Outlook Brightening for Auto Makers, Dealers
Mike Balise says manufacturers are building more cars than consumers will buy, which will benefit car shoppers by deflating prices.
The highways are getting a little shinier.
The Great Recession hit many industries hard, and auto dealers were no exception. As consumers put non-necessary expenditures on hold and hung onto their clunkers a little longer, the average age of cars on the road soared past 12 years.
But they couldn’t put off those trade-ins forever, and with the economy showing signs of life and consumer confidence inching up, carmakers and dealers are reaping the benefits.
“New-car sales are hot,” said Mike Balise, vice president of his family’s regional chain of dealerships. “The overall trend in the industry is up; they’re making 16 million cars again.”
In fact, just five years ago, that was the standard number of vehicles rolling off North American assembly lines. But after dropping below 16 million in 2008 for the first time in 10 years, new-car production bottomed out at around 8 million a couple years later. The fact that manufacturers are producing with confidence again bodes well for dealerships in Massachusetts and everywhere else.
According to the Fabricators & Manufacturers Assoc., manufacturers have curtailed production and instead focused on keeping their operations lean while still meeting the rising demand for auto parts — another result of aging cars on the road. They note that the increased production, expected to top 16.7 million units in 2015, will result in higher employment in auto manufacturing as well.
It will also impact the used-car market, Balise said. “You saw used-car values peak in the spring, and they’re starting to come down faster than they normally would because the new-car manufacturers are coming on stronger; they’ll suppress the market in terms of transaction prices.
“As these manufacturers ramp up capacity,” he explained, “they’re building too many cars. They’re talking about building 16 million, and that is true, but they’re only going to retail 14.5 million. The other 1.5 million will go to Enterprise, Hertz, Avis, your fleets, and they only use them six to 13 months. So there are going to be lots of 5-, 6-, 10,000-mile current-year used cars going to auction.”
In short, he said, “new-car sales are brisk, prices are going down, because the capacity to make cars is still greater than the marketplace, and that will lower the prices of cars and lower the value of late-model used cars.”
Lease of Their Concerns
Gary Rome, president of the Hyundai store in Holyoke and the Kia dealership in Enfield that bear his name, said he has not yet experienced a huge spike in business stemming from the new manufacturer confidence. “But our service and our parts sales have increased dramatically — about 28%.”
Leases are soaring too, he added.
“That’s the other thing — we’ve seen an increase in leasing from a lot of folks,” he said, noting that, on average nationally, leases account for around 11% of all new-car transactions. At Gary Rome, the number currently approaches 35%.
“People are looking to get more car for less money, which they can do with a lease,” he said, noting that the popularity of the option tends to ebb and flow according to how aggressively car makers are pushing special lease programs. “When manufacturers have inventory and they want to move it, they’ll incentivize the leasing to make it more enticing for customers. And customers are responding to that — interest rates are lower, payments are lower, with little or no money down.”
Retail incentives to buy have steadily decreased since peaking during the heart of the recession, when 0% financing was all the rage.
“In general, the car companies have shown some restraint in discounting,” writes Jim Henry in Forbes. “In fact, average actual transaction prices hit a record [in May] of $28,921, according to J.D. Power and Associates. That is what consumers actually paid, net of incentives. In May 2008, that number was $24,404.”
What they want to pay for, Balise said, hasn’t changed much.
“Mileage, reliability, and safety tend to dominate everything,” he told BusinessWest, noting that gas has hovered close to $4 per gallon for so long that people have made gas mileage a permanent part of their car-buying priorities.
“I think it’s always in people’s minds; they’re always considering it. Even my friends buying things like Denalis and Explorers — one guy in particular tows a racecar, and he was very conscious about a three-mile difference between two choices. For most people, it’s very top of mind, and certainly the manufacturers are producing models with better mileage than ever, lots of great choices.”
That enthusiasm has not, however, crossed over to electric vehicles.
“In general, I think that the tendency toward electric cars is going at a very slow pace,” Balise said, noting that GM has lowered the price of its Volt about 20%.
“Those cars seem to be more peripheral. No one bought the Volt except a few people who wanted to be at the cusp of that technology. Everyone else, if Chevy showed you a Malibu and a Volt and then showed you the price, 99 out of 100 people are going to choose the Malibu all day long.”
The U.S. government has attached tax incentives to electric cars, but Balise said consumers simply haven’t been responsive to them. “The government is trying to create a market that doesn’t exist. Who wants a car you have to recharge, and that takes three or four hours to recharge?”
Analysts have noticed the same trend. “Increased sales are in store for fuel-efficient cars and trucks, especially compact cars, subcompact cars, and hybrids. Despite fairly steady gas prices, consumers are finally ready to commit to these segments for longer than the length of a gas price spike,” noted Colorado-based Accurate Auto Body in its blog.
“They are not eager to commit to all-electric vehicles, though, so automakers will increasingly concentrate their efforts on plug-in hybrids and hybrids. And for those consumers desiring hybrid technology without the hybrid cost, additional hybrid features will be found in more economical conventional cars as manufacturers upgrade their efforts to meet the government’s corporate average fuel economy (CAFE) standards.”
Meeting consumer demands has become more challenging at a time when shoppers are showing up at dealerships with more information and research than ever at their fingertips, Rome said. But he considers that not a negative, but an opportunity to meet their questions with knowledge and attentive service.
“We know that 90% of our customers are going on the Internet to do research, and our job is to provide them with efficient responses that are informative. It’s not unusual for customers to be on the lot at our dealership while using their smartphones to look elsewhere or verify information, to make sure they’re getting a good deal, to look at reviews, to make sure they’re doing business with the right dealership. It’s actually good to see.”
That’s because the Holyoke dealership recently won the Hyundai President’s Award for customer satisfaction, ranking sixth out of 812 dealers in the country. “We’ve seen stability, even in a down market, because of the way we treat our customers,” Rome said, which extends to the company’s charitable involvement in the community. “We have a mantra that we use here: people today come to expect more, so extraordinary is the new ordinary, and people have come to expect an extraordinary experience.”
Across the country, car buyers are increasingly seeking those experiences. According to more than 70 economists and analysts from business, academia, and government who participated in the Chicago Fed’s annual Automotive Outlook Symposium in May, the nation’s economic growth is forecast to be solid this year and strengthen somewhat in 2014; they expect that to translate to 15.3 million new-car sales this year and 15.8 million in 2014, after bottoming out at 10.6 million in 2009.
Truck sales are a particular bright spot. Kenny Veith, partner with Americas Commercial Transportation Research Co., noted at the symposium that, while heavy-duty truck sales are forecast to decrease from 278,700 units in 2012 to 262,300 units in 2013, they are expected to surge to 300,900 units in 2014, while medium-duty truck sales are projected to grow from 188,400 units in 2012 to 197,600 units in 2013 and 213,700 units in 2014.
“For domestic brands, rising pickup truck sales are expected to be another significant factor,” adds Henry in Forbes. “Pickup sales are an important sign of recovery in the housing market. They’re also big-ticket, highly profitable sales in a product segment where the domestic manufacturers still dominate. J.D. Power said it expects full-size pickups to account for 11.4% of industry retail sales, up from 9.7% in May 2012.”
Balise has seen that activity at his own dealerships. “It’s been a really good year for most manufacturers, and trucks are as hot as they’ve been in a long time,” he said.
Rome is confident enough in the industry outlook that he plans to renovate his Holyoke dealership, following a recent renovation of the Kia store in Enfield. “We’re going to reinvest,” he told BusinessWest.
In other words, he keeps rolling along — just like the industry as a whole.
Joseph Bednar can be reached at email@example.com