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 trade-ins.
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
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 vehicles.
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.
Originally posted on Automotive Fleet
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