Improving U.S. Economy Fueling Sensitive Rebound in New-Vehicle Sales

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NADA Convention & Exposition

ORLANDO, FL – A recovering U.S. economy is driving growth of weak new-vehicle sales, but plenty of risks remain in the market, a leading forecaster says.

“If we don’t remain disciplined, we could get back into our bad habits,” says Jeff Schuster, executive director-automotive forecasting at J.D. Power & Associates.

Schuster points specifically to keeping production in line with demand, a delicate balance that was thrown out of whack in 2008 and left thousands of vehicles collecting dust as consumers reined in spending.

The deadly combination drove the newly reorganized General Motors Co. and Chrysler Group LLC into bankruptcy, costing thousands of jobs and multi-billion-dollar government bailouts.

“Don’t over produce,” Schuster warns during a speech at a J.D. Power conference prior to the opening of the annual National Automobile Dealers Assn. convention here. “Have the right level of capacity, bring out the right vehicles.”

So far, industry capacity has come down to more reasonable levels, with the Detroit Three taking out some 10%. But too much still remains, Schuster says, and only will grow in coming years with more auto makers, such as Hyundai Motor Co. Ltd, expanding their presence in the U.S.

“So a risk for the industry to fall back into its bad habits exists,” Schuster says, fearing a return to the days when deep discounting kept vehicles rolling out of factories but eroded profitability for both the auto makers and their dealers. “If someone breaks ranks, it becomes chaos.”

An influx of smaller, more-efficient vehicles will satisfy consumer demand as fuel prices once again begin rising. But a fleet with 60% to 65% small cars and cross/utility vehicles by 2010, as J.D. Power forecasts, might be too much.

“Consumers are open to small cars,” Schuster says, “but I don’t think they are ready for the barrage that is coming.”

Buyers will need time to adjust to small cars with higher content and higher sticker prices, he adds.

But a general improvement in the U.S. economy is driving optimism at J.D. Power.

Just days ago, the forecaster raised its retail sales outlook for 2010 by 100,000 units to 9.6 million cars and trucks, up 12% vs. like-2009. Including fleets, J.D. Power’s forecast calls for 11.7 million light vehicles in 2010, up 13% over 2009.

The company sees the industry reaching 15 million unit-sales annually by 2012, with retail deliveries comprising 12.5 million of that total.

“Slow, steady growth,” Schuster says, “but growth.”

Key drivers behind the rebound include the aging vehicle parc and more buyers, no longer upside down on car loans, ready to re-enter the market. New-car loans are a bit easier to come by, Schuster says.

“Credit has come a long way,” he says, “(but) it has a long way to go.”

Also, auto makers are producing more on the strength of last year’s “Cash for Clunkers” program that cleared inventories, and consumer spending is rising.

“Consumers are returning to the marketplace and that will provide more support” to the economy, Schuster says.

And with looser credit comes more leasing programs. J.D. Power forecasts long-term lease penetration of between 15% and 18%, a healthy level but far from the 20% to 22% of past years.

“We don’t believe it will ever get back to the 20%-22% range,” Schuster says.

Challenges to auto maker and their dealers are many, but Schuster points specifically to a changing competitive landscape. For instance, J.D. Power expects 60 to 65 new models annually from auto makers in the coming years.

More models, he says, means less volumes on existing ones.

More auto makers are coming, as well. India’s Mahindra & Mahindra Ltd. and Italy’s Fiat Auto SpA, for example, have announced plans to sell in the U.S. More niche builders, such as the electric-car manufacturers, are coming, as well, and European brands such as Peugeot and Renault are contemplating a return.

“It’s a competitive market, and it’s only going to get more competitive,” he says.

Globally, J.D. Power forecasts the industry to grow about 30% from 2009 to 2013. Toyota Motor Corp., General Motors Co., Renault SA/Nissan Motor Co. Ltd. and Fiat/Chrysler will outperform the industry over that timeframe, but producers based in China and India will see gains of more than 60%.

“All-in-all, Toyota stays on top after they get through their troubles,” Schuster says, referring to the Japanese auto maker’s recent quality crisis.

The BRIC contingent – Brazil, Russia, India and China – will see the greatest growth. Those markets already have grown from a combined 5 million vehicles built in 2000 to 21 million this year.

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