Considering the state of world events and market conditions, 2011 turned out to be a pretty good year for auto dealers, at least compared with 2010. According to information published by Autodata Corp., total light vehicle sales for 2011 was expected to surpass 12.5 million units (as of press time) – an approximate 10% increase over sales in 2010. To some experts, these numbers are an indicator of an improving economy and consumer demand. To others, this trend was inevitable.
According to a recent article from The Detroit News, economists for both General Motors Co. and Ford Motor Company expect U.S. auto sales to increase in 2012 above the expected 12.5 million units that were forecast for 2011. A general figure that seems to be circulating in the industry is that we may see vehicles sales in the 13.5 to 14.0 million range, which would represent another 10% increase.
Why is everyone so bullish on auto sales, in spite of a sluggish economy? Five simple reasons:
1) Average age of vehicles:
The past 15 years have seen a steady increase in the average age of vehicles, according to a Polk research firm. In 2011 the average age of vehicles on the road was 11 years. This trend is due to two reasons: vehicles are more durable and customers are holding on to their cars longer. At some point, however, as older cars break down and the cost of repairs start to rise, the benefits of holding onto a car versus purchasing a new one will be tipped in favor of the latter. As that tipping point is reached for millions of older cars, consumers will start trading them in.
2) Scrappage rates:
Starting with ‘Cash for Clunkers’ in 2009, scrappage rates remained higher than usual for two years, with total numbers of cars scrapped exceeding the total numbers of new vehicles registered. According to Polk research, the trend of scrappage rates exceeding sales was expected to continue through 2010 and 2011.
And in another article from The Detroit News, a sales analyst from Ford Motor Co. predicted that scrappage rates of 6% on 250 million vehicles on the road in the U.S. (in 2011) would generate the need for 12.5 million to 13 million new vehicles.
Scrapping statistics are generally viewed as a bellwether for future gains in vehicle sales. The higher the scrappage rate, the more demand for new and used vehicles.
3) Inventory levels back to normal:
Last year was a bad year for Japanese automakers. The tsunami in March severely impacted inventory levels for much of the year. Supply chain interruptions caused by the tsunami also affected U.S. manufacturers’ production.
Then, just as things were getting back to normal, flooding in Thailand threatened to impact production again. As of press time some auto plants in Thailand had been shut down, and the expected impact to production was unknown. However, we predict any slowdown will be short-lived and the impact on inventory levels will be nowhere near as severe as was caused by the tsunami.
In Q4 of 2011, AutoNation was expected to receive shipments of 30,000 units from Japan, well above their average rate of 27,000, indicating that Japanese automakers are up to 110% of their pre-tsunami production levels. Presumably other auto dealers are also back to normal inventory levels as we head into 2012.
4) Easing lending requirements:
Since the 2008 crisis, banks and finance companies have taken losses in real estate and business loans. One bright spot, however, has been in automotive retail. Apparently people are more likely to walk away from their homes than let their cars be repossessed. Banks took minimal losses, if any, for car loans, so naturally their interest in this area has grown and they have begun to ease lending requirements.
According to an Experian Automotive Credit Trends Report released in 2011, banks starting easing up lending in the second half of 2011. New car loans for buyers with credit scores below prime jumped 22.4% in 2011 compared to 2010, while car buyers with the worst credit, deep subprime scores, saw the largest increase of 44.1% over the same period.
Since almost half of all consumers have credit scores below prime, that’s good news for both car shoppers and auto dealers.
5) New, innovative products:
In 2012 automakers are releasing new products that are in compliance with increased government regulations, as well as appeal to increased consumer demand for fuel-efficient, safer, and “green” vehicles.
Some innovations include:
- Many 2012 vehicles will have higher miles-per-gallon (MPG) compared to models from previous years. 40 MPG is the new standard in compact vehicles.
- Start-Stop Technology: Hybrid owners are familiar with start-stop technology, but now manufacturers are expanding its use because it’s an inexpensive way to improve a vehicle’s fuel economy by up to 10%.
- Electronic Stability Control (ESC): the government has mandated that all 2012 models under 10,000 lbs. have ESC, which has been proven to reduce fatalities in accidents.
- Inflatable seat belts: Ford Motor Company is introducing this innovation, which combines the features of traditional seat belts with those of airbags. The feature enhances safety, especially for rear seat passengers such as young children who are more vulnerable in crashes.
- Luxury: The 2012 Ford Focus will have new perks: rain-sensing wipers, a parallel parking system, a blind spot warning system, a backup camera, ambient lighting, push-button ignition, a stitched dashboard and a navigation system. In the past, consumers would have to pay for a pricey model to have all these luxuries included, now they are becoming de facto in less expensive models.
- “Green” Cars: Some consumers want more than fuel efficiency. Car manufacturers have responded by producing new cars using recycled and environmentally friendly filler in the seats, headliners and carpets. The Ford Fusion Hybrid, for example, has seats made from reclaimed plastic.
The combination of older cars and high scrappage rates indicates a pent-up demand for new vehicles, and thanks to lending requirements easing up, along with normal inventory levels, consumers will find it easier to purchase a new car in 2012 than in recent years. Additionally, auto manufacturers are offering plenty of choices with increased fuel efficiency, safety features and other attractive options for consumers.
For these reasons, I believe that 2012 will be better than 2011, and another 10% increase in sales would put us that much further down the road back to 15-16 million units.