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Are Light Vehicle Sales on a Secular Decline?

Sejuti Banerjea

The automotive industry came out with its monthly sales data this week and things don’t look so good. While March does seem to be something of a low point, the seasonally adjusted annualized rate (SAAR) was the lowest in two years. Data provider Autodata says that SAAR of sales for March 2017 was 16.62 million units compared with 16.67 million units a year ago.

WardsAuto data was even more conservative at around 16.53 million units. Analysts polled by Reuters were expecting around 17.3 million units, so auto stocks did a nose dive following the results.

What Seems to Be the Problem?

Used Car Prices Are on a Decline: With used car supplies on a rise as a large number of previously-leased cars reportedly hit the market, there is a pressure on prices. This impacts new car sales because of cheaper used car alternatives. It also extends the replacement cycle since turning in an old car fetches a lower price. This affects new car sales.

Longer Holding Period: People have been hanging on to their cars longer than they did earlier, mainly because of the extended recessionary conditions that made consumers more conservative. So even after the markets got more conducive, the decision to replace has become dependent on incentives (at least in part). Morgan Stanley expects government incentives like cash for clunkers to kick in some time this year, as older cars without the latest safety equipment continue to get into more accidents.

Lower Gas Prices, Rising Consumer Confidence: This would be positive for car sales; just that consumers seem to be bypassing the light vehicle category and opting for SUVs and pickups instead. This is an overall positive for automakers although negative for their light models because SUVs and trucks are higher-priced and generate higher profits. IHS Markit analyst Stephanie Brinley says that new SUV models to hit the market this year will ensure strong sales and “These vehicles will continue to drive the story of increasing popularity of utility vehicles and maintain pressure on car sales.”

Rising Delinquencies on Auto Loans: The last few years have been favorable from an interest rate perspective, helping sell cars, especially to those who would not otherwise have bought one. But the situation is getting a bit out of control as the 60+ day delinquency rate for subprime auto loans is at the highest in at least seven years, according to Fitch. But since car sales remain hard to make, it could further increase competition between lenders, adding to their risk (as Moody’s predicts). This would mean a contraction in loan supply further down the line, driving a vicious cycle. 

Automakers have now started increasing their discounts on cars in order to burn off rising inventories and there should be corresponding negative impact on profits. But sales levels indicate that even the heavy discounting is not fetching desired results, so they may be required to cut production. This will of course lead to lower capacity utilization and thereby, hit margins again.

2017 Was Supposed to Be Good

Morgan Stanley was positive about car sales going into the year and estimated that sales would grow 2-4%. It was banking on higher replacement and government incentives.

Germany’s Center for Automotive Research (CAR) estimated a 2% increase, on the back of Trump’s economic stimulus programs and tax cuts.

J.D. Power and LMC Automotive said that expected fiscal stimulus and deregulatory policies of President Donald Trump would boost sales.

BMI Research was less enthusiastic, saying that the market was reaching a natural plateau after several years or strong growth and that rising used car stocks and the debt situation would take a toll. It expects a 1-1.8% decline this year despite 1% growth in SUVs and trucks.

March Gainers and Losers

The top gainers in March shipments were General Motors GM 1.5%, Tesla Motors TSLA 45.9%, Nissan 3.2%, Volkswagen 2.6%, Mitsubishi 6.2%, Mazda 4.9%, BMW 3.6%, Daimler 2.0%, Subaru 11.3%, Porsche 3.6%.

The top losers in March were Ford F -7.2%, Fiat Chrysler Automobiles FCAU -4.6%, Toyota Motor Sales (TM) -2.1%, Honda HMC -0.7%, Hyundai -8.0%, Volvo Cars -21.9%, Kia Motors -15.2%.

Summing Up

This year could see automakers under pressure to sell accumulated inventory of light vehicles and they may also be driven to cut production. But there will be a boost in other areas, so companies like Ford that have popular models in those categories will do well.

Second, there is expected to be a steady flow of new SUV models that will also be positive for automakers’ revenue and profitability. Not all automakers have gotten in the electric car game, but 2017 should also see some speeding up there, particularly because it is incentivized by the government.

So although light vehicle sales remain disappointing and the near to mid-term prospects in that category aren’t too bright, this may not be a disappointing year for automakers.

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