By Mike Antich
The industry's annualized selling rate for July was 12.6 millionvehicles, the lowest since April 1992, according to Autodata. Full-year salesin 2007 were 16.1 million, 16.5 in 2006, and 17 million in 2005. Not only arethere fewer new vehicles being sold, but there is also a corresponding decreasein trade-ins. If the new-vehicle market generates the used vehicles oftomorrow, then it appears there will be fewer used vehicles in the future. Thisis a classic formula of action/reaction. If new-vehicle sales decrease, especiallyover a multiyear period, then it stands to reason there will be a correspondingdecrease 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 financingleases.Several days later, Chase AutoFinance, a unit of JPMorgan Chase & Co., announced it would not providelease financing for Chrysler brands. Similarly, Wells Fargo & Co. stoppedfinancing all auto leases. GM said it will continue to offer retail leases, butMark LaNeve, VP for North American sales and marketing, said GM hopes to cutleasing so that it accounts for only 10-15 percent of its business.
As Chrysler’s portfolio of leases reach end-of-term over the nextfew years, the number of off-lease vehicles thereafter will decline. On Aug. 1,Chrysler announced several finance packages “to make buying as affordable asrenting.”These include 72-month financingon a wider range of vehicles and $2,000 cash-back on certain purchases financedby Chrysler Financial.The 72-monthfinancing deals are designed to allow customers to buy vehicles with monthlypayments similar to leases. The one difference is that a lease customer is outof the vehicle in 24 to 36 months, while financed customers are typically invehicles for the full six years, further decreasing the volume of futuretrade-ins.
Another thing is also certain; far fewer trucks will be built thanin the immediate past. GM Chief Operating Officer Fritz Henderson said theautomaker 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. announcedit will stop making new auto loans through U.S. dealerships and direct-to-consumerchannels. Although HSBC does not finance auto leases, it does remarket reposwhen customers default on loans. The repo market represents a significant segmentof the wholesale market. For instance, 1.5 million vehicles were repossessed in2007 and primarily remarketed through wholesale auctions. I believe tightercredit restrictions on subprime consumers will decrease the number of repos infuture years. Finance companies such as HSBC almost exclusively remarket reposat auction. The withdrawal of a major industry player such as HSBC, along withfewer 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 hunchis that there will be more announcements similar to HSBC forthcoming fromanother industry player or two.)
In my view, all of this points to a decreased supply of used vehiclesfor the wholesale market two to three years from now. If you accept the truismthat new-vehicle retail sales “manufactures” the used vehicles of tomorrow, weshould anticipate a smaller inventory of used vehicles in the wholesale marketin the future.
“If we’re not building asmany new vehicles, where will the future used-vehicle supply come from?” saidDarrin Aiken, assistant vice president, remarketing for Wheels Inc. “If we havedismal new-vehicle markets in 2009 and 2010,there is a distinct possibility there may be a shortage of used cars threeyears afterwards. When there is a shortage of inventory, experience tells us resaleprices 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 thewholesale used-vehicle market until 2011 or 2012. Our economy functions incyclical business cycles and eventually there will be a cyclical upswing.When this occurs, there may be a tight supplyof used vehicles, especially trucks, due to the pent-up needs of theconstruction industry, which is currently deferring the purchase of replacementvehicles.
A lower supply of used vehicles means demand (especially in arecovering economy) will exceed supply. This will create a “rising tide” effectof stronger demand for all used vehicles, resulting in higher resale prices.
Let me know what you think.