Possible Automotive Prospects, Dynamics and Surprises This Year

As executive vice president-operations, Anil Goyal oversees a team of editors and data scientists at Black Book, a company that among other things tracks vehicle residual values.

He has a background in strategy and has held senior positions in the banking industry, including risk management and marketing.

Goyal holds a Ph.D. in Decision Sciences and an M.S. in Operations Research from Rensselaer Polytechnic Institute.

In a Wards Q&A, he talks about automotive dynamics and prospects for 2019.

Wards: What is the new- and used-car outlook for this year?

Goyal: For used, we saw the 2018 depreciation rate drop to 12.4%. Prior to that it was 17.5%. So, 2018 was a pretty good year despite the rising supplies. We’re projecting 15% this year.

Wards: What dynamics determine that?  

Goyal: In the end, it’s all supply and demand. The demand was very strong in 2018. The tax cuts boosted the spending power. The consumer confidence was high. The job growth was strong, over 200,000 jobs added every month.

It’s still a growing economy this year, but to a lesser extent. There is a cloud of uncertainty, such as with the government tariff issue still unresolved and interest rates expected to rise (again).

Wards: This would affect both new and used cars. Would it affect one more than the other?

Goyal: That’s a great question. We think it impacts new more. Our forecast is 16.7 million new deliveries this year vs. the 17.3 million in 2018. If you really look at the numbers, 17.3 million was achieved on the backs of commercial fleet sales.

Wards: And retail was down wasn’t it?

Goyal: A little, yeah, about 1%. Commercial fleet purchases usually follow a four-year replacement cycle. Rentals are much faster.

Wards: Do some commercial fleet procurers sometimes buy used vehicles?

Goyal: Not typically, because they want to be in that warranty period. Maintenance costs are the biggest headaches for them. A lot of it is leasing.

We also are projecting 300,000 more off-lease vehicles this year.

Wards: Which would be what, about 4 million?

Goyal: It’s about 4.2 million. That creates more of a market for used vehicles. Despite the rising used supplies, the marketing really has been good. Some of the large franchised dealerships have grown their used-car business substantially. The margins are higher for used cars than new.

Wards: Some dealers would rather sell more used cars than new because of that.

Goyal: Right. CPO (certified pre-owned) programs have grown. Dealerships are resilient. They kind of scent it out and do whatever is right to serve the consumer. The used-vehicle market really has found a stronghold for the value-conscious buyer. Think about this: You’re adding all these jobs a month. These mostly are people who are getting newer jobs. They are attracted to the used market.

Wards: And they also need a vehicle to get to work.

Goyal: That’s exactly right. So, there is still new- and used-car demand in 2019, just not as strong as before. Challenges on the new side are for the OEMs to market to entry-level customers, then build up the loyalty as consumers build up the income curve. But a lot of OEMs have walked away from smaller cars and sedans, the more affordable vehicles.

On the other hand, OEMs can get those entry-level people through a CPO car vs. the higher-priced SUV. CPO has always been on the heels of getting someone in and introduced to the brand. It will be more prevalent this year.

We expect the new-vehicle transaction prices to continue to rise. We think incentives as a percentage will also rise.

Wards: One of the things driving the transaction prices up is that many people are buying more vehicle and more stuff on it. It’s one thing for an automaker to raise prices, another for the customer to say, “I’ll take everything available on that vehicle.”

Goyal: There is a trend of OEMs pushing in higher trim levels. It used to be fewer trims and more options. Now they have simplified it by introducing more trims and packages to differentiate.

Wards: Pickup trucks once were strictly utilitarian and purchased by people who needed them for work. Now, they are much more than that.

Goyal: Many of them are luxury vehicles. It’s interesting to sit in pickup trucks loaded with luxury.

Wards: It’s hard to predict surprises or they wouldn’t be surprises, so I’m not asking you to do that. But if there were surprises this year, what might they revolve around?

Goyal: It could be OEMs really cutting back on production to get their bottom line and financials much better. Globally there’s been a slowdown and a lot of OEMs have been depending on emerging markets for their growth.

Another surprise could be lenders tightening credit more if the used-car market starts to drop. If you tighten that credit availability, it restricts the market from a demand perspective.

Wards: Some lenders, not all, seem to be in and out of subprime in recent years. One year they are in it, the next year they’re backing away from it.

Goyal: Lenders go through cycles. In 2016, the delinquencies and losses went up a bit. As a result, there was more tightening.

Last year was such a great year from a job-growth perspective, lenders saw their performance improve. So that expanded the criteria.

Now, several lenders I have surveyed say they are looking to tighten the criteria and be more judicious about it.