TORONTO, ONTARIO and CHICAGO, ILLINOIS--(Marketwire - Feb. 17, 2012) - With auto show season in full swing, and GM reporting record profits, there are positive signs that the industry is headed in the right direction despite economic uncertainty. BMO today released an overview of what is driving sales and what's around the corner for the remainder of the year.
Auto Sales - New and Used
Auto sales got off to a great start in 2012, extending the trend toward recovery from the sharp contraction during the recession. In January, sales in Canada were 15 per cent higher than a year ago, while U.S. sales jumped 11 per cent. On a seasonally adjusted basis, last month's sales amounted to 1.8 million units in Canada and 14.2 million in the U.S.
"We look for sales to total about 14.3 million units in the U.S. and 1.6 million in Canada. This compares with 12.8 million and 1.59 million, respectively, in 2011. But there is the potential for a surprise on the upside," said Kenrick Jordan, Senior Economist, BMO Capital Markets. "With the availability of Japanese products back to normal levels this year, we see Japanese automakers making every effort to regain market share. This should make for attractive pricing. Furthermore, because consumers put off purchases in view of weak economic growth during the past few years, there is some pent-up demand, particularly in the U.S., where the average vehicle age is at a record high. Also, a slew of new products in the market may well entice cautious consumers to buy."
Maryann Keller, President of Maryann Keller and Associates, noted that there are some ideal conditions that are encouraging people to buy cars. Vehicle prices have generally increased by only single digits, employment has improved and interest rates have been very low, meaning that car loan rates have also improved affordability.
"Vehicle affordability is improving, as lenders are proving to be more likely to provide credit across all credit tiers," said Ms. Keller. "While the demand has improved for new cars, so has the demand for used cars. The Manheim Index indicates that used car values have risen to record levels through January, meaning trade-in values have also ticked upward, giving consumers more trade-in equity toward the purchase of a newer vehicle."
Ms. Keller added that upwards of 75 per cent of auto dealers in the US are hiring, which bodes well for peripheral businesses that serve the auto industry, including auto parts manufacturers.
Dealerships Making Changes in Canada and U.S.
The dealer landscape in Canada is continuing to evolve. There were approximately 3,500 dealerships nationwide last year, a number that reflects the stability of retail business within Canada.
"What we're noticing is that dealers are contributing to the experience of the consumer through significant investments in the form of new facilities, upgrades to showrooms and technology, as well as staff training," said Robert Sadokierski, Vice President, Dealership Finance, BMO Bank of Montreal.
Another trend expected to continue is more consolidation of ownership of dealerships to groups that control multiple dealerships. Many dealers are forced to sell their businesses mainly because of two factors: issues with succession, such as no family to carry on the business; as well as insufficient capital requirements to expand in the industry, particularly in urban markets where real estate values pose a challenge.
Mr. Sadokierski added that overall, there is continued strong performance in the luxury sector as well as by manufacturers who have well-priced sub-compact and compact vehicles.
"The U.S. auto industry has experienced significant turmoil over the last several years, particularly the turbulence and sales declines of 2008 and 2009," said Ghram Debes, Managing Director, Head of Dealership Finance, BMO Harris Bank. "But now we have had consecutive years, in 2010 and 2011, of good sales pace, despite disruptions caused by the earthquake and tsunami in Asia.
"With leaner expense structures, lower inventory levels and an improving economy, many dealers I talked to went from their worst year to one of their best, for net profit, in the span of two years," he added.
Mr. Debes also noted that there are more signs of strength for the future. Many dealers are now investing in facility upgrades and new technology to make themselves more competitive. There has been increased consolidation of stores, as larger groups are buying single-point dealers in both public and private transactions. Finally, the average age of a vehicle on the road today is more than 11 years, and cars don't last forever.
The full report can be downloaded by clicking here, and to listen to an MP3 of the expert panel, please click here.