||Vehicle Manufacturers Faced with New Challenges
Even as new-car sales recover -- and consumers flocked to the Detroit auto show to check out all the latest cars and trucks -- automakers are grappling with a new and different market after the recession of the last few years.
It's a younger market, and it is challenged by a housing slump and nagging uncertainty over gas prices. So even though Americans will likely buy a million more new cars in 2011 than the 11.6 million they bought in 2010, this recovery will be like no other.
First, drivers are getting a lot younger -- but they might not be so interested in buying a new car. It seems that cars just don't grab kids the way they used to, which is a problem since people younger than 38 are expected to account for a larger percentage of the driving public than baby boomers by 2015, according to IHS Automotive.
"Many young people care more about buying the latest smartphone...than getting their driver's license," said Jim Lentz, president of Toyota Motor Sales. "That's a serious problem we need to address."
Meanwhile, RealtyTrac forecasts that lenders will repossess 1.2 million homes this year. People who are losing homes won't likely be shopping for a new car.
Gas prices, and their effect on buyers, will be the biggest wild card -- especially with automakers churning out a bevy of new small, efficient cars.
So far, $3.10 a gallon is not slowing a buyer migration back to light trucks -- a category that includes pickups, SUVs, crossovers and minivans. GM says gas prices could top $4 a gallon this year. But would that send drivers into the showrooms for new hybrids like the Ford Fusion or Honda Civic?
New jobs needed to sustain long-term recovery
The future is brighter, but a robust auto sales recovery will depend on sustainable job creation, easier credit and a continued flow of attractive and affordable vehicles such as those unveiled in Detroit last week.
Right now, pent-up demand is driving much of the recovery. Tens of thousands of people have driven their old wheels about as far as they can go. The average vehicle on the road is more than 10 years old, according to consumer marketing researcher R.L. Polk.
The luxury market is getting a boost from the recent two-year extension of the Bush administration tax cuts, said Paul Taylor, economist for the National Automobile Dealers Association.
Leasing, which fell from about 27.5% of all new vehicle sales in late 2007 to 21% after the September 2008 financial meltdown, has bounced back to 28%, according to CNW Marketing, a research firm in Bandon, Ore.
A different market
In the great middle of the market, the dynamics have changed. Even as unemployment begins to fall, people still have less disposable income.
U.S. Labor Department data show that 36% of workers who lost one job between 2007 and 2009 and found another one are earning at least 20% less.
"The needs have changed. You need basic transportation and more economical vehicles as the price of gas goes up," said Don Esmond, senior vice president for Toyota Motor Sales.
Those who have taken pay cuts or experienced extended periods of unemployment may now be part of the used car market. But that's not all bad, because as used car prices climb or hold steady, that improves trade-in values for people who are looking to buy new vehicles.
Car loans bouncing back
The other encouraging sign is that lenders are taking reasonable risks again. Auto loan approval rates for consumers with FICO scores between 620 and 749 have recovered to the 85% to 90% range from 75% in late 2009, according to CNW Marketing.
The same data show that only about 15% of subprime borrowers -- those with credit scores below 620 -- can expect to get a loan now, down from nearly 70% during the peak of the housing bubble.
The surge of new models coming from nearly every new automaker should also bolster sales. Consumers are more willing to risk buying a new car if they are drawn to it emotionally, artistically or, in the case of hybrids or electric vehicles, by the desire to make a cultural statement.
Small-car revival: Fact or fiction
Do enough Americans really care about saving gasoline to bring down the cost of battery packs or fuel cells?
New alternative fuel cars -- Chevrolet Volt and Nissan Leaf already here, the Prius V and Ford Focus EV on the way -- and other creative 40-something m.p.g. subcompacts such as the Fiat 500 and the Chevrolet Sonic show that the industry is serious about taking fuel economy to a higher level.
Because gas prices have risen incrementally of late, there has been no seismic change in consumers' vehicle choices. Last year, truck sales climbed 18%, while passenger cars were up a lesser 5%.
Most companies are hedging their bets on how consumers will decide in the future.
"At what point psychologically do people realize, 'I just spent triple digits to fill my tank?' " asked Mark Fields, Ford president for the Americas, in explaining Ford's diversified product strategy. "We are planning for a (gas price) range that is higher than it is today."
Mike Jackson, CEO of AutoNation, has a bird's-eye view of the market from the 210 dealerships his company owns in 15 states. He is skeptical about consumers' appetite for small cars absent a 50-cent hike in the federal gasoline tax.
"I do think people respond to higher gas prices," Jackson said. "But the question is how do you get there?"
(Source: Detroit Free Press, 01/17/11)
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