Used-Car Market Intelligence Report: Part I

CARY, N.C.  - 

While hurdles are still on the horizon, the used-vehicle industry began 2012 with some very encouraging signs for dealers, automakers, remarketers, auctions and others in the business.

Given this environment, Auto Remarketing took a deep dive into these used-car opportunities and challenges from the first half of 2012 in a special “Used-Car Market Intelligence Report."

To shed more light on this topic, this section takes a look in fine detail at key areas of the used-car business. We begin this three-part series by examining leasing and residual values.

Leasing Strength to Continue

Starting with the lease business — which has had its ups-and-downs over the past few years — J.D. Power and Associates indicated recently it believes the leasing levels franchised dealers witnessed through the first six months of the year should continue as the rest of 2012 rolls along.

In fact, senior director Thomas King told Auto Remarketing last month that he expects lease penetration for the balance of 2012 to be similar to year-to-date levels — holding at 20 percent to 21 percent.

“Although we do anticipate greater volatility on a monthly basis,” King cautioned, adding the factors that could sway the net impact leasing penetration.

Those factors included:

—Continuation of depressed lease-return volumes due to the decline in leasing in 2008 and 2009.
—Continuation of elevated 72-month (and longer) loan penetration, which provides consumers with reduced monthly payments and an alternative to leasing.
—Continued recovery of the subprime market, which is contributing to overall industry growth but has a limited impact on leasing (lower credit buyers have a low propensity to lease).
—Luxury vehicle sales recovering from a slow start to the year as luxury buyers have a high propensity to lease.
—New product activity as OEMs are planning multiple new and redesigned products, typically using incentive tactics biased to lease customers rather than cash/finance buyers.

King also explained any leasing trends that might unfold based on which vehicle segment and brand.

“In all segments, we expect to see volatility as manufacturers sell down old models prior to the launch of new/redesigned models,” he stated. “During sell down, manufacturers tend to use elevated cash and finance incentives, while new-model incentives are typically biased towards leasing in order to take advantage of strong residuals on the new-model-year/redesigned products.

“Lease penetration will likely peak at the end of the year as luxury brands launch their traditional year-end sales initiatives,” King added.

King wrapped up his midyear analysis with Auto Remarketing by touching on expectation for 2013.

“We expect overall industry retail demand to increase in 2013 relative to 2012 — from 11.6 million retail sales in ’12 to 12.3 million retail sales in ’13,” King highlighted. “This overall expansion will lead to elevated lease volumes.

“Lease penetration is expected to be flat to slightly above 2012 levels,” he continued. “Leasing in 2013 will benefit from an increase in lease returns, reflecting the recovery of new vehicle leasing that began in the fourth quarter of 2009.”

Top Players in New-Vehicle Leasing

When Experian Automotive revealed its first-quarter State of the Automotive Finance Market Report in late May, the firm looked at the biggest lease providers in the new-vehicle market.

With regard to the strongest share of the new lease market, American Honda Finance topped the list (16.5 percent), followed by Toyota Financial Services and Ford Motor Credit, both of which were at 11.4 percent.

Nissan Infiniti Financial Services was next at 10.8 percent, according to Experian, followed by Ally (9.0 percent). Hyundai Capital America took a 7.5-percent share, while Volkswagen Credit came in at 7.3 percent. Mercedes-Benz Financial pulled in a 6-percent share of the market, followed by BMW Bank of North America (5.6 percent) and Chase Auto Finance (3.0 percent), respectively.

Ranking these same lenders based on the percent of their new-vehicle financing that are leases, Mercedes-Benz Financial (76.21 percent) topped the list, with BMW Bank of North America (56.92 percent) in second, officials noted.

Hyundai Capital America was at 52.95 percent, followed by VW Credit at 52.41 percent. Nissan Infiniti Financial Services had 46.19-percent penetration, with American Honda Finance at 43.03 percent.

Next up, Toyota Financial Services (31.05 percent) and Ford Motor Credit (31.23 percent) were close in this measure, as well. Ally came in at 21.61 percent, and Chase Auto Finance was at 11.54 percent.

Residual Value Trends

Next up is our look at residual values. For this feature, ALG shared with Auto Remarketing in June some of the movements in this area during the first half of the year, while also offering a comparison to the year-ago period.

One key point ALG illustrated is that the projected 36-month residual values for new model-year vehicles in its July-August edition were only slightly lower than the residual projections in January-February, largely because of an adjustment to account for the “current sustained strength of used-car values,” explained
Eric Lyman, ALG’s vice president of residual value solutions.

More specifically, ALG noted that 36-month residuals for new model-year vehicles were at 48 percent in the January-February edition. For July-August, it was 47 percent due to a 2-point positive adjustment for the aforementioned strength in used values.

In other words, without the adjustment, the slide in value retention would have been stronger, Lyman said.

Breaking it down by brand, ALG pointed out that the two makes expected to command the most retention (Mini and Subaru, respectively) were the same when comparing the January-February edition to the July-August edition.

“Subaru and Mini continue the behaviors that contribute to higher residuals,” Lyman said. “Lower incentives, less fleet penetration and strong product are characteristics of both brands.”

Moving along, one of the moves that the firm highlighted was that of Honda. The brand was ranked sixth for projected residual strength (52 percent) in the January-February edition, but despite its anticipated retention dropping 0.4 percentage points, Honda moved up to No. 3 on the list for July-August.

ALG explained that the introduction of 2012 model-year units (CR-V, CR-Z and the Ridgeline) for the March-April edition drove this change.

More specifically, the top three makes for expected residual strength in each period were as follows, with expected 36-month residual value in parenthesis:

1. Mini (56.2 percent)
2. Subaru (54.2 percent)
3. Acura (52.5 percent)

1. Mini (54.7 percent)
2. Subaru (53.7 percent)
3. Honda (51.6 percent)

Another interesting move that ALG highlighted was Fiat’s. In the January-February edition, its residual projection was at 41.1 percent. But the brand moved up two spots and its residual climbed to 43.6 percent, due to the positive adjustment on the Fiat 500 model, which occurred for the March-April edition, ALG explained.

Next up, ALG offered a residual analysis by segment. Officials pointed out that the top three segments for projected value retention in the January-February edition (sporty compact, sport subcompact and compact, respectively) were in the same order at the top of the list for the July-August edition.

Though No. 1 in both periods, the residual for sporty compact dipped from 55.7 percent to 53.4 percent. ALG pointed out that the Honda Civic, Volkswagen Golf, Mazda3 and Nissan Sentra had downward impacts.

One segment showing a significant uptick is the microcar segment. Projected residuals here climbed from 38 percent in the January-February edition to 41.9 percent in the July-August edition. This led to the segment climbing four spots in the rankings. ALG emphasized the adjustment for Smart in the July-August edition as being pivotal.

Year-Over-Year Comparison

Comparing projected residual values in the July-August edition to the year-ago edition, ALG found that retained value expectations increased from 45.4 percent to 47 percent. Lyman attributed this largely to the sustained strength in used values as well as the behaviors by automakers that have led to positive residual outcomes.

Lyman also shared the three segments showing the most improvement from the year-ago. At the top of the list was midsize pickup class, whose residual value projection climbed from 45.2 percent in July-August 2011 to 49.9 percent for July-August of 2012.

He attributed this gain to the refresh for the Toyota Tacoma, as well as the discontinuations of the Ford Ranger and Dodge Dakota.

Showing the second highest improvement from a year ago was the subcompact segment, whose projected residuals climbed from 45.7 percent to 49.5 percent thanks to all the new models in this class.

In fact, the Hyundai Accent, Chevrolet Sonic, Kia Rio and Nissan Versa all had new models for this year, Lyman pointed out. Also driving up residuals in the subcompact class was ALG moving the Mini Cooper base model – which commands strong retention – into the class, and the aforementioned adjustment for the Fiat 500.

Next up on the improvement list was the full-size car segment, which climbed from 40 percent to 43.2 percent. This was due partly to the exits of the Ford Crown Victoria, Mercury Grand Marquis and Lincoln Town Car, which made up a “huge chunk” of this class, but had lower residuals.

Additionally, residuals for the Dodge Charger and Chrysler 300 were up; and the Hyundai Azera was all new, all of which pushed up residuals for full-size car segment.

Auto Remarketing Editor Joe Overby contributed to this report.

Editor’s note: Stay tuned to
Auto Remarketing Today for Parts II and III of the “Used-Car Market Intelligence Report,” where we look at used retail sales, used-vehicle values, retail used supply and wholesale volume. The complete report can be found in the July 1 print edition of Auto Remarketing.

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