Where new-model SAAR should be to keep used market healthy

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The American International Automobile Dealers Association reported that average length of time a new model sat on a dealer’s lot hit 70 days in March — the longest stretch of time since July 2009. Edmunds contends current new-vehicle inventory levels haven’t been this high since 2004.

Cox Automotive chief economist Tom Webb sees the assertions from AIADA and Edmunds stemming from franchised dealers starting both February and March with more than 4 million new units in stock as a headwind for both used- and new-vehicle sales.

Webb explained that hefty incentives were applied to that new-model inventory — a move that eventually places pressure on used-vehicle values — and the industry achieved a seasonally adjusted annual selling rate (SAAR) of 17.5 million in February. The strategy repeated in March, but the new-model SAAR fell to 16.5 million — the lowest reading since February 2015.

“Last month’s weak sales pace, plus less-than-needed production cuts, has left dealers with still too much new metal on the ground,” Webb said.

During his last quarterly conference call, Webb elaborated about where he thinks a healthy new-vehicle sales pace can be that leaves the used-vehicle segment with plenty of retail room to maneuver.

“I think if you look at it from a very long, long trend what you might term the underlying demand for new vehicles — the current vehicles in operation plus scrappage — I don’t think it’s that much north of 16 million going longer term. So the SAAR at some point has to move down below 17 million. But again it’s dependent upon what real retail demand there is out there,” Webb said.

“The fact that dealers have 4-plus million new vehicles in stock is the pressure on used-vehicle values. Obviously that’s too many,” he reiterated.

While used-vehicle production certainly can be attributed to situations such as trade-ins and off-lease returns, Webb acknowledged automakers have difficult challenges in managing factory production.

“A production adjustment has to be made with the sales pace in March being a disappointment,” Webb said. “We didn’t make a lot of the progress in terms of getting new-vehicle inventories in line. There’s still an overhang. To the extent the manufacturers produce to demand, then you don’t have that downward pressure on used-vehicle values. To a certain extent, I’m still hopeful that is what they will do.

“I’m somewhat surprised they’ve left their dealers holding that much inventory for such an extended period of time now rather than adjust,” he went on to say. “I know some of it has to do with imbalances and production schedules etc. But still, it is not a good thing for them since they also hold the residual values on 10 million leases out there.

“It’s not good for the manufacturers and it’s certainly not good for the dealers,” Webb added.

Update on rental-risk prices & volume

Manheim reported the average price for rental risk units sold at auction in March remained down 3 percent year-over-year. Webb explained prices were up relative to February, but less than the normal seasonal pattern would indicate.

Webb went on to note that a straight average of auction pricing for rental risk units in March represented a 3.5-percent rise from a year ago, “reflecting a better mix of market classes and lower mileage.” He added that SUVs and CUVs accounted for 33 percent of rental risk sales in March of this year versus only 25 percent last March. The share accounted for by compact cars fell from 29 percent to 25 percent.

Manheim also pointed out that average mileage for rental risk units in March (36,800 miles) decreased by 10 versus a year ago.

“Rental risk volumes sold at auction in the first quarter were up considerably, even compared to last year’s high level,” Webb said. “Unlike last year when dispositions were being driven by a high number of new units’ entering the fleet, this year’s off-rental volume was more the result of fleet rationalization. As such, off-rental auction volumes may weaken later in the year.”

Webb also touched on how the best of off-rental units aren’t necessary being skimmed off by rental car companies and being wholesaled other places than having those units come down the lanes.

“There was fear as the rental car companies used non-auction channels — direct to dealer sales and retail customers — that the auctions would end up with the higher mileage poor condition vehicles, the less desirable vehicles. But that has not been the case,” Webb said.

“I watch it very closely with the types of vehicles that come through our auctions and the condition levels. We’re not skewed in any way along those lines so that’s heartening,” he continued.

Meanwhile as those new-vehicle inventories pile up, Webb pointed out that OEMs aren’t falling back into previous practices by sending more units into the fleet space. Manheim determined that the combined rental, commercial fleet and government purchases of new vehicles decreased by 13 percent year-over-year in March, with the “all-important” rental segment down the most at a 14 percent decline. 

“Granted, that was relative to a very high level a year ago,” Webb interjected.

“Certainly in the way past, basically when you had a lot of program cars, that was an avenue,” he continued. “Even when the manufacturers had ownerships in the rental car companies, you could use that as an avenue to keep factories open.

“Given the restructuring i.e. the bankruptcies that occurred during the recession, the manufacturers have a lot more flexibility in terms of production and in terms of making labor a more variable cost than a total fixed cost,” Webb went on to say. “To that extent, there’s less of a need to do that. Certainly they got burned in the past doing it. So to a large extent, most have not done that.”

And what about rental car companies working deals with the automakers?

“You look at the rental car companies and they’ll tell you they’re not getting that great of a deal in terms of the pricing,” Webb replied. “Certainly there’ll be a manufacturer of a particular model that will put a little pressure on the rental car company to take some of those units to even things out. But in the overall scene, they’re not overly pushing the market, which is a good thing.”

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