Automotive Industry Perspective 4th Quarter 2017
Light Vehicle Sales Exceed 17 Million for Third Straight Year
By Keith Spacapan
U.S. light vehicle sales totaled 17.25 million units in 2017, a 1.8% decline from the all-time high of 17.55 million units in 2016. This is only the fifth time in history the domestic market exceeded 17 million units, but it marked the end of a string of seven consecutive annual gains that followed the 2008-09 market collapse.
Industry analysts doubt if units sold would have topped 17 million units without the occurrences of Hurricanes Harvey and Irma. The 2017 Atlantic hurricane season was the costliest in U.S. history. New and used vehicles destroyed in the storms led to a significant level of replacement sales.
Year-end close-out promotions also helped lift sales of 2017 model year vehicles. Volkswagen was offering deals with zero due at signing, no down payment, no security deposit, and no first-month payment. According to J.D. Power, sales incentives in early December were 11.2% of manufacturers’ suggested retail price, exceeding the 10% threshold for the 17th time in 18 months.
The surge in buying attributed to the storms and sales promotions alleviated concerns of excess dealer inventory due to slow sales earlier in the year. At year-end, there was a 71-day supply of inventory on dealer lots, two days less than the previous year, and only marginally higher than the industry benchmark of 65 days. If the recent market softness turns into a long-term downward trend, manufacturers’ commitment to manage inventory by adjusting production will be challenged. In the past, manufacturers have resorted to costly sales incentives to artificially inflate sales at the expense of profitability.
Most industry insiders anticipate 2018 light vehicle sales to fall near the high 16 million-unit range, as an increasing number of vehicles will be coming off lease. The flood of vehicles could push down residual values, which, in turn, would encourage buyers to purchase used vehicles instead of new vehicles. Further, the Federal Reserve System is expected to continue to raise interest rates, which may be enough to impact consumers’ purchasing decisions.
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.