unit sales from light trucks including crossovers in 2017. We expect the shift to light trucks to continue given a healthy underlying economy, modest fuel prices, and an increasing array of light truck and cross-over product.

Light truck industry sales actually increased 4.4% in 2017 while passenger car sales declined 11.2%. Light truck sales represented 65% of the U.S. market in 2017, up from 61% in 2016 and 57% in 2015. Therefore, we expect Ford and GM to manage through this mild downturn without any significant negative impacts to credit quality from the declining overall U.S. vehicle market.