2 Concerns Automotive Investors Should Keep an Eye On

By Auto Fool.com

General Motors HQ in Detroit, MI. Image source: General Motors.

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If you keep up to date with the automotive industry, you've probably heard concerns about new vehicle sales peaking in the U.S.ad nauseam, and the doom and gloom that this scenario spells out for automakers such as Ford Motor Company and General Motors . However, analysts and Detroit's two largest automakers themselves have noted that they can break even if new vehicle sales in the U.S. merely reach between 10 million and 11 million vehicles annually -- a level barely tested even during the depths of the Great Recession.

Investors shouldn't worry too much about "peak auto sales" quite yet; but that doesn't mean that there aren't related factors to be concerned about. Here are a couple to keep in mind as we move forward.

Two dreaded words
There are many two-word combinations that are vile; in the automotive industry, one such combination is excess capacity. In a way, excess capacity is the root of all evil, and research from IHS Automotive was a little sobering for investors.

Looking at 2015 data, IHS Automotive estimated that the global automotive industry's production capacity reached 119 million units, and exceeded actual production by 31 million units last year. While investors can't single out any specific automaker from this data, the estimate has the global auto industry working at about 74% capacity, which is below the level investors would like to see.

On the bright side, there's a reason behind those figures. IHS Automotive estimated that excess capacity as a percent of production was 7% in the U.S., which is great because that's the driving force behind the vast majority of Detroit automakers' profits. Europe, where automakers have struggled to make profits in recent years, had an excess capacity of about 22%.

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Lastly, China had an excess capacity of about 54% of production last year, which speaks to automakers banking on the country providing substantial new vehicle-sales growth in the years ahead. If that doesn't materialize because of economic issues, automakers' margins and profits will take a hit.

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In addition to excess capacity
Another concern for investors will be the ability of automakers to drive average transaction prices higher. Recently, that hasn't been a problem, with Ford noting its ATPs rose $1,600 in March compared to the prior year -- which was double the rate of the industry average. GM also increased its ATPs by a similar $1,500 per vehicle last month.

However, automakers will likely face pricing pressure globally because of a plethora of new vehicles being rolled out worldwide. It's no secret that a fresher vehicle lineup sells better. That's forcing automakers to invest more heavily in mid-cycle model refreshes, and more often.

"In the old days, facelifts were too modest and the customer didn't notice. They were probably $10 million to $20 million jobs," while nowadays broader revisions can easily cost $100 million to $200 million, Chris Theodore, former vice president of product development at Ford, and vice president of platform engineering at Chrysler, told Automotive News.

Ralph Gilles, global design chief for Fiat Chrysler Automobiles, told Automotive News that the company has become much-more proactive in what he calls "life cycle management." Ten or 15 years ago, a mid-cycle enhancement was different, he says: "The product would be three years in the market, and we'd touch the bumpers, paint and grille. These days, we're touching the product every two years, and in some cases, every year."

Even further, beyond excess capacity and more-expensive refreshes, there's a wave of off-lease vehicles about to come back to dealerships. Consider that 27% more cars were sold with three-year leases in 2013 than in 2012, according to Edmunds.com. Those fresh off-lease vehicles are pushing the average used car age from 4.6 in 2012 down to 4.4 years in 2015. Newer used vehicles could mean more-competitive options for consumers looking to purchase a vehicle, thus putting more pricing pressure on new-vehicle sales, as used vehicles cannibalize sales.

Ultimately, with sales of SUVs and full-size trucks on fire in the U.S., as well as excess capacity estimated to be in the single digits, major automakers are reaping the rewards. And despite peak auto sales concerns, automakers have breakeven levels far below what they used to.

However, that doesn't mean there aren't factors to be concerned about. Investors would be wise to keep an eye on excess capacity in China, as well as the trends of more frequent and expensive mid-cycle refreshes and newer used cars.

The article 2 Concerns Automotive Investors Should Keep an Eye On originally appeared on Fool.com.

Daniel Miller owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.