AutoNation CEO calls industry overproduction the ‘old model’

Mike Jackson, chief executive officer of AutoNation Inc. Photographer: Bloomberg/Bloomberg

U.S. automakers won’t go back to bloated output and bulging dealer lots, even after the global semiconductor shortage ends, according to the chief executive officer of the nation’s biggest chain of car dealers.

“The industry has understood that overproduction and excessive inventories as the old model is not where they want to be,” said Mike Jackson, CEO of AutoNation Inc. “I really think there’s a new strategy going forward.”

Since automakers book revenue when they ship cars from factories to dealer lots, they have tended to produce more cars than the market demands, then use incentives to wheedle dealers into accepting them. But excessive incentives can eat into carmaker profits and damage vehicle brands.

The Covid-19 pandemic has broken the U.S. auto industry of its bad habits, Jackson said in an interview Monday.

Factory shutdowns because of the chip shortage and the Covid-19 pandemic have hobbled auto production over the past year, with output cut in North America by 5 million vehicles. That has led to historically low inventory in the new-car market and pushed the average price of a new vehicle above $40,000 — an all-time high that would have been considered a luxury price tag not long ago.

The imbalance between supply and demand has given consumers sticker shock and is driving up inflation, but it’s been a boon to corporate earnings. Ford Motor Co. brightened its previously gloomy outlook, saying it expects stronger second-quarter results thanks to growing demand and a sharp rise in the prices.

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“Our pricing is just strengthening every day,” Ford CEO Jim Farley said at a conference last month. “It’s pretty breathtaking actually.”

General Motors Co. said in May that it would hit “the higher end” of its 2021 earnings target, despite a chip shortage that is leaving many dealer lots bare.

Vehicle production should fully recover next year, Jackson said, but even with factories humming at full capacity, it will take longer for automakers to catch up with demand. The pandemic has created a stronger preference for personal transportation, a lasting shift in consumer taste, he said.

Dealers also are benefiting from sky-high prices. AutoNation on Monday reported a fifth-straight record quarter, beating analysts’ estimates with $6.98 billion in revenue, up 54% from a year earlier. Its profit of $4.83 a share blew past the average analyst estimate of $2.81.

AutoNation rose less than 1% to $103.31 at 10:19 a.m. in New York, defying a rout in the broader market sparked by the spread of the coronavirus’s delta variant. The stock had surged 47% this year through July 16.

The pandemic still carries plenty of downside for automakers. The lack of chips is leaving factories idle and delaying the launch of key vehicles.

Startup Rivian Automotive Inc. said last week that it would delay the arrival of its debut electric pickup until September, citing supply-chain bottlenecks. Meanwhile, Ford and Stellantis NV are battling chip shortages as they launch the high-profile Ford Bronco and Jeep Wagoneer models, respectively.

–By Gabrielle Coppola (Bloomberg)

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