What’s the new “normal”?
That question came up a lot at this month’s National Automobile Dealers Assn. convention in Orlando, FL, where the weather was mostly sunny but chilly, which pretty much describes the forecast for the auto industry this year.
After 2009’s bleak vehicle sales, better days seem ahead, but nothing spectacular – at least not compared with a few short years ago.
The old normal for annual sales typically topped 16 million units. Then the industry got slammed in 2008 and hit even harder in 2009.
It is still odd to look at a bar chart showing in graphic detail the drop from 16.3 million units in 2007 to 13.1 million in 2008 to 10.4 million last year.
Based on an average vehicle price of $25,000, a 6 million annual drop in unit sales totals $150 billion in lost revenue. There isn’t enough rainy-day savings to make up for that.
Industry players at theconvention offer various predictions for 2010 auto sales. All things being relative, they are rosy forecasts compared with last year’s “Automaggedon.”
Chief Economist Paul Taylor pegs light-vehicle deliveries this year at 11.9 million units. He acknowledges that is 500,000 more than conservative estimates.
“We’re seeing a lot of good signs this year,” Taylor says at an American Financial Services Assn. conference held in conjunction with the NADA gathering. “A lot of people are candidates to buy new cars. Necessity is the mother of invention for 2010.”
But where are all those buyers? January’s seasonally adjusted annual rate was 10.8 million units, and February isn’t expected to be much better. That means the industry has a lot of catching up to do to hit those optimistic predictions.
Taylor points to the good signs of improved consumer confidence and credit availability. But the unemployment rate must get lower and housing values higher for car sales to get going. Consumers fretting about joblessness and lousy home values usually aren’t in the mood to buy a new car.
Back when the economy rocked, credit rolled and hefty consumer incentives kept coming, auto sales seemed headed for new highs. I recall the 2004 NADA convention when auto executive James Press, then with, talked of annual U.S. sales soon reaching 20 million units.
“We’ll reach a point when 20 million is a fact, not an exception,” he said back then. After last year, that forecast seems somewhere over the rainbow.
But the boom years had a down side, auto analyst Erich Merkle says at an AutoTeam America conference tied to this year’s NADA gathering.
“I hope we don’t go back to 16 million to 17 million anytime soon because it was too high, considering the circumstances,” he says. “People were overbuying.”
And about a million of those wonder-year vehicle sales represented excessive rental-fleet deliveries. Auto makers have since scaled back on those because of their harmful side effects, such as weakened residuals.
Merkle bullishly says 12.5 million units “is very doable” this year, as the economy recovers. “In fact, 12.5 million might be conservative. Well, I don’t want to go that far. But it should be a good year.”
President Michael Maroone predicts an eventual return to the auto industry selling around 16 million units a year. But next time it will be different for two reasons, he says at a J.D. Power and Associates conference in conjunction with NADA’s gathering.
One, dealers are running leaner operations, with fixed costs reduced, he says. Two, auto makers, because of capacity cutbacks, aren’t forcing cars on the market like they did before, hurting values and profits alike.
“It will be a very profitable 16 million, a sweet 16 million – if we maintain a business discipline,” Maroone says.
Without predicting when, Sid DeBoer, chairman ofdealership chain, thinks U.S. auto sales eventually will hit 20 million, given a healthy economy and enough population growth.
Maybe Jim Press’ 20 million predication of six years ago doesn’t seem so unrealistic after all. There’s an old Italian saying: Col Tempo. With time.
There’s this too: “The reality is that people love cars,” DeBoer says.