By Mike Antich
The industry's annualized selling rate for July was 12.6 million
vehicles, the lowest since April 1992, according to Autodata. Full-year sales
in 2007 were 16.1 million, 16.5 in 2006, and 17 million in 2005. Not only are
there fewer new vehicles being sold, but there is also a corresponding decrease
in trade-ins. If the new-vehicle market generates the used vehicles of
tomorrow, then it appears there will be fewer used vehicles in the future. This
is a classic formula of action/reaction. If new-vehicle sales decrease, especially
over a multiyear period, then it stands to reason there will be a corresponding
decrease in the future number of used vehicles available in the wholesale market.
A growing amount of data is adding substantiation to this hypothesis,
especially in light of industry events that occurred in the past two weeks.
A Dizzying Two Weeks
On July 25, Chrysler Financial announced it would stop financing
leases.Several days later, Chase Auto
Finance, a unit of JPMorgan Chase & Co., announced it would not provide
lease financing for Chrysler brands. Similarly, Wells Fargo & Co. stopped
financing all auto leases. GM said it will continue to offer retail leases, but
Mark LaNeve, VP for North American sales and marketing, said GM hopes to cut
leasing so that it accounts for only 10-15 percent of its business.
As Chrysler’s portfolio of leases reach end-of-term over the next
few years, the number of off-lease vehicles thereafter will decline. On Aug. 1,
Chrysler announced several finance packages “to make buying as affordable as
renting.”These include 72-month financing
on a wider range of vehicles and $2,000 cash-back on certain purchases financed
by Chrysler Financial.The 72-month
financing deals are designed to allow customers to buy vehicles with monthly
payments similar to leases. The one difference is that a lease customer is out
of the vehicle in 24 to 36 months, while financed customers are typically in
vehicles for the full six years, further decreasing the volume of future
Another thing is also certain; far fewer trucks will be built than
in the immediate past. GM Chief Operating Officer Fritz Henderson said the
automaker intends to reduce truck production capacity by 300,000 units.
Likewise, all other OEMs are reducing their truck production.
This drum beat continued on Aug. 4, when HSBC Finance Corp. announced
it will stop making new auto loans through U.S. dealerships and direct-to-consumer
channels. Although HSBC does not finance auto leases, it does remarket repos
when customers default on loans. The repo market represents a significant segment
of the wholesale market. For instance, 1.5 million vehicles were repossessed in
2007 and primarily remarketed through wholesale auctions. I believe tighter
credit restrictions on subprime consumers will decrease the number of repos in
future years. Finance companies such as HSBC almost exclusively remarket repos
at auction. The withdrawal of a major industry player such as HSBC, along with
fewer loans to marginal-credit consumers, will result in a decreased volume of repos,
creating another downward ratchet in used-vehicle supply (As an aside, my hunch
is that there will be more announcements similar to HSBC forthcoming from
another industry player or two.)
In my view, all of this points to a decreased supply of used vehicles
for the wholesale market two to three years from now. If you accept the truism
that new-vehicle retail sales “manufactures” the used vehicles of tomorrow, we
should anticipate a smaller inventory of used vehicles in the wholesale market
in the future.
“If we’re not building as
many new vehicles, where will the future used-vehicle supply come from?” said
Darrin Aiken, assistant vice president, remarketing for Wheels Inc. “If we have
dismal new-vehicle markets in 2009 and 2010,
there is a distinct possibility there may be a shortage of used cars three
years afterwards. When there is a shortage of inventory, experience tells us resale
prices will increase.”
Factoring in Lag Time
There is a lag time in the “used-vehicle manufacturing” process.
For instance, the 2009 models fleets are currently ordering will not enter the
wholesale used-vehicle market until 2011 or 2012. Our economy functions in
cyclical business cycles and eventually there will be a cyclical upswing.When this occurs, there may be a tight supply
of used vehicles, especially trucks, due to the pent-up needs of the
construction industry, which is currently deferring the purchase of replacement
A lower supply of used vehicles means demand (especially in a
recovering economy) will exceed supply. This will create a “rising tide” effect
of stronger demand for all used vehicles, resulting in higher resale prices.
Let me know what you think.