Changes Needed in Auto Industry

After a recent relapse to the $71 level, oil prices are rebounding with the June light sweet crude on the NYMEX trading at near $75 a barrel. Increased tensions in Iran concerning the development of its nuclear program and the country’s refusal to co-operate have market watchers thinking of what happened in Iraq and the subsequent war.

 The trend for oil is clearly higher. Iran’s deputy oil minister warned the world that the price of crude oil could inevitably trade at $100 a barrel in the upcoming winter. I feel this comment is somewhat exaggerated given the timeline involved, but I do feel that oil does have chance to eventually trade at $100 a barrel if current demand-supply imbalances and geopolitical tensions drag on. I do not have a timeline, but base it on extending out the current upward sloping trendline.

 As the busy summer driving season approaches, gasoline prices may continue to rise and hold at well over $3 a gallon. For U.S. automakers such as General Motors Corp. (NYSE/GM) and Ford Motor Co. (NYSE/F), it will continue to be difficult given the existing trend. U.S. automakers who have made lots of money from SUVs are seeing softening sales. April sales for the U.S. automakers were once again troublesome. GM saw its April adjusted sales fall 7% year-over-year, while Ford also recorded a similar 7% drop in April sales. DaimlerChrysler (NYSE/DCX) reported an equally unimpressive 6% decline.

 On the other end, Japanese automakers continue to perform well. Honda Motor Co. Ltd. (NYSE/HMC) saw its April U.S. sales jump 6.5% after releasing an impressive new line of cars and trucks. The shift to Japanese vehicles was even made more evident as Honda saw its U.S. truck sales surge 9.3% in April. Toyota (NYSE/TM) saw its April U.S. sales rise 8.5%. Only Nissan Motors (NASDAQ/NSANY) recorded a decline with April sales falling 1.7%.

Advertisement

 The reality is the U.S. automakers must adjust their product mix and focus less on SUVs and more on innovation and fuel efficient vehicles whether fossil fuel-based or a hybrid. If this does not happen, I expect the downward slide in U.S. automakers will continue in the foreseeable future.