AutoGuide.com

Are the Good Times of the Auto Industry Sustainable? Just Barely, Stats Show

1

The current success of the automotive industry is just barely sustainable, according to J.D Power statistics presented at this year’s Automotive Marketing Roundtable.

Incentives are through the roof and are at their highest since the recession, while stats show auto sales are down 1.2% from last year. When incentives are this high, dealers and automakers suffer. According to J.D Power numbers, there is a bit of good news, however. The average transaction price (ATP) is up $600, bringing it up to $31,200 per vehicle. Higher ATPs mean consumers spend more money to buy a car and get a more expensive product. This often translates into payment being spread out over longer periods of time, so the consumer is locked into their purchase for longer.

“Is this level of performance sustainable?” asked Thomas King, president of media and marketing at J.D Power. “And the answer is: just about,” he said. “Transaction prices have been growing rapidly ever since the recession,” said King. “And this year we will see our highest average transaction price ever,” he said.

J.D Power estimates are showing 2016 consumer spending at $438-billion, the highest ever, they say, and a $2-billion increase from last year. Since last year, there has been a 211,000 decline in unit sales, landing total unit sales at 14 million, and predictions on next year’s unit sales estimate it will stay the same.

how bad is incentive escalation

Even though unit sales numbers are up, it is likely due to the fact that dealers are shelling out more and more money to draw buyers in. Compared to last year, September incentives have gone up an average of $490 per vehicle, a 13 percent increase. These incentives are usually a sizeable amount of cash, around $4,000 on average per vehicle. Incentives can also come in the form of discounts or extended warranties. They may also bump up the trade-in price.

Dealers are spending more on incentives now than they did immediately after the 2008 economic recession. Loan to value ratio is 101 percent, up 1.2 points. “So people are actually financing their vehicle for more than it is actually worth,” said King.

Vehicles are also spending more days sitting on the lot until they are sold compared to previous years. This number, called days-to-turn, went from 71 to 74 days. This is bad for auto dealers because the longer the vehicle sits in the lot, the more it costs them to keep it around. This also takes a toll on automakers because the longer a vehicle sits in inventory, the more automakers rely on incentives to make the sale.

Auto sales analyst and founder of Goodcarbadcar.net, Timothy Cain, said that in the early part of an economic downturn, automakers will usually incentivize as a means of eliminating inventory and maintaining production levels until they better understand what the economic indicators are showing.

“What we will see is a continued slowdown in passenger car sales, as we’re already seeing that huge incentivization in passenger cars isn’t stopping the slowdown that’s already been enacted.”

Cain sites historical examples of fuel price increases affecting the market, so that people stop buying bigger trucks and utility vehicles, but he said that is not the case anymore.

SEE ALSO: Automakers Outperform EPA Emissions Standards Again

“A sudden, unexpected fuel price uptick won’t have the impact now that it did a decade ago. There will be some impact, but not as much, because the utility vehicle category is so much more inclusive of efficient, car-like products, because the ‘light truck’ market is much less reliant on body-on-frame vehicles, and because fuel economy numbers have grown so far, so fast. Pickup trucks, too, are much more efficient,” he said.

“Tastes are changing,” Cain added, “and the car market is rapidly shrinking and will continue to do so over the next few years”

Cain believes automakers will eventually tire of the massive incentive levels in low-profit categories that are producing significantly lower volume. He said that buyers will start to purchase more expensive utility vehicles at higher ATPs by utilizing leasing and longer-term loans. “And all of this will, in the near-term, allow the industry to maintain somewhat healthy volume,” he said. “But we couldn’t expect the days of steady, consistent, growth coming out of a huge recession to continue.”

Dave Sullivan, product analysis manager at AutoPacific, said he wouldn’t paint the situation as bad as J.D Power. “The mix of vehicle sales is transitioning to a very healthy and profitable mix of crossovers and trucks, not low-margin small cars,” he said. “We may have hit ‘peak car sales’ but that doesn’t mean it’s not a healthy industry.”

WP Twitter Auto Publish Powered By : XYZScripts.com