New-car glut weighs on prices, profits

on Apr24

For years experts have warned that a wave of off-lease vehicles returning to market in 2016-18 could send used-vehicle prices plummeting. In recent weeks, Wall Street analysts and business reporters have picked up on the theme, saying collapsing used-vehicle prices could end the streaks of rising sales for used and new vehicles.

But so far, the auto industry has taken the off-lease glut in stride. Used prices have softened only slightly.

Instead, the threat is from a different glut: rising inventories of new cars and trucks.

In fact, the cause and effect is playing out in reverse: Excess new-vehicle volumes — and rising incentives automakers are throwing at the problem — are having a more negative effect on used-vehicle pricing. That’s according to Cox Automotive Chief Economist Tom Webb.

Webb: Dealers have too many new vehicles.

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

U.S. new-vehicle inventory was 4.19 million vehicles on April 1, the most to begin a month since 2004, according to the Automotive News Data Center. On a days’ supply basis, stocks of cars and light trucks combined stood at 73 days, vs. 65 days a year earlier. 

As inventories rise and demand slips from an all-time peak, automakers are increasingly under pressure to slap incentives on vehicles to sustain sales and justify high vehicle production. That, in turn, causes dealers to further lower used-vehicle prices to keep them attractive, potentially putting more pressure on automakers to offer additional incentives on new cars. 

The result? A vicious cycle that threatens to bite into the profits of automakers and dealers, said Anil Goyal, senior vice president of automotive valuation and analytics at Black Book. 

“It just feeds on itself,” Goyal said. “If you keep pumping more and more incentives into new cars, it’s going to continue disrupting the market on the used-car side as well.” 

Goyal pointed to a conversation he had with a dealer who anticipated selling a used pickup to a customer, only to see him buy a new truck thanks to incentives. 

“Why buy a 3-year-old pickup truck,” Goyal asked, “when you can get a reasonably priced new one?”

Softening prices

Used-car pricing has softened in recent months after years when limited supply kept prices strong. The NADA Used Car Guide’s Used Vehicle Price Index slipped 0.3 percent in March to its lowest level since 2010, while the Manheim Used Vehicle Value Index declined for the fifth time in six months, though it remains above where it was a year ago. The NADA index does not account for the impact of new-vehicle pricing increases and measures only vehicles up to 8 years old, unlike the Manheim index, which tracks all prices and ages.

The used-vehicle market has weathered steadily increasing lease returns, contrary to the predictions of some analysts who had anticipated a collapse in pricing.

Used-vehicle retail sales in the U.S. rose 5 percent in the first two months of 2017, according to the National Automobile Dealers Association, even as new light-vehicle sales dipped 1.5 percent during the same period. Moreover, the impact of higher used volumes has been offset by rising sales of certified pre-owned vehicles — a natural outlet for many nearly new lease returns — and dealerships’ increased use of sophisticated technology to stock and price vehicles appropriate to their markets.

Batey: GM has good reason for high inventories.

In March, new-vehicle sales fell to their lowest seasonally adjusted annualized sales rate since February 2015: 16.6 million. It was the first time the rate dipped below 17 million this year after actual sales topped 17 million in both 2015 and 2016. Webb said sluggish sales figures and fewer production cuts than were necessary have left dealers with increasingly full lots. 

“New-vehicle sales probably should be under that 17 million rate relatively shortly,” Webb said. “To keep it above sort of implies you’re forcing the market higher than it wants to go. You’re doing incentives or something else to push product.” 

Jonathan Banks, vice president of vehicle analysis and analytics at J.D. Power, said the new-vehicle market is being propped up by incentives, which he said have topped 10 percent of sticker on average, well above a “healthy” rate of 8.5 percent. 

Were automakers to cut back on incentive spending to that 8.5 percent level, Banks predicted U.S. new-vehicle sales would fall to between 16.5 million and 16.7 million this year. That also would ease the pressure on used-vehicle prices. 

“It would be nice to see a pullback back down to 8.5 percent, and then you just see where sales land,” Banks said. “Are manufacturers willing to let sales go down to a level that’s reasonable? Having incentives over 10 percent is not reasonable.”

Output cuts

Banks said he has been encouraged by recent production cuts at General Motors and Ford Motor Co. GM plans 10 weeks of downtime at multiple assembly plants this year as it retools for redesigned vehicles.

GM North America President Alan Batey defended the company’s high inventories at the New York auto show. “Our inventory is high because we’re going to take 10 weeks out in the back end of the year as we’re modifying our plants, particularly with pickup trucks,” he said.

GM’s supply of U.S. light vehicles was 97 days on April 1. Ford’s was 80 days.

GM could further cut production this year if it needs to “balance supply and demand” in a market that does not meet expectations, Batey said.

Said Banks: “They’re cutting production. Regardless of why they say they’re doing it, the fact they’re doing it is good.”

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