March 22, 2018
LAS VEGAS – Interest rates are on the rise, overall vehicle sales in the U.S. have softened and auto dealers are flush with used vehicles. But a J.D. Power analyst still sees reason to be optimistic about the industry’s near-term prospects.
“If you look at the topline metrics, while sales could be better, we’re actually on track to have potentially one of the best if not the best year in history,” says Thomas King, J.D. Power’s senior vice president-data and analytics division.
Speaking at the J.D. Power Automotive Summit here, he notes U.S. retail sales (excluding fleet) have been declining from 14.2 million units in 2015 to 14 million last year, and the 2018 forecast calls for 13.8 million retail deliveries.
“We prefer an industry that is growing. But in fairness, 13.8 million units of retail still is an extremely robust sales pace,” he says. “It could be better but certainly it’s not bad.”
King points to rising transaction prices in the U.S., from an average $30,000 in 2014 to $31,700 last year (including incentives). This year, average transaction prices are expected to reach $32,200, he says.
“For the manufacturers, this is terrific because the margin structure is such that it does have a direct impact on the bottom line. Margins are pretty high, and an extra $500 in pricing makes a difference” he says. “For the retailer, margins on new vehicles are pretty skinny, and you don’t get that same benefit. It’s a slightly tougher environment for retailers.”
King highlights the industry’s migration from cars to trucks and utility vehicles, “an old topic that continues to be a major headache for the industry.”
It’s harder to sell sedans, coupes and roadsters to Americans who have discovered they can’t live without the flexibility and room that comes along with big body-on-frame SUVs and smaller car-based unibody crossovers.
“So far this year, 32% of retail sales are cars, down 4 points from last year and down 14 points from 2014,” King says. “It’s a rate of change that continues to be a challenge.” A few years from now, he says it’s possible cars will make up less than 20% of the U.S. sales mix.
“That’s a problem because at that point the car market specifically isn’t going to be big enough to support all the models we currently have for sale today,” he says, noting 120 car models are available in the U.S. today, compared with 95 SUVs.
King's Powerpoint slide plays up transaction prices.
“That means OEMs must make some very tough decisions – not just how many cars they build, but how many cars will survive into the future. Ultimately, there will be a lot of pressure to put product investment dollars into the SUV market.”
Other negative signs King sees: On a retail basis so far this year, 59% of brands are down, and 76% of car models have lost sales.
“But more surprising is how tough the environment is for trucks and SUVs.” King says 45% of truck models are down so far this year on a retail basis, while 53% of SUV models have lost volume, “despite being a red-hot segment relatively speaking. It really demonstrates just how competitive the SUV segment is.”
Incentives to move the metal start going up when automakers fail to maintain sales targets, and December saw the highest average incentive spend, at $4,400 per unit, up from $3,300 in December 2014.
Helping drive up the December incentives was excessive inventory of older-model vehicles that needed to be cleared out. King says automakers have largely addressed the inventory issue with regard to cars, which has led to a reduction in car spiffs.
“To a degree, that was inevitable because car spending at the end of the year was frankly unsustainable,” as profit margins were being wiped out, he says.
Despite a robust SUV market, incentives for those utes are starting to rise, jeopardizing their lucrative margins.
By the end of the year, King says he expects overall incentives to continue climbing, potentially reaching an average $4,700 per vehicle.
He marvels at the growing pool of consumers willing to spend $60,000 for premium pickup trucks and even more for luxury SUVs.
“You have to ask yourself, who on Earth is buying these more expensive vehicles?” he asks. “If this is a situation where consumers are digging ever deeper into their pockets to fund more expensive vehicles, inevitably it will reach the point where it has to stop and maybe even reverse. Particularly for manufacturers, it will be a challenge.”
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