Phil Biggs covers the automotive industry for NewsTalk 1340 WJRW
July 17, 2014 – 11:00 am ET
DETROIT, Michigan. – Most auto industry experts euphorically proclaimed optimism for continued growth late last year as 2013 finished with sales of 15.6 million new passenger cars and light trucks. But in December when none of the world’s top eight automakers met analysts’ estimates, things began to get dicey. Coupled with an abysmal first quarter 2014, many industry watchers suggested the “relative boom times” over the past few years may have landed them in the ditch.
But a strong rebound since March has restored confidence and we now look to be headed on a path to 16.5 million in annualized sales, and we could even flirt with 17 million, which would propel the industry to 2007 pre-recession levels. There are several reasons to support the favorable projections for the second half of 2014, even though some business challenges remain as a possible roadblock to best-case performance. Here are a few observations:
Positive economic indicators provide the basis for buoyed confidence. Leading the way for strong sales in the remainder of 2014 are record-low interest rates, pent-up demand and fairly stable signs of a sustained recovery. These positive trends, along with consumer confidence sitting at a six-year high, continue to lead willing consumers into dealerships with no signs of slowing down. Edmunds.com senior analyst Jessica Caldwell says the impressive rate of sales will be in place during the summer months and through the remainder of 2014.”Sales continue to be really strong. That speaks to a lot of the momentum in the market place right now. It’s a good indicator for the next six months.”
Enticing low interest financing options are widely available, which on the one hand offers car buyers easier access to credit. But on the other hand, as Morgan Stanley analyst Adam Jonas points out, the increased use of six- and seven-year loans is a “disturbing trend that could cause consumers to wait longer between purchases, and take them out of their normal trade cycle.” Jonas confirms that this could create a vacuum that may lead to demand problems later this decade.
Nevertheless, Morgan Stanley is forecasting U.S. volumes that reach 18 million during 2017, which would surpass the highest rate ever for the industry. New car sales this year are getting a boost from a surge in lease returns, as leasing has increased every year since hitting bottom in 2009 according to Edmunds.com. Higher fleet sales, arrival of new models, and continued lenient credit to car buyers are likewise contributing factors to what appears will be a strong 2014 finish.
Technology now plays a big role in driving higher transaction prices. Because of longer term car loans, some car buyers today are more able to afford and sample the latest in-vehicle gadgets. It is becoming the norm, as many automakers are beginning to standardize telematics, infotainment, new safety control modules and other on-board technologies – particularly in luxury segments – and consumer demand for these systems is growing.
Not only is today’s vehicle itself more than 85% comprised of integrated software systems, but so is the dizzying array of driver control choices: haptic-sensing feedback, multi-touch hand gestures, proximity sensing, natural speech recognition, smartphone-like display modules, car cameras, active park assist, adaptive cruise control, lane keeping technology…the list goes on and on.
The ever-growing volume of on-board technology is largely what is pushing the dramatic increase in vehicle sticker prices, and now 2014 is likely to be the first year in which the average transaction price tops $30,000, according to Automotive News. When considering there are nearly 4,000 fewer U.S. auto dealers doing business today, and with retail incentives at a low point, it makes sales volume predictions believable and margin growth look exciting.
So what might sideline this continued sales crescendo? The historic causes for concern are “incentive creep” where dealers promote unwarranted consumer rebates in order to drive sales over profit, and whether funds for new vehicle purchases continue to remain flush and available.
But the elephant in the room is what happens next to the housing market. For decades housing has signaled the strength or weakness of the auto industry by serving as a leading indicator of how auto sales will perform. With housing starts off nearly 20% from 2014 projections, new home sales at the moment aren’t serving as the proven marker of future auto sales. Home builders, economists and analysts point to several factors crimping the supply of new homes in the U.S. last year, including scarcity of buildable lots and tight labor markets in some regions. But the Wall Street Journal suggests “the bigger culprit was weakened demand due to the 1% rise in rates during Q3 2013, spiking the national average to 4.5%.”
Home mortgage rates this year have continued to rise slightly which in turn has further weakened consumer demand in housing thus far in 2014. As many unemployed workers struggle to find new jobs, and if families delay new home purchases, will auto sales remain disconnected to the housing sector and maintain their torrid pace anyway…defying precedent? Or will the auto industry re-align with historic economic patterns and relinquish its 2014 momentum? Stay tuned…
Phil Biggs is Executive Vice President for the Nashville, TN-based technology company, NeXovation.
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