US auto finance and leasing trends, prospects for 2013
By Ed White – Chairman, White Clarke Group
At the turn of the year, I wrote that the global auto market looked set for a year of subdued growth outside of hotspots such as China and India, but in the US the sector would certainly see a continued rise in sales. Since then, the US auto market has indeed continued to perform well, aided by modest economic recovery and greater availability of credit. The hazard of the ‘fiscal cliff’ has been sidestepped, if only for the short term, and the stock market has outperformed expectations, indicating that confidence is growing and that perhaps the economy really is on the mend.
In February, US retail sales witnessed the biggest increase in five months, although in fact the cause for around half the increase was higher fuel prices. But despite the spike in pump prices, sales also rose significantly at auto dealers, indicating that the impressive surge in the auto market has continued from 2012 into the first quarter of 2013. The trajectory of new vehicle registrations looks set to continue its upward swoop.
US light vehicle sales continued to increase over the second half of 2012 and the year ended strongly on a total of 14.5 million units, a year-on-year increase of 13.4%. (The light vehicles segment includes cars, pick-ups and light trucks.) In fact, sales in November reached a seasonally adjusted annual rate (SAAR) of 15.8 million units − the highest rate since March 2008 and getting close to the sales rates of 16-17 million units last seen in the early- to mid-2000s.
Sales volumes retreated in January 2013, but this was to be expected as December is traditionally a strong month, and in the context of the uncertainty around federal fiscal policy the January figures can be seen as a continuation of the overall momentum. In February and March sales have surged again, and the total light vehicle SAAR also maintained momentum, at 15.3 million units.
According to the latest J.D. Power and Associates and LMC Automotive forecast, new vehicle sales remained strong in March, with the light vehicle retail SAAR staying at 12.1 million units. As can be seen in the accompanying chart, although sales over the last 12 months have progressed on a saw-tooth path, the overall trend has been upward. Expectations are that the rate of increase in sales will steady through the rest of 2013.
US new light vehicle retail sales by SAAR, March 2012−March 2013 (millions of units) Source: J.D. Power and Associates, LMC Automotive – March Automotive Forecast
Vehicle sales are commonly accepted as pointers to national economic health, therefore the solid sales performance in the first quarter indicates an improving economy, despite the need in the near future to resolve the fiscal issues which will likely lead to higher taxes and lower government spending.
Leasing accounted for 23.1% of new vehicle retail transactions in March, a rise of 3.1% on March last year. There is a tendency for the length of loan terms to rise, but an increase in leasing along with low interest rates have helped to offset this, as purchasers can allow more of their monthly payment for paying the loan principal.
The forecast for the fleet share of the market for this year is to remain on 21%. The age of the vehicle park overall has been increasing but ageing vehicle fleets will need to be replaced and this, along with the easing credit conditions, will help sales growth rates in 2013, if at a slower pace than last year.Leased vehicle returns and the increase in new vehicle sales should ensure the continued decrease in used vehicle values.
In terms of vehicle production, US volumes grew impressively in 2012, confirming the recovery seen in 2011. . Production of all vehicles reached 10.3 million units in 2012, an increase of 19.3% on the previous year. Commercial vehicle production (all types) rose 9.5% to 6.2 million units, while car production surged by 37.9% to 4.1 million units (source: OICA).
Confidence has returned in home-produced autos from the ‘Detroit Big Three’ (Ford, GM and Chrysler), which augurs well for the industry in the longer term, particularly given the constant pressure from the big Japanese and European manufacturers. However, the recent rate of increase in production will not be as impressive this year. There is even the risk that manufacturers might look over-optimistically at the market potential and raise output levels to meet demand that does not grow at an equivalent rate.
Used vehicle market
The used vehicle market has showed resilience over the past year, with positive trends that look set to continue in 2013. In 2012 used vehicle sales exceeded 40 million and retail sales through dealers increased 5% (source: Manheim, 2013 Used Car Market Report). The UCMR reveals that new vehicle sales into commercial fleets rose 7% in 2012, and while government fleet purchase increased only 2%, that was the first increase in five years. There was also growth in new lease originations of 16%. With the supply of used vehicles remaining tight, resale values and fleet depreciation rates are not anticipated to slide in 2013.
As mentioned, commercial vehicle production increased significantly in 2012, matched by sales of both new and used truck/trailers. A buoyant market saw truck and trailer sales rise by 13.6% (source: Independent Equipment Company, ELFA) and the consensus is that sales levels will remain high through 2013, along with prices. This optimism is mirrored by expectations for there to be some further improvement in the freight tonnage index, following that seen in 2012.
Growth in the transport sector should maintain a healthy rate, albeit constrained in this first half by subdued investment until the fiscal uncertainty is resolved. Signs that the housing market is picking up will boost economic confidence and have a positive effect on commercial vehicle acquisition and stock replacement.
The biggest regular outlays, especially for fleets, are going to be on fuel and tires – costs that are directly affected by trends in commodities prices. Over recent months the price of fuel at the pump has increased due to oil price rises, meaning that in 2012 the average US household paid $2,912 for fuel according to the US Energy Information Administration, equivalent to nearly 4% of average household annual income. In addition, tire prices have increased due to rising costs of rubber, steel and oil. Fleet managers can do little about the cost of replacement tires, but they can be made to go further and fuel costs can be mitigated by the introduction of smaller, lighter, more fuel-efficient vehicles.
Production of such vehicles is being encouraged by the setting of fuel consumption targets − the US government aim is for an average of 54.5 miles per gallon (MPG) by 2025. This also means automakers are investing more in developing hybrids and electric vehicles (EVs), as well as in developing hydrogen fuel cells as an alternative to hefty batteries.
The latest report from the US Environmental Protection Agency (EPA) gives details not only for fuel consumption, but also for CO2 emissions. It reveals that between 2007 and 2012, fuel economy values rose by 16% and CO2 emissions fell by 13%, with fuel economy improving by 1.4MPG in 2012 alone. The report also shows that the number of hybrid and diesel passenger vehicle choices doubled between 2007 and 2012, and there was a six-fold increase in the number of vehicles with a combined MPG rating of 30 or better; these numbers can be expected to carry on rising.
The US will also see the introduction of government regulations to reduce greenhouse gas (GHG) emissions from trucks. Although these will not be effective until 2014, they have been criticized by some in the industry for adding another potential hike to commercial vehicle prices that have risen appreciably already. To counter this, the green lobby points to the combination of GHG regulations and the first fuel economy standards for US commercial vehicles, meaning that truck users will benefit from greater fuel efficiency and save money in the long run.
For the private driver, hybrids and EVs are popular as concepts but high purchase prices remain a constraint. Although prices are being reduced in relative terms (such as by Nissan on its Leaf plug-in) they need to fall further to garner meaningful sales, or fuel prices would need to rise regularly and significantly. However, in the longer term the price difference with standard autos is likely to narrow, and moves will be made to resolve other perceived problems (low range, availability of charging points, length of time needed to recharge).
Most companies – at least larger corporations − are committed to moving towards ‘greener’ fleets, but this is likely to be gradual, as large-scale capital expenditure on fleet replacement in order to satisfy a sustainability initiative is difficult to justify. However, progress is being made and, although slow, will continue.
The one thing every sale needs, whatever the size, is finance. Data from Experian shows the loan share in Q3 2012 dominated as ever by banks, with over 40% of the market, but this had slid by nearly 3% on the same period in the previous year. Captives were the next largest finance provider, almost unchanged at just under 19%, but credit unions were fast catching up – their share rose nearly 5%.
Another form of financing which has a near-9% market share is Buy Here Pay Here (which also takes the form of Lease Here Pay Here), a means of direct finance at the point of sale, primarily for sub-prime loans. BHPH capital comes from a variety of sources, with owners often setting up their own capital company backed by private equity to fund the deals.
And a further aid to dealer finance, floorplan financing, seems to be picking up, corresponding to the increase in vehicle sales.
Automotive loan market share, Q3 2012
Source: Experian Automotive
As we know, the market for new auto sales has recovered dramatically, and with it dealers’ profits and margins have grown. However, since the onset of the financial crisis and the fall of the major US automakers, the number of dealerships has shrunk significantly – by around 12%. In hard economic terms this is not a bad thing, as the pre-crisis credit bubble had hidden the problem of having a surfeit of dealers, who were maintaining sales with the backing of easy credit and offering a multitude of incentives to buy.
The sub-prime finance market is now experiencing a revival: established providers are increasing their loan volume and new players are appearing, backed by private equity. Data for Q3 2012 versus Q3 2011 from Experian shows that sub-prime credit is on the increase, raising the risk factor for all players as competition increases.
It may seem a statement of the obvious, but in an increasingly connected global environment, the auto industry must be adept in retaining and improving its competitiveness. One essential resource is technology, particularly as business is transacted more and more via the Internet. The industry must aim to maintain efficiency through the ongoing adoption of the latest technology platforms – business will grow as transactions are made more productive by increasing the proportion of volume gained over time spent.
Companies need access to adaptable solutions to be able to respond to new opportunities in changing market conditions – in all areas, from back-office to front-office – and successful customer care leads to profitable books.
About White Clarke Group
WCG is the world's leader in end-to-end automotive & asset finance software solutions and consulting services. Its award-winning software platform offers the end-to-end solutions of choice for Automotive Finance and Asset Finance companies in 27 countries around the globe.