Inside Automotive with Jim Fitzpatrick, powered by CBT News

Profit Over Volume: Why Discipline Matters in Today's Car Market

• Jim Fitzpatrick • Season 1 • Episode 10

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Kevin Tynan, Director of Research at the Presidio Group, discusses the auto industry's shift from chasing market share to maintaining pricing power and margin integrity. This new discipline among manufacturers creates a healthier market environment with controlled production levels and stronger profitability despite lower sales volumes.

• June sales volume was not impressive but pricing power and margin integrity remain strong
• Industry has moved away from chasing market share and overproducing inventory
• Production discipline learned during pandemic shortages is creating a more stable market
• EV sales may surge temporarily as $7,500 federal tax credits face potential elimination
• This surge should not be misinterpreted as genuine demand but rather consumers chasing deals
• The true organic EV market will finally become visible in late 2025/early 2026 without subsidies
• North America rushed to match China's EV pace despite not controlling the mineral supply chain
• American manufacturers excel at producing profitable trucks and SUVs for the domestic market
• Dealerships represent an "undiscovered opportunity" with four diverse revenue streams
• Auto parts retailers provide strong investment returns through their counter-cyclical business model
• Vehicle affordability challenges will persist as domestic brands maintain higher price positioning


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Jim Fitzpatrick:

Welcome to Inside.

Jim Fitzpatrick:

Automotive with Jim Fitzpatrick. Hey everyone, Jim Fitzpatrick, thanks so much for joining me on another edition of Inside Automotive right here at CBT News. Joining us now is Kevin Tynan, Director of Research at the Presidio Group. Kevin, thank you so much for taking the time out of what is a very busy summer for you. I know you crisscrossed the country speaking at so many different association meetings and conferences and such, so thanks for taking the time with us. We appreciate it. Here we are in the beginning of July, so talk to us a little bit about June sales. What are some of the things that jump out at you? Talk to us a little bit about June sales.

Kevin Tynan:

What are some of the things that jump out at you? Yeah, I would say, when you look at the volume, the seasonally adjusted rate probably not super impressive, especially compared to earlier in the year, march and April, where you had this tariff threat. But you know, I'm kind of more focused on the pricing power and the margin integrity than the volume number. So for me I look at it where, hey, if it's a 15, low 15s, and the manufacturers aren't overproducing which it looks like they're not to me that means that we have a reasonably organic, firm price, reasonable margin kind of market going forward and I think that's better for the industry, for retailers, and I get it. Retailers see opportunity in more than just the new vehicle sale. You know there's other benefits to creating a buyer, whether it's in finance and insurance or as a service customer or whatever it winds up being, but ultimately to not be oversupplied, have some firm pricing and visibility.

Kevin Tynan:

going forward is not a bad thing for the industry.

Jim Fitzpatrick:

No, it's not, and we've talked about that before, in terms of lower volume and higher gross profits and such for more of a healthy, profitable dealership overall. And I don't think dealers have a major problem with that right, I mean, if they're not chasing the 17 million SAR which, as we talked about before, I'm not so sure how important that is, as it is to the dealer versus the OEMs, right.

Kevin Tynan:

Yeah, and that's interesting because in my travels in the past month and talking to a lot of dealers and other industry watchers, it seems like, or it feels like, the industry is not chasing market share for the sake of market share anymore. Obviously, there are a few that are oversupplied and will have to do that, and it may be in small pockets of nameplates. Specifically, some models aren't selling as well and it's inventory management at the end of the day, but you know there would always be this thread or somebody would always bring up to me oh, all it takes is one bad actor to chase market share.

Kevin Tynan:

And then everybody jumped in and it's this price war race to the bottom.

Kevin Tynan:

And it feels like it's not that kind of industry anymore where manufacturers have gotten a little bit more disciplined on production, and maybe that's the lesson learned from that value of scarcity during the pandemic period, but it doesn't look like there's this rush to run the factory 24-7 and just choke the dealers with inventory, so it feels a little bit different in that sense. I will say, though, the concern you have is if there is that production discipline, that production capacity still exists and at some point that has to be dealt with, because it's costly to run your factories below 80 percent persistently, and I think at some point those costs have to be rationalized.

Jim Fitzpatrick:

That's right. That's right. Maybe they can build a little cheaper car with that extra time on their hands, right?

Kevin Tynan:

Yeah, you know, and that's an interesting concept and I've heard a lot of people talk about that this summer, and I guess it depends on who you are as an automaker, you know, if you look at the domestic manufacturers who have really moved up market in that mixed shift to truck from car where your average transaction price is in the low to mid $50,000 range, you know I question what does creating a low content $20,000 vehicle do for you other than lose money? And it feels a little bit like putting your worst foot forward where you're putting a stripper out there for $20,000. And then what's next? Right, you're still not profitable to up to close to $50,000.

Jim Fitzpatrick:

That's right. Yeah, what did you win?

Kevin Tynan:

Yes, so you know what's next for that consumer. They're still unprofitable for you in the low 30s, probably even into the 40s. So you get a customer who, even if they do like the product, you're still going to be married to an unprofitable consumer for two or three more purchases. So it's an interesting dynamic, but I'm not sure it works for a lot of automakers.

Jim Fitzpatrick:

That's right. That's right. So what will this mean, with the numbers coming in now, for June? What does it mean for Q3?

Kevin Tynan:

I mean, if you had to give a forecast here, yeah, well, so I think we are the back half of the year probably looks more like May and June in a 15 range, which again is not a bad thing.

Jim Fitzpatrick:

Yeah.

Kevin Tynan:

What it does. Though, if we're talking about that volume being a reflection of pricing power and margin, it means that affordability isn't coming back. Maybe there's a couple of brands in there that are aggressively discounting just to get inventory in control, but once it's there, I would expect that the domestic brands, those dealers, they're not coming back down market and this was kind of my message through the summer was you know, don't expect that right.

Kevin Tynan:

Those you know, your Stellantis brands, your GM brands, the Ford brands, are not going to get less expensive If they are in control of their output and their inventory. It's only going to go and be inflationary in that sense. The other thing, or where I think the deals will be, will be with EV subsidies or tax rebates or whatever winds up happening, getting cut off and maybe, sooner than people realize, that could be the end of September. Instead of a stair step down, that could be a chop all at once.

Kevin Tynan:

And you're going to see this mad scramble, which I think has already started, for aggressive lease, ev deals or cash on the hood or low rate financing. I think what you might see is a sort of false narrative, that is, ev sales are surging but it's really just not getting caught holding the bag if you're a dealership, for when those incentives go away. Essentially, if you think about the $7,500 federal tax credit, it would be an instant increase by $7,500 in the price of the vehicle.

Jim Fitzpatrick:

Sure, no question, and much the way we saw the latter part of March. You spur a lot of activity in sales due to the threat in early April of tariffs hitting. We're going to be seeing the same thing now with the possible loss of the $7,500 a car on EVs, where this actually might clean out the shelves of EVs at dealerships, right.

Kevin Tynan:

Right, but I would be careful not to interpret it as strong demand for that product. I mean, I think, when you're talking about sub $200 a month leases with, you know there's obviously some money to put down there. But you know still, if you calculate it out, 24 month leases are under $400. And where you look at average payments are these days that's probably half of what people are expecting to pay.

Kevin Tynan:

You know so. So I would just be careful that that's not a legitimate signal of demand other than consumers looking to buy that kind of deal. I would not expect it to be sustainable going forward. But you know, post that period, I think for the first time probably ever in late 25 and into 26, we will see what the EV market organically actually looks like.

Jim Fitzpatrick:

That's right.

Kevin Tynan:

That's right If those federal and state subsidies and incentives go away, we'll have a pretty good idea of what that looks like. I mean, we know what profitability, or the lack thereof, looks like for the manufacturers. We'll see, I guess, a better gauge of where organic demand from the consumer actually is on those products.

Jim Fitzpatrick:

And the same holds true on the used car market for EVs right.

Kevin Tynan:

Yeah, yeah, I mean I think you have the. You have a little bit of the unknown of what a used or high mileage battery means versus what we've traditionally considered. You know, a high mileage car. Okay.

Kevin Tynan:

So a hundred thousand miles on a on an engine and internal combustion engine isn't as scary, obviously, as it used to be. But I think people aren't sure I don't know that we have real good testing techniques or pre-purchase inspection methods that can say here's the health of this battery. I'm sure it's out there, but I'm not sure the average consumer understands what that looks like. So those products may be a little bit scary for them. And then on the other end of it, even if you are confident in those kinds of diagnostics, repair is going to be significantly a different financial burden than what it would be for an internal combustion vehicle. It may not go as frequently, you might not have as many of the little problems, but the big problems are everything.

Jim Fitzpatrick:

That's right. That's right. It is amazing. You and I have been talking now for years and we've seen this whole surge of EVs where the whole industry is going oh, we're going all in on EVs and of course the laws were out there that said by 2035, it's going to be all EVs in certain states. And now we see that go away. We see the $7,500 going away, we see it all going away. Manufacturers have made a complete 180 on this.

Kevin Tynan:

EV situation right, and this is all within like the last three years, maybe something like that, right? Yeah, it is incredible, you know, and I actually one of my stops was a conference with some very smart and connected people. In terms of China, you know, and in the back of my mind and there's a couple of people I discussed this with that kind of agree with me is, you know, not that the move to electrification was bad, but it feels like we were doing it at China's pace or trying to keep pace, and, on the one hand, you hear all the time that it's a race we can't win. China has put electricity as their focus for decades right.

Kevin Tynan:

They control the supply chain, the mining, the processing of the minerals. They put this in place over the course of decades because they didn't want to be beholden to oil, to petroleum, so they can do electricity. So it makes sense for them to make their transportation and commercial and passenger to be electric. And I feel like we got caught in this mindset that we're falling behind technologically. But it's a move that I'm not sure we definitely needed to make or to make at the pace of China right. So where, why not be good at the game we play, which is internal combustion vehicles powered by gasoline, and then we move towards electrification as it makes sense for our market, rather than jumping in with both feet on something that we don't control? So now we can't control pricing and cost, so it winds up not being profitable for us and we're trading essentially that dependence on foreign oil to dependence on China's minerals and mining and processing and their supply chain, and I'm not sure that that's a good trade.

Jim Fitzpatrick:

Don't you think this was all driven though by a certain element in government that said we gotta go clean energy and I'm gonna be the hero, the white knight in shining armor, that's gonna to bring clean energy, and we're going to have clean air and this is going to be good for the environment, and we're going to put these things into place without any Right?

Kevin Tynan:

Again, how, in the early days and even now, how are we powering these things?

Jim Fitzpatrick:

Right.

Kevin Tynan:

So we're not using a whole lot of renewable. I mean and again that's to my point is, maybe we'll get there over time at a more reasonable pace.

Kevin Tynan:

But if we're powering electric vehicles with coal, ultimately, at the end of the day, we're just moving the air quality, or lack thereof from one country to another or one state to another, you know, and it feels like again it was rushed to the point where, yeah, you know, we will develop these technologies over time, but to say, to put a deadline on it or force automakers to do unprofitable things very quickly, it just seems like we're playing right into the strengths of our opponent, which is to go electric very quickly.

Jim Fitzpatrick:

That's right.

Kevin Tynan:

And I don't know that that was totally necessary. We can absolutely get there, but the irony is that everybody tells us we should be doing it also tells us it's a game we can't win. We can't keep up with China, their pace of innovation, their labor force, their industrial policy, all these things. So why are we even playing that game?

Jim Fitzpatrick:

That's right. That's right. And when we interview Michael Dunn, who you know is a foremost authority on the China auto industry, he says we are on an island on this planet and China and EVs are everywhere except here in North America. But they're coming I mean these cheaper. We've talked about it before, right.

Kevin Tynan:

Yeah, and I saw Michael at the China.

Jim Fitzpatrick:

Yeah, I'm sure you did when you mentioned you were there.

Kevin Tynan:

Yeah, and what was interesting is and my sort of point is playing devil's advocate is so if China isn't doing EVs in the US and Canada, so what Right? Like it's not like we have. Our manufacturers have over too much capacity of electric vehicles. We're trying to jam them into Europe and we're losing.

Jim Fitzpatrick:

Yeah.

Kevin Tynan:

Or to jam them into China and we're losing, or to jam them into China and we're losing. We're not Right. So so we're doing what we do here and I don't understand the problem with continuing to do that. Well, look, if we're a pickup and SUV market and we automakers have focused on this on the North America markets and are very profitable doing it, and have retreated out of China and out of Europe because the demand profile there doesn't match what we built here, I'm not seeing where that's, you know, a complete failure.

Kevin Tynan:

I think, again, we can move in those directions at our pace, but let's do what we do well, while we're doing those other things. And that's ultimately, I think, what happened. If you think about Europe, right, and China builds a lot of capacity for electric vehicles, they satisfy their domestic market, but there's still too much capacity. So now you go to look for markets to put it in and they wind up winning in Europe and they wind up winning in other emerging markets or mature markets, but we're not necessarily competing head to head. Our domestic manufacturers got out of a lot of those markets years ago because they were chronically losing money for yeah, yeah, it's good point.

Kevin Tynan:

That's a good point yeah.

Jim Fitzpatrick:

Yeah.

Kevin Tynan:

So don't hit the, don't hit the panic button just yet. I mean, if you're making money doing what you do in North America and your operation is right size to be that in that region and do it profitably, okay, and then we'll, we'll invest in some of these other technologies, as you know, as we see necessary, but I don't know that the rush is really there to to throw out the baby with the bathwater and then, at the flick of a switch, say we're going to get rid of this 100 plus years of technology and do this thing which we don't lead, in which we're not good at, which we don't have the supply chain set up for.

Kevin Tynan:

Which is expensive, which is unprofitable. So it's an interesting problem and we'll see, I guess, how it plays out over the next couple of years.

Jim Fitzpatrick:

Hey, this is a question that, just as an economist that I mean you worked at Bloomberg and now the Presidio Group and you're in that community for sure Does it surprise you that the stock market is doing pretty well right now in light of all of this uncertainty out there with tariffs and interest rates and gas and Well, look, I don't pick stocks anymore, but I do think about this that when you look at the different ways to play the auto industry, I mean it is, and not just now, but for a very long time.

Kevin Tynan:

you know, even when I started in this industry, I feel like the manufacturers are a very difficult place to differentiate them, to pick a winner. You know, I feel like it's this basket of companies that basically do the same thing.

Jim Fitzpatrick:

Yeah.

Kevin Tynan:

That are essentially subject to the same macroeconomic conditions, regionally, wherever they're producing. And I don't want to call the space uninvestable, but you know, if you look at the returns of automakers over time, they're not great. You know. And even if you consider a Tesla, like the way it whipsaws in terms of its valuation, you know it spikes, it plummets it spikes it plummets.

Kevin Tynan:

You know, it's a very it's a nerve wracking place to think about in terms of investing, you know. And then there's other areas. The suppliers are difficult, too, because they're always beholden to cost cuts and what their OE partners are trying to do in terms of production volume and guarantees and things like that the dealerships and we've talked about this, I feel like is the undiscovered opportunity. Essentially, you're talking about four businesses under one roof.

Jim Fitzpatrick:

That's right.

Kevin Tynan:

Whether it's new, used part, service, finance and insurance, and there's that ability to revenue diversity. And it's a nimble, resilient group that can kind of go where the opportunity is yeah, they pivot.

Jim Fitzpatrick:

I'm not getting new cars, I'll sell used cars. I'm not getting either, I'll go to fixed stops and collision. It really is, you're right, and the other one that I've found interesting.

Kevin Tynan:

That has done well. When you look at returns in the stock market that doesn't get talked about. A lot is the retail auto parts companies, parts companies, you know, if you pull up a chart of an. Autozone or an O'Reilly's, you know, over time way better return from those companies than you would see from manufacturing right and manufacturing which historically has always been a high volume, low margin market.

Kevin Tynan:

Some of these other places have been way better opportunity. They just don't get the headlines. You know the stories just aren't as sexy as talking about a Tesla or even a Ford Motor Company or GM or Stellantis brands. But from an investment perspective it's a very difficult you know, almost perplexing way to think about making money in the markets as related to the auto industry.

Jim Fitzpatrick:

Yeah, yeah, there's no question. I saw a report that Brian Benstock had shared with us here at CBT News and that business is just skyrocketing, the parts business and is just continuing to grow in the billions and billions of dollars. It's been really something.

Kevin Tynan:

Yeah, it's an interesting business because I think it's sort of counter-cyclical in the sense that if the new vehicle market is slow, people are holding on right. We're seeing average age of vehicles go up, right Repair maintenance, and there's also the part where people want to buy chemicals, do their oil changes. That's right, but also clean, you know interior exterior do some detailing.

Jim Fitzpatrick:

Yeah, that's right.

Kevin Tynan:

So there's a lot of components of that business. But even in that situation where people are buying new or not buying new and holding on longer in the periods where they are buying new, you figure they're just replenishing the fleet anyway, and that may be five, six, seven years down the road, but you're just backfilling. You know the, the, the, the, the registered vehicles somewhere near 300 million in this country and people will need parts and chemicals for those things going forward.

Kevin Tynan:

So it's almost like there's not a bad time to be getting involved with with retail auto parts, because you're either you're either building the fleet for five, seven years down the road or you're addressing aging vehicles today.

Jim Fitzpatrick:

That's right, that's right.

Kevin Tynan:

Just philosophically interesting space.

Jim Fitzpatrick:

That's right. I'm going to go buy Petboy stock now, after this conversation.

Kevin Tynan:

Well, now you can't Not anymore. What are the publicly traded ones?

Jim Fitzpatrick:

Maybe AutoZone, then I'll find one of them AutoZone Advanced.

Kevin Tynan:

Auto Parts Genuine Parts, they I'll find one of them Advanced auto parts.

Jim Fitzpatrick:

Genuine parts. Yeah, they're out there. That's right. Kevin Tynan, director of Research at the Presidio Group. Thank you so much for joining us on the show. Very much appreciate it. I know our dealer viewers get a lot out of your time here, so appreciate it.

Kevin Tynan:

Thanks, Jim.

Jim Fitzpatrick:

Happy summer to you, yes, you too. Thanks for watching Inside Automotive with Jim Fitzpatrick.