Detroit may be celebrating era about to end

After 3 years of record sales for automakers, analysts see signs of harder times on horizon

DETROIT — Automakers have reason to celebrate as they gather this week at the Detroit auto show to unveil the new range of brawny trucks, high-tech cars and rugged sport utility vehicles that will arrive in showrooms in the months ahead.

They just ended 2017 with sales in the United States topping 17 million vehicles for the third year in a row, the best three-year stretch the industry has ever experienced.

Spurred by low gas prices, Americans are snapping up trucks and SUVs, which generate fat profits for manufacturers. The U.S. economy remains strong, with unemployment low and interest rates modest.

“It’s going to be a very good year in 2018,” said Mike Jackson, chief executive of AutoNation, the nation’s largest auto retailer.

But a closer look suggests that the industry may be headed for choppier waters than the hoopla in Detroit would indicate. While sales are healthy, consumers are actually buying fewer new vehicles. Purchases by individual customers at dealerships — known as retail sales and considered the most accurate reflection of demand — declined slightly in both 2016 and 2017. Some automakers are offsetting lower consumer purchasing by selling more cars to fleets like rental-car companies.

More worrisome is that the drops in retail sales have come even as manufacturers have resorted to heftier discounts, which eat into their profits. Sales incentives are now equal to more than 11 percent of the average vehicle’s sticker price. As recently as 2014, that figure was below 8 percent.

There are other troubling signs, too. Interest rates have started rising, which increases the cost of financing or leasing a new car. Younger buyers are showing less interest in owning cars than older generations.

And the supply of low-mileage used cars is growing, giving shoppers attractive and lower-cost alternatives to new cars. Close to 4 million leased vehicles will be turned in and offered for sale as used models this year, up from 3.6 million in 2017.

“There’s a lot of headwinds out there,” said Mark Wakefield, global head of the automotive and industrial practice at Alix Partners, a consulting firm.

The auto industry has a long history of going from boom to bust — periods of rising sales and profits followed by inevitable slumps that leave idle plants and mounting losses. The last bust coincided with the 2008 financial crisis and nearly ruined Detroit. General Motors and Chrysler had to be saved by federally engineered bankruptcy proceedings.

Now analysts are wondering if harder times are arriving again.

Alix is forecasting a moderate drop in sales this year, followed by steeper declines in 2019 and 2020. In both of those years, Alix believes sales will fall short of 16 million cars and trucks.

This uncertainty comes as manufacturers are adding factories. BMW and Audi are finishing new plants in Mexico. Volvo’s new plant in South Carolina will start building luxury sedans this year. Toyota Motor is adding a new truck plant in Mexico and just announced it would build a car factory with Mazda in Alabama.

Fiat Chrysler is ramping up a plant in Michigan that had been idle for more than two years, after retooling it to make pickup trucks instead of cars.

The industry runs into trouble when automakers get stuck producing more vehicles than customers are willing to buy, said Ron Harbour, an auto manufacturing expert at Oliver Wyman, another consulting firm.

He added that one part of the industry was already in considerable distress — the car business. With Americans flocking to roomy vehicles like SUVs, sales of family sedans and compacts have plunged in the last few years. Family cars like the Toyota Camry used to make up 25 percent of all new-vehicle sales. Now they account for just 15 percent.

As a result, some manufacturers are seeing a split in their operations. While running truck factories almost around the clock, they have been idling workers, cutting shifts or slowing assembly lines at their car plants.

“I wouldn’t be surprised to see a car plant close in the next few years,” if auto sales fall below 16 million vehicles a year as forecast, Harbour said. “Somebody’s going to have to bite the bullet.”