Why Ford's CEO Thinks Auto Sales Haven't Peaked

Ford CEO Mark Fields presented the all-new 2015 Ford Edge at an event last year. Strong sales of the new Edge helped boost Ford's profit in the second quarter. Source: Ford Motor Company

Is the market for new vehicles in the U.S. peaking?

That's what some analysts think. Sales were up strongly in the years following the economic crisis, as you'd expect during an economic recovery. But so far this year, U.S. auto sales have grown just 4.5%.

Right now, the rate of sales in the U.S. is hovering close to the highest levels reached last decade, when gas was cheap and credit was easy. That suggests that there isn't a whole lot of room left for growth.

But does that suggest a peak? At least one expert doesn't think so.

Ford's CEO isn't worried about a "peak" quite yetFord CEO Mark Fields doesn't see it as a "peak." Rather, in his view, it's a "plateau" -- a level of sales that can probably be sustained for a while.

As he said during Ford's second-quarter earnings conference call, "There's a lot of discussion around the market being at a peak, but I really term it a plateau. When you look at what's driving the market, it's really around replacement demand. In any mature market, about 80% of the industry in any given year is driven by replacement demand."

"Replacement demand" is exactly what it sounds like: Individuals, businesses, and governments buying new vehicles to replace old ones. That can happen because old vehicles wear out, because needs change, or because folks like to have new cars with the latest features.

To some extent, those kinds of purchases are contingent on the economy. When times are tough, the old car can be run for another year or two, or the latest features can be lived without for a while longer. But in good times (and often in not-so-good times), old vehicles get replaced.

Fields noted that the average age of a vehicle in the U.S. is now over 11 years old. That's very high, in historical terms. Fields thinks that will continue to drive strong new-car sales for a while longer.

But a plateau in U.S. auto sales isn't all good news: Ford's pricing could come under pressure.

A "plateau" could still put pressure on Ford's bottom lineIt's easy for automakers to post year-over-year sales growth when economic times are improving. If conditions this year are better than last year, people and businesses will buy more vehicles. Sales will go up.

Right now, the pace of new-vehicle sales in the U.S. is very strong. If it's just as strong at this time next year, that will mean that the economy is still in good shape -- but it will also mean that automakers will have to find other ways to generate year-over-year sales growth.

How will they do that? It's likely that they'll do it by discounting. In fact, Fields said that some automakers are already boosting incentives on car models. Many automakers, including Ford, have seen sedan sales fall as more buyers choose SUVs and pickups. Some have boosted incentives on car models in an effort to lure more buyers.

"We have to watch that closely," Fields said. Incentives are part of the business of selling cars. But if they grow too high, they can cut into profit margins.

Fields doesn't expect that to impact Ford's results in North America, because incentives across the industry have stayed flat -- or even decreased -- on truck models. That bodes well for Ford: Ford's SUV sales are up strongly this year, and Fields (like just about everyone else) expects Ford's pickup sales to rise in the second half of 2015 once Ford's dealers have full inventories of the new F-150.

Ford is well-positioned to profit -- for the momentCertainly, a "plateau" in U.S. auto sales is a better prospect than a slump, for lots of reasons. But it still raises the prospect that profit margins at Ford and its rivals could come under pressure as some automakers boost discounts in an effort to generate year-over-year sales growth.

As long as demand for its pickups and SUVs remains strong, Ford's bottom line in its North America unit is -- probably -- insulated from that effect. But that could change, and Ford investors will be watching.

The article Why Ford's CEO Thinks Auto Sales Haven't Peaked originally appeared on Fool.com.

John Rosevear owns shares of Ford. The Motley Fool recommends Ford. 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.

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