Automotive Industry Perspective 1st Quarter 2018
Industry Treading Lightly Despite Early Strong Returns
By Keith Spacapan
Aided by higher retail incentives, strong fleet deliveries, customer preferences for light-trucks, and an extra weekend of sales, U.S. light-vehicle deliveries surged to a seasonally adjusted annual rate (SAAR) of 17.4 million units in March 2018. However, most industry insiders view the spike to be an anomaly, as analysts are predicting full-year sales to drop below 17 million units for the first time in three years, to between 16.7 million and 16.9 million units.
Edmunds reported average interest rates on new vehicle loans hit their highest level since 2009. The annual rate on new financed vehicles averaged 5.7% in March 2018, compared to an average of 5.0% in March 2017. To offset the higher interest rates, manufacturers increased average new vehicle incentives an estimated 8.0%, to $3,750 per vehicle.
As of month-end February 2018, industry-wide dealer inventory averaged 69 days, versus 86 days for the “Big Three” auto manufacturers (Fiat Chrysler, Ford, and General Motors). With additional retail incentives, the Big Three reduced their dealer inventories to 78 days in March. However, a reliance on costly retail incentives can be to the detriment of long-term profitability. The second quarter will test the commitment of the Big Three to adjust production in line with customer demand.
In the first quarter, crossovers, SUVs, pickups, and vans represented 68% of new vehicle sales, up sharply from 45% in 2009. Consumers are preferring pick-ups, SUVs, and crossovers because of their superior utility while manufacturers eagerly follow the migration because of their enhanced profitability. Surprisingly, Ford is only the first major manufacturer to announce its plans to stop selling passenger cars in North America, but certainly not the last.
In another industry first, General Motors is switching its reporting of U.S. Auto sales from monthly to quarterly. According to GM, thirty days is not enough time to separate real trends from short-term fluctuations.
Keith Spacapan is Vice President of Hilco’s automotive practice. Keith has more than 20 years of automotive industry experience, including 15 years with General Motors as a divisional director of operations and finance. He has also worked with a wide range of automotive suppliers. His unique dual perspective—original equipment manufacturing and related suppliers—fosters a full understanding of the dynamics which impact asset value.