Wednesday, September 25, 2013 | Edited by Daniel Moores
||U.S. Auto Sales Predicted to Top 16 Million in 2014 -- With Profits
Analyst: "It's coming effortlessly"
The U.S. auto market is poised for a fifth straight year of growth for just the second time since World War II.
The recovery from the recession has been so robust that the debate is now whether sales will reach 2000's record levels -- and whether that would even be a good thing.
Deliveries of new cars and light trucks may rise to 16.1 million next year, the average estimate of 13 analysts in a survey by Bloomberg News. That's about 500,000 more vehicles than automakers are on pace to sell this year and while it's within reach of 2007's 16.15 million, it's well short of the 17.4 million peak.
Since the annualized pace of auto sales in August exceeded 16 million for the first time in six years, analysts have been looking back at the last time sales were so brisk. Six years ago, while sales were still above 16 million, Detroit was losing billions, saddled with high costs and poor cars.
"It's not just the number 16 that's amazing," George Magliano, chief economist for IHS Automotive, said by telephone. "It's the fact that it's coming effortlessly. We're not dumping cars and trucks into the fleets. We're not using humongous incentives to move them. It's a reflection of people's willingness to buy and the strength of the product out there."
The last time U.S. sales rose for five straight years was 1996 to 2000, when the Detroit 3 profited from booming demand for pickups and SUVs and let their car lines atrophy. As gasoline prices rose, they were unprepared for shifting tastes. So even as annual sales remained in excess of 16 million, Detroit fell further behind.
This time, Detroit has competitive vehicles including small and mid-size cars, and automakers are commanding record-high prices. Brands such as Volkswagen and Audi, Kia and Hyundai have gotten into the mix following the footsteps of Toyota and BMW, and yet automakers are limiting deliveries to rental-car companies so that even those transactions are profitable.
The natural midpoint for U.S. sales is probably about 16 million per year, said Mark Wakefield, a managing partner for AlixPartners LLP, a consulting firm that advises on restructurings and has worked with auto companies including GM. He's concerned about deliveries racing beyond that toward 17 million or more and the payback that will follow.
"I care less about the natural mid than about how far this cycle is going to go beyond that, and then when it will come back, because I know it will," Wakefield said in an interview.
Driven by profitable sales growth, the North American auto industry is in the midst of the fastest expansion since 1950, according to Morgan Stanley. In the five years through 2015, automakers are adding 3.5 million vehicles worth of annual production capacity, the New York-based bank estimates.
"Part of why we expect volume to grow is because there's a philosophy of if you build it, you kind of make people come and buy it," Adam Jonas, a Morgan Stanley managing director and analyst, said in a telephone interview.
The additional capacity will test pricing discipline because the industry's ability to produce vehicles is growing faster than demand is, Jonas wrote in a Sept. 10 report.
Industry analysts widely agree that demand will return to near 2007's level next year. Only two of the analysts surveyed by Bloomberg predicted demand would fall short of 16 million, and both estimated 15.9 million.
Morgan Stanley estimates the market could exceed the 2000 record and eventually climb to 18 million before the next downturn. Jonas warns that it would most likely happen because automakers cut prices and lend money to people who may not be able to handle the debt, he said.
"It's doable, but we're going to have to do some dumpster diving for that," Jonas said. Lenders tend to extend too much credit to car buyers at the top of an economic cycle and contract too severely in a downturn, he said. "When times are good, they're really good. And when times are bad, they're awful."
The bad times were worst for General Motors Co., Chrysler Group LLC and Ford Motor Co. The first two filed for government-backed bankruptcies in 2009. The latter avoided that fate by borrowing $23.4 billion in late 2006 to fund a costly restructuring outside the courts.
Today, the three have overhauled their lineups and consumer perception is improving. Consumer Reports lauded GM's Chevrolet Impala as the best sedan on the market. Ford's Fusion is taking market share from Toyota Motor Corp.'s Camry and selling at premium prices.
"It would be one thing if the domestics were going to get better in cars and pull back on trucks, but they aren't," Tom Libby, an analyst for R.L. Polk & Co., said by telephone. "You see a rising level of competitiveness for the domestics across the whole industry, which is forcing the Asians to be more aggressive just to maintain where they are."
No car reflects the extent to which Asia-based automakers have been put on the defensive better than Toyota's Camry, the No. 1-selling U.S. car for 11 consecutive years. Toyota plans to protect that position, Bob Carter, senior vice president its U.S. sales unit, told the Automotive Press Association this month in Detroit.
"I know that you've read many of the articles out there that we're piling the incentives on Camry," Carter said. "Well, versus historical Toyota averages, yes we are. Toyota has increased our support for Camry because it's appropriate for this highly competitive and large segment."
A total of 376 models will be introduced in the U.S. from this year through 2015, according to Polk.
Those new cars and trucks are likely to draw more buyers as Americans' vehicles age to about 11.5 years old on average, said Itay Michaeli, an auto analyst for Citigroup Inc.
Vehicles in the U.S. market historically have been scrapped at a much higher rate when they reach about 13 years old, Michaeli said. At that point, replacement increases significantly, according to Citigroup's research, and since the top sales years were 1999 through 2006, that time is coming.
"No later than 2015 will that inflection occur," he said. "It's a pleasant surprise to think that maybe it's starting to occur now, earlier than expected."
For now, automakers can celebrate that they're back to pre-recessionary levels even in the face of tepid economic growth and industry-specific challenges, including drawing younger buyers and urban dwellers who increasingly have access to alternatives like public transportation and car sharing.
"We spend a lot of time talking about what's turning people off from buying cars and trucks," IHS's Magliano said. "Well, it seems that people are really predisposed to buying cars and trucks. We've got some legs from here."
(Source: Bloomberg, 09/16/13)
||The Pickup Wars: Ford Under Siege
The autumn pickup wars have been joined, with Ford aggressively defending its segment leadership against redesigned rivals from General Motors and Chrysler Group's Ram brand.
Ford's F series continues to lead full-sized pickups with 39.4 percent of the market through August, compared to 35.1 percent for GM and 17.9 percent for Ram. There's a lot at stake as football season starts and truckmakers roll out promotional campaigns.
"Ford will defend that turf," said Tom Libby, analyst for Polk. "If they can't defend it with the product, they'll defend it with incentives. The benefits to them of having the most popular vehicle in the country are huge. For the next several months they'll be in a defensive situation. They now have the oldest product in the segment, so for the next 10 months they'll have to defend it with other means."
Ford won't begin making its 2014 models until late October or early November. Ford is expected to launch the next-generation F-series pickup as a 2015 model in the second half of 2014. Ram introduced its new 1500 in the last quarter of 2012, while the 2014 Chevrolet Silverado and GMC Sierra began hitting the market this summer.
Said Jessica Caldwell, an analyst at Edmunds.com: "The truck market is seeing release of a lot of pent-up demand. GM has had better luck launching a new product while that is happening. But Ford has a lot of loyalty."
Edmunds.com incentive numbers show that Chevrolet and Ram, despite having 2014 models in their mix, spent more than Ford in average incentives per vehicle in August. Though Chevrolet spent more than Ford, Chevrolet was selling down 2013 models in August and now has a higher percentage of 2014s in the market.
Incentives are higher in Texas, the nation's top truck battleground, accounting for 1 in 6 pickups sold nationally.
Rox Covert, who owns two Chevy stores near Austin, Texas, says Ford and Ram have gotten more aggressive with incentives to blunt GM's pickup launches. He has seen some Ford dealers advertise $12,000 in savings on the F-150.
"When a customer comes in to see you, that's in the back of their mind," he says.
Chevy and GMC dealers have been able to counter the steep discounts with their own heavy incentives on the 2013 pickups, while selling the full-priced 2014 models to early adopters. But with many stores running out of '13 models, dealers will be looking for incentives on the new truck, Covert says.
Mitchell Dale, owner of McRee Ford in Dickinson, Texas, near Houston, says: "Over the last 60 days, F-series incentives have been at or higher than levels we've seen in the last year or so. You've got over $9,000 if you take all the discount packages and special bonus packages on the XLT. Both Chevrolet and Ford are advertising $9,000. It's a good time to buy no matter what the brand."
Doug Scott, Ford's truck marketing manager, said Ford can afford to pay higher incentives because its 2014 models won't go on sale until the fourth quarter.
"We have an advantage in that we have a later changeover. The Silverado and Sierra are '14 models. That is becoming a more predominant part of their mix. Ram has already transitioned. Our transition is later. We don't start building the 2014 F-150s until the end of October or early November. As a consequence we're selling '13s while the other guy's selling '14s. That gives somewhat of an advantage because incentives are going to be higher on '13s than on '14s."
In addition to incentives, Ford is bolstering its 2014 lineup with new variations, including an upscale Tremor sport truck and an STX Crew Cab aimed at value-conscious buyers. Ford is aiming at buyers in the under-$30,000 sticker range to augment its leadership in high-end trucks above $40,000, Scott said.
Rivals aren't sitting still. Dave Elshoff, spokesman for Ram, said: "We're leading with product strategy. The answer is diesel. It's an absolute game-changer in the half-ton market."
Ram will introduce a 3.0-liter, six-cylinder diesel in the 2014 Ram around the first of next year, giving Ram a powertrain option its light-duty competitors don't have.
"The track record of the Ram brand since it was created in 2009 is to gain about 8 points of share. That's share we've earned from our competitors."
Chevrolet has gotten a boost from positive reviews of the new Silverado, a pickup that initially was criticized as too conservatively styled when it was first shown early this year. In a test pitting the market's newest entrants against each other, Consumer Reports magazine recently gave the Silverado a slight edge over the Ram in a test of the market's two latest entrants.
The F-150 wasn't tested, but the magazine noted a next-generation model is coming in 2015.
Polk's Libby said the Detroit 3 continue to reap benefits from their pickup dominance as pickup sales outpace the market.
"If you're able to compete in this full-sized segment, it's a huge benefit in terms of market share and profitability. Those who aren't participating aren't benefitting from the growth in the segment. It (the segment) is so tempting because of the volume and profitability. This is an ongoing strength of GM, Ford and Fiat-Chrysler. While there are Asians in the segment, their share is very low."
(Source: Automotive News, 09/23/13)
||Leases Buoy Market, But Add Factory Risk
Leasing is back in a big way -- and that comes with risks as well as rewards.
Through June, almost 26 percent of new-vehicle deals in the United States involved a lease, up from 21 percent for all of 2010 and way up from the recession trough of 17 percent in 2009, says Edmunds.com.
On the upside, leasing moves the metal because monthly payments are low. But guessing wrong on what those vehicles will be worth three years later means heavy losses.
"It's inherently risky," Dave Zuchowski, head of sales at Hyundai Motor America, says of predicting residual values.
"A lot of things can happen over the course of a 36-month lease term. Some you can recognize, some will be a complete surprise, and all will affect resale value. Nothing is wrong with risk as long as you price for it."
Toyota is one of the risk-takers. It introduced the redesigned 2014 Corolla with low lease payments and residual values that are higher than those of the previous model. Toyota is betting the 2014 Corolla will be worth 63 percent of the sticker price three years from now compared with 53 percent for the 2013 model.
Zuchowski says Hyundai is "comfortable" with its 25 percent lease mix in the first half, up from 20 percent for all of 2012, 16 percent in 2011 and under 5 percent in 2007.
Ally Financial Inc. raised its leasing business to 28 percent in the second quarter of 2013, up from 19 percent in the second quarter of 2012, the company said in its July 31 earnings conference call with analysts.
Bill Muir, president of Ally Financial, said Ally's lease ratio is a reflection of the industry overall. "It dropped dramatically when a number of major players more or less got out of the leasing business for a year or two," he told analysts.
"Now it's getting back toward the territory between 25, 30 percent for the industry. Given our position, we're going to mirror that."
Jessica Caldwell, an analyst at Edmunds.com, says the ratio of vehicles that are leased to those purchased with loans is "OK" now but should not go too high.
"I don't think there is a right number for leasing," she says. "It's one of those delicate balances."
When it comes to new-vehicle leasing, residual values matter a lot. That's because lease customers borrow the difference between the cost of the vehicle and what it is expected to be worth at the end of the lease.
The higher the residual value, the lower the monthly payment because the customer has to borrow less.
Lenders sometimes inflate residual values to reduce monthly payments, and they set aside reserves for potential future losses. Higher-than-expected vehicle values at the end of the lease mean lower-than-expected losses.
Conversely, lower-than-expected vehicle values mean higher-than-expected losses. That happened in 2008 and 2009 when gasoline prices spiked, used-car prices tanked and the economy plunged into a deep recession.
Lenders suffered heavy losses when off-lease vehicles, especially large SUVs, brought thousands of dollars less than projected. At the same time, the finance sector crashed and lenders tightened credit, making it hard for auto companies to finance leases.
Leasing all but dried up when credit tightened and U.S. sales of new light vehicles plunged to 10.4 million in 2009. That drop in new-vehicle sales lowered the future supply of late-model used vehicles, which pushed used-vehicle prices to record levels.
Buoyed by looser credit and a recovering economy, leasing began to come back in 2010 and has been growing steadily.
Automakers say they are being more cautious about residuals this time.
They use ALG data as a benchmark but set residual values conservatively, Hyundai's Zuchowski says.
"In fact, they over-reserve," Zuchowski says of manufacturers in general. "If ALG says, 'We think this car is going to be worth 50 percent at the end of 36 months,' in the old leasing world a manufacturer might say, 'We think it's going to be worth 54 percent.' And when it came back in three years it's only worth 48 percent. They had a 6 point problem on a $20,000 car.
"Now when ALG says, 'We think it's going to be worth 50 percent,' the OEMs say, 'We're going to reserve this at 3 points below, so we're going to put it on our books at 47 percent.' It comes back at 48 percent, and there is no risk at all -- and you make a little money."
Still, some companies are willing to gamble. In its quest to gain market share in the compact-car segment, Toyota Motor Sales U.S.A. and its captive finance arm have projected residuals for most trim levels of its redesigned 2014 Corolla at 63 percent at the end of a 36-month lease.
ALG data indicate Toyota's projection is at least 3 percentage points too high. If ALG is correct, Toyota could lose $600 on every $20,000 2014 Corolla it leases.
In an interview, Bob Carter, senior vice president of automotive operations for Toyota, defended the strategy: "We don't monkey around with 'buying up' residuals. That's not to say we aren't aggressive."
Luxury is steady
Geoff Robinson, vice president of marketing at Mercedes-Benz Financial Services, says that even during the worst of the recession leasing accounted for about half of all sales of new Mercedes-Benz vehicles -- and that the figure consistently hovers around 50 percent.
Leasing works for Mercedes-Benz and its dealers because it promotes customer loyalty, Robinson says.
More than 50 percent of customers who lease a new Mercedes-Benz vehicle lease another vehicle from the company. That's about 10 or 12 percentage points higher than the number who return to the brand after purchasing.
Robinson expects new models, such as the new compact CLA that goes on sale this month, to attract a slightly younger customer and build more leasing momentum.
"Leasing fits so well with the brand; it's strongly ingrained in what we do," Robinson says.
ALG predicts that Mercedes-Benz vehicles will hold 50.5 percent of their sticker prices after three years.
Eric Lyman, an ALG vice president who oversees the company's residual values forecast, predicts residual values will drop from where they are now but remain higher than where they were for most years since 2000.
He cites an aging fleet of vehicles that will have to be replaced, a new generation of drivers entering the market and a strengthened economy as reasons.
He adds: "We didn't see this big increase until the 2010 calendar year, when used-car values catapulted up to these stratospheric heights."
(Source: Automotive News, 09/23/13)
Daily Sales Tip: Add Value, Not Cost
It's natural for prospects to try to negotiate the best terms possible for their company's investment.
One way effective salespeople negotiate win-win outcomes is by offering prospects more value in return for something else, whether it's a bigger purchase or a longer service contract.
This way, instead of adding costs, the salesperson is providing additional value (and getting something in return).
The important part is that the prospect views the salesperson as someone who's interested in serving his or her needs.
That goes a long way toward building trust and buyer loyalty.
Source: Adapted from Value Added Selling, by Tom Reilly, president of Tom Reilly Training