Automakers’ shares finally rose on Friday after a poor performance for the last seven months. This is because investors are expected sales in the coming months to shoot up thanks to the devastation caused by Hurricane Harvey in Texas.
Hurricane Harvey made landfall in Texas last week as a Category 4 hurricane. Wind speeds of greater than 130mph, torrential rain and massive storm surges left much of the state devastated. Houston, the fourth largest city in the US, was ravaged by Harvey, with record breaking flooding. The storm not only caused destruction to land and buildings, but, according to Jonathan Smoke, Chief Economist at Cox Automotive, also the worst damage to vehicles in history. Hurricane Harvey has caused more vehicular damage than either Hurricane Katrina (2005) in New Orleans or Superstorm Sandy (2012) in New York City. This is because Houston is a much larger city than New Orleans so property damage was much more, and Harvey caused way more flooding than Sandy did.
Current estimates say around 300,000 to 500,000 passenger vehicles were damaged or destroyed in the Houston area alone due to Harvey. That figure may even go up to 1 million once a complete assessment of damages is made. That is approximately $2.7 billion – $4.9 billion in damages. And these figures do not include the vehicles that were parked for sale in dealer lots; that damage is still being assessed.
In all this destruction, there is a silver lining for the auto industry. The industry has been struggling the entire year, with most automakers’ sales showing a drop from the previous year. Share prices have also been dipping. This downslide should now change. Analysts have noted that auto sales usually surge in the wake of a natural disaster, as it did for Superstorm Sandy. At that time, auto sales shot up 49%The Houston area is the 9th largest vehicle market in the nation, with Ford being the market leader with an 18% market share.
The end of August marked zero sales in the Houston area, which also contributed to the poor performance of the auto industry. No sales are expected to come out of Houston even in the first two weeks of September while assessments on damage are done and insurance claims are filed. Automotive dealers will also be trying to get back on their feet. Some dealers would not be affected if they were outside the flooding areas, while other dealerships would have been totaled by the storm.
The auto companies will also be scrambling to ship new and used vehicles to the affected areas. There is a huge inventory in the US auto market right now. However, most of this inventory is in the light vehicle (especially the sedans and hatchbacks) segment. Texas is a light trucks market. Meaning, people love their crossover SUVs, SUVs and pick-up trucks. They will not settle for a small car. This means automakers will have to beef up the inventory in this segment. This is going to be the challenge, as sales data shows that consumers now prefer the light truck segment over the traditional light vehicle segment.
Auto sales should start picking up by the end of September and carry on well into 2018. Investors are already responding to this expectation, with the Detroit Big 3 (General Motors Co, Ford and Fiat Chrysler) share prices going up lately.
General Motors Co closed up at 2.9% at $37.60 per share. Ford went up 3.3% to $11.39 per share. Fiat Chrysler shot up 5.2% to $15.90, the highest their stocks have been in 5 years.