In his State of the Union Address, President Obama gave a shout-out to the auto industry, touting its best year ever.
I’ve been cautiously optimistic about the return of the auto industry, but it got me thinking — can this resurgence last?
U.S. automotive sales in 2015 were the highest on record with 17.5 million cars and small trucks sold. This new standard is an increase of nearly 6 percent from 2014 and was the first time sales were close to that high since 2000.
According to the Wall Street Journal, low gas prices, around $2 per gallon nationwide, and plentiful credit were key factors in the banner-setting year and are leading auto makers to project a continuation of a healthy demand for higher-margin pickup trucks and SUVs, which fatten their bottom lines.
Similarities to last industry failure
While this is great news for Detroit, similarities between today’s high-water mark and the robust sales of 15 years ago could also be indicators of a downturn in sales similar to the one that marred the automotive market just under a decade ago.
Right off the top of my head, factors such as low interest rates, availability of product and a booming economy fueled the car-buying frenzy at the turn of the century. I also remember the economy cooling and gas prices soaring, which led to consumers seeking out more fuel-efficient means of transportation.
Auto makers started seeing a decline in sales in 2006 but seemed to view the dip as a temporary trend. Detroit continued its push of SUVs and less fuel-efficient vehicles but attempted to entice buyers with incentives such as 0 percent financing. As the economy collapsed, new-car sales plummeted. By the end of 2008, auto sales fell by 400,000 vehicles, a 37-percent decrease from the previous year.
Too big to fail
This devastating blow put the auto industry in jeopardy and necessitated an $80 billion bailout as Congress deemed the industry too big to fail. Congress helped keep the industry afloat but accused manufacturers of not operating competitively for years, choosing profits over sustainability. Legislators’ laundry list of conditions in which the bailout would be issued included a push towards making alternate-energy vehicles, eliminating ballooning executive salaries and more wage equality between union and non-union laborers.
One of the big things I remember from that bailout was when a few CEOs were forced to sell their private jets and take $1.00 annual salaries while the mess was cleaned up.
Fortunately, the bailout worked. By the end of 2014, the Treasury Department was completely paid back and made billions in profits. The icing on the cake, however, was a healthy auto industry.
With low interest rates, low gas prices and an the Great Recession in the rearview mirror, which allows lenders to offer loans to prime, subprime and nonprime buyers alike, I can see how another auto collapse could be in the cards. However, if the auto industry’s analytical experts are to be believed, a collapse is not likely.
Strong sales forecasted
In a report by the detroit news, Lacey Plache, chief economist at Edmunds.com said that a peak in the low 18-million range is “not unreasonable” and Bank of America Merrill Lynch Global Research analyst John Murphy predicted sales will hit 18 million by 2018. In that same report, Steven Szakaly, chief economist for the National Automobile Dealers Association said in January that selling 18 million vehicles by the end of the decade would be “a stretch,” but he seems to be one of the few dissenting voices.
New car sales bottomed out in 2009 at 10.4 million units sold. Since then, new car sales have increased by an average of close to one million per year. Edmonds.com predicts this trend to continue into 2016 at around 18.1 million new vehicles sold.
Following suit, IHS Automotive, a global leader in industry analytics, predicts this upward trend in auto sales will continue for at least the next few years and then level out to sales numbers similar to 2015’s throughout the rest of the decade and beyond.
I see several reasons for this perceived leveling-out. One has to do with interest rates, which have maintained for several years but are expected to increase over the next few years. Just a 2-percent increase in interest could make a difference of thousands of dollars over the course of a car loan.
Another factor is one of the reasons sales have gone up so drastically, which is sub-prime buyers being able to achieve car loans. As with the recent housing bust, many unqualified buyers have been granted loans without the means to make consistent payments. A strong economy could keep these buyers in the black, but a dip in the economy could cause an increase in the default rate.
Leased vehicles play role
Yet another factor is the percentage of leased vehicles in the market. According to Experian, as of the third quarter of 2015, over 26 percent of all new cars were leased with an average APR of 5 percent. While low lease rates are pulling in new customers, the inevitable wave of used cars flooding lots in the coming years will be quite the sight. In fact, Manheim projects nearly half a million more cars are coming off of a lease every year with 2016 predicted to see 3 million vehicles returned to dealerships.
These leased cars will not be able to be sold at their peak values, meaning dealers could potentially take losses on a high percentage of their inventories.
I believe there are several reasons to the automotive industry has every right to expect a boom for the next decade or so, but in order to maintain current growth, manufacturers must avoid the mistakes of the past in their practices and adaptability. As long as that happens, I feel minor fluctuations in interest rates, the economy and product availability will not hurt the industry’s imminent success.
Given these factors, where do you believe the automobile industry is headed? Being that this is a presidential election year, do you see a chance for politics to play into economic factors that could either aid or hurt the economy and consequentially the industry? What are some other factors that should be considered? I open the discussion to you.
Jim Jabaay is vice president of sales at LotVantage, a SaaS Software company that provides a complete set of online inventory marketing applications for auto, powersports, marine and RV dealers. He can be reached at (866) 881-3229 or email@example.com. Operators also can visit the company’s website at www.LotVantage.com.