Tag Archives: Auto Industry

Carmageddon: All 3 Major Auto Markets Contract YoY For The First Time Since January 2009

For the first time since January 2009, sales of cars declined year-over-year in all three of the world’s largest auto markets of Western Europe (-6.8%), China (-1.8%) and the United States (-3.7%).  Combined, these three markets account for roughly 70% of the world’s auto sales (chart per Bloomberg).

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And while auto OEMs spent the first part of 2017 ignoring the growing signs of trouble facing their industry, some are finally starting to admit that all is not well in auto land.  As we noted a couple of days ago (see “How Is This Not A Recession? Ford To Slash 10% Of Global Workforce“), Ford just announced plans to cut about 10% of its global workforce.  Meanwhile Nissan Motor is forecasting a surprise drop in profit this year and Toyota Motor expects an 18% decline as well. 

  • Off-lease supply: This has already more than doubled since 2012 and is set to rise another 25% over the next 2 years.
  • Extended credit terms: Auto loans are at record lengths and lease assumptions (residuals, money factor) are at record levels of accommodation.
  • Rising rates: Starting from record low levels in auto loans.
  • Overdependency on auto ABS: The outstanding balance of auto securitizations has surpassed last cycle’s peak.
  • Record high deep subprime participation: 32% of subprime auto ABS deals were deep subprime (weighted average FICO < 550) in 2016 vs. 5% in 2010.
  • Record high units of new car inventory: 2016YE unit inventory levels were near 10% higher than 2015YE, and are continuing to trend higher in 2017.
  • OEM price competition: Car manufacturers have capacitized to a 19mm or 20mm SAAR. At this point in the cycle we start seeing more money ‘on the hood’ to move the metal. As new car prices fall, used prices look relatively more expensive, which necessitates a decline in used prices to equilibrate the supply/demand imbalance.
  • Increased ADAS penetration: We expect auto firms to achieve nearly 100% active safety penetration by 2020, creating an unprecedented safety gap between new and used vehicles, accelerating obsolescence of the used stock. Rising insurance premiums on older cars could accelerate this shift.
  • Trouble in the car rental market: Due to a number of secular shifts, including how consumers access transportation options (e.g. ride sharing), car rental firms are facing stagnant growth, weak pricing and over-fleeted conditions. As these cars hit the auction, the impact on prices could be significant.

And here are the stats…

Off-lease volumes have already doubled since 2012 and are only expected to get worse…meanwhile, lending standards have gradually gotten worse and worse…

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But lenders are starting to get worried and are tightening lending standards for the first time since the great recession.  (Note: Shows net percentage of respondents reporting tightening standards on consumer loans for new and used autos. Negative numbers indicate loosening standards.)

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Meanwhile, none of the warnings about a flood of used car volumes about to hit the market has impacted new car volumes being pumped out by the OEMs and pushed on to dealer lots.

All of which results in this fairly brutal outlook for used car prices and, by extension, the auto market generally.

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Source: ZeroHedge

 

Latest On US Auto Sales

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Most of you reading this are probably aware the U.S. auto market is a train wreck waiting to happen, but a recent report by Moody’s really puts the industry’s insane lending practices into perspective.

Reuters reports:

As U.S. auto sales have peaked, competition to finance car loans is set to intensify and drive increased credit risk for auto lenders, Moody’s Investors Service said in a report released on Monday.

“The combination of plateauing auto sales, growing negative equity from consumers and lenders’ willingness to offer flexible loan terms is a significant credit risk for lenders,” Jason Grohotolski, a senior credit officer at Moody’s and one of the report’s authors, told Reuters.

Motor vehicle sales have boomed in the years since the Great Recession. U.S. sales of new cars and trucks hit a record annual high of 17.55 million units in 2016.

Industry consultants J.D. Power and LMC Automotive on Friday reiterated their forecast for a 0.2 percent increase in sales in 2017 to 17.6 million vehicles.

But Moody’s says it expects U.S. new vehicle sales to decline slightly to 17.4 million units in 2017.

In the first nine months of 2016, around 32 percent of U.S. vehicle trade-ins carried outstanding loans larger than the worth of the cars, a record high, according to the specialized auto website Edmunds, as cited by Moody’s.

Wow.

Typically, car dealers tack on an amount equal to the negative equity to a loan for the consumers’ next vehicle. To keep the monthly payments stable, the new credit is for a greater length of time.

Over the course of multiple trade-ins, negative equity accumulates. Moody’s calls this the “trade-in treadmill,” the result of which is “increasing lender risk, with larger and larger loss-severity exposure.”

To ease consumers’ monthly payments, auto manufacturers could subsidize lenders or increase incentives to reduce purchase prices, though either action would reduce their profits, the report said.

Bad loans and reckless behavior generally seems to be already baked into the cake, so the real question is when will it all truly enter the market and create major problems? The cycle is already long in the tooth and a year of negative sales growth could turn out to be a tipping point.

Source: ZeroHedge