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Autos, 2009 and Beyond
By Josh DeForest
January 15, 2010 07:35 AM
Anyone with even cursory knowledge of the automotive industry knows that 2009 saw such tumult and tremendous upheaval that we are unlikely to ever see again. Certainly the industry was crippled and nearly brought to its knees in a panic that for some made the Y2K scare (remember that!?) seem like child’s play.
Most noticeably, 2009 saw record low car sales reaching an annualized rate of 9 million new car sales per year (a decline of almost 7 million from peak to trough).
We witnessed two of the Big Three file for bankruptcy, something that some would say should have happened many years ago. This, in the end, will benefit all three in no small way albeit in much different ways. Ford immerged as the American hero in the eyes of the consumer, not taking a bailout and really stepped up its product lines. They have revolutionized the way we look at American cars an image that (with the exception of trucks) was tarnished by a lack of innovation and styling. Chrysler and GM, have been given a second chance (even if it is on the taxpayer’s dime) to retool their operations and hopefully get out from under the throes of the UAW to once again be profitable.
Then we experienced the “Cash for Clunkers” program that promised much and delivered little more than a roller coaster ride that made all involved sick to their stomachs (see our August 6th and September 18th articles). In the end, we sold tomorrow’s cars today with a hefty price tag for the taxpayer.
Some of this change was inevitable, almost all of it was painful, but in the end I think we will look back and say that the automotive industry immerged a much stronger and formidable force in the midst of increased competition.
For one, the number of new to four year old cars at the end of 2009 was down substantially and the projection for 2010 expects even further decline (this figure peaked in 2004). According to data from RL Polk, the scrappage rate was around 2%, indicating that we have fewer recent used cars because of lack of supply. We have already seen used car values increase and we expect this trend to continue but with much of the increase already behind us. New car sales will increase over the course of 2010, but with jobs growth slow in the making, it is unlikely that this increase will be so great as to reverse this trend.
2010 should be a good year for automotive dealers and the institutions that finance their products. The auto industry has trimmed a lot of the fat with respect to brands, dealerships, and overall costs. For the automakers this coupled with increasing sales should help them in their quest to return to profitability. For individual dealerships, the news is even better; eventually pent up demand will be released and with less competition those dealerships that were able to weather the storm will reap the benefits.
Possibly the biggest opportunity for financial institutions lies in leasing. All of the big players have exited the business and there is significant opportunity to build a brand while the competition waits on the sidelines. The Fed is going to have to increase rates and when this happens leasing becomes more attractive by comparison. Finally, higher used vehicle prices reduce residual risk and the lack of competition (especially subvention) allows lessors to create leasing programs on their own terms.
We see tremendous opportunity in the automotive sector for those that are quick enough to begin to act now. The economy has not experienced a full recovery yet, that is for certain, but what is also certain is that first adopters are always the ones who are rewarded and if you wait until the conditions are right, it will be too late.
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