Wednesday, December 2, 2009

Heavy Truck and Auto Parts Sales Outlook 2010 – The Politics of Parts

We are looking at some growth in 2010 for heavy truck parts and auto parts, but we might be missing the opportunity for more significant growth. Why? Two reasons: (1) we will grow in 2009 simply because it is the bottom of the hole and everything looks like up from here, and (2) we might not realize our growth potential because our pace for climbing out of this hole has a lot to do with consumer confidence.

We recently finished two “collaborative” parts sales forecasts for 2010 – 2012; one for auto parts sales, and another for heavy truck parts sales. The process was interesting and consisted of two rounds of participation. First off, we provided the OEMs data on sales “drivers” (things like fuel prices and miles driven) and what we saw as implications. The OEMs then critiqued our drivers and our implications. In the second round, we mentally “ingested” all these drivers and took a whack at forecasting each OEM’s year-over-year parts sales for 2010 (the red “Carlisle” line in the top chart). Each OEM was given a code so that the final results were blind. The OEMs then provided their blind forecasts, which, generally, were less bullish than ours. For the most part, we all agreed that 2010 looks better than 2009 when looking at year-over-year parts sales.

Many of the big drivers of a parts sales upturn seem to stem from consumer confidence. Consumer confidence drives increased spending, which drives increased retail sales and production, which translates into more goods to be moved for HT, and more new retail sales for auto.

The OE auto parts sales forecast differs significantly from the heavy truck forecast. It is simpler. The light vehicle sales market is selling below the replacement rate of 15 million units or so. In fact, just getting to the replacement level of sales would be great; all we need is some more consumer confidence to get to this level.

Heavy truck parts sales service the general economy. We need to move more freight over the roads to drive increased parts sales; more construction, more consumption, more manufacturing, more jobs, more use of parked trucks. Coupled with some positive signals in a somewhat recovering economy, new emissions regulations could hasten fleet replacement, and a surge in HT parts sales. However, even with all this, modal trends do not favor a return to the good old days. Warren Buffett just bought the Burlington Northern Railroad. He’s a pretty smart billionaire. Buffett thinks that evolving market conditions favor more rail and more intermodal.

Going back to the top chart, the big difference between the bullish “Carlisle” forecasts and the OEM forecasts is all about the speed of the recession recovery. There’s good news here and some not-so-good news.

The Dow hit 10,000 again in October and people don’t feel so poor anymore. The big question is how this growth in paper wealth will translate into spending. The last few months have shown some expected improvements in certain fundamentals of the economy, but we’ve had some disappointments on some of the soft things that ultimately drive consumer confidence. Things could be better.

Consumer confidence with the present situation is at a very low point. Why? Hey, we missed the bullet and avoided a depression with Obama’s controversial economic stimulus. The meltdown of the economy was certainly a top worry for many consumers, but now we are on to the next score of worries. Americans are worried about the government going broke. Thomas Friedman (I still really do not care for him) described this as the Warren Buffett principle:
The Warren Buffett principle: Everything I’ve ever gotten in life is largely due to the fact that I was born in this country, America, at this time with these opportunities for its citizens. It is the primary obligation of our generation to turn over a similar America to our kids.
Obama’s job approval numbers are also at a low point. It was not enough for him to dodge the depression bullet; much of his magic was all about change (that really is not happening), trust, brilliance, and hoped-for decisiveness. Few see the brilliance or “change” with his indecisive efforts in healthcare reform efforts. Afghanistan war policy is another matter. Healthcare reform is all about same-old-same-old compromises. Afghanistan is pretty much all about Pakistan. So, folks - call them consumers - have lost trust in him. Even the NY Times is riding hard on Mr. Middling. Maureen Dowd has some new nicknames for him, and Paul Krugman never drank the Obama Kool-Aid. Obama’s job approval is tanking, and this will have a significant negative impact on consumer confidence … now that we all know it will take 2 years for the jobs to come back. Since we are a consumer economy, this will snowball into lagging GDP, and continued consumerism belt-tightening (that dreaded Keynesian paradox). Consumer confidence will just have to reflect reality and not partly trust, respect, and hope.

Bottom Line: Pretty much everybody agrees that we should see year-over-year parts sales growth in 2010. The big question is, how much? There are certain certainties out there that guarantee a slower recovery: a still bursting mortgage bubble and very high unemployment. Offsetting this anchor is pretty much a lone soldier: consumer confidence. How much growth? It pretty much depends on Barack Obama. Is he a Jimmy Carter? Or the good parts of Bill Clinton?

In the next few weeks we will scratch beneath the surface and look at key parts sales driver

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