Renewed Supply, Incentives Spur Car Sales

By Lacey Plache October 11, 2011

Honda Crosstour Engine Install _feature.jpg

The economy may be floundering but don’t tell that to the auto industry. Supply is up, prices are down, and car sales spiked in September to 13.1 million on a Seasonally Adjusted Annualized Rate (SAAR) basis from 12.1 million in August. A key reason for this upswing is the recovery of Japanese automakers from the March earthquake. Supply is also growing for other automakers that faced high demand in recent months but were unable to immediately respond with increased production.

Indications point to even more momentum for the auto industry as supply continues to grow and push prices to become more competitive. Plus, car-buying conditions should keep improving with lower gas prices easing pressure on the most strained fuel efficient segments. Meanwhile, auto loan finance rates will remain low for the foreseeable future. Still, the economy, and especially tepid consumer confidence, cannot be ignored as a potential drag on new vehicle sales.

Japanese Supply Recovering
Chart 1-Vehicles Delivered to Dealership.jpgSince June, the Japanese automakers have been making progress on the slow road to recovery from disruptions caused by the March earthquake. Nissan production was the least affected and started bouncing back more quickly than its key rivals Toyota and Honda. After falling to 81 percent of its average 2010 production level in May, Nissan’s delivery rate totaled more than 115 percent of the 2010 level during June through September. As a result, Nissan’s inventories are growing. Nissan expects a return to full global production by October.

Toyota’s earthquake recovery began in earnest with an accelerated return to full production in June for 8 of the 12 models it produces in North America, including the top-selling Camry and Corolla. Vehicle deliveries increased from 28 percent of the average 2010 level in May to nearly 70 percent in June and reached 93 percent in September. Toyota made headlines last month when it announced that its production in both North America and Japan was back to 100 percent, with plans to operate this fall at levels 15 percent higher than originally forecasted.

Honda’s recovery, meanwhile, has lagged behind its key Japanese competitors by a couple of months. Honda’s units delivered fell to around 50 percent of the 2010 average level during May to July, before rising to 95 percent in August and then 103 percent in September. North American production is back to normal for all vehicles except the 2012 Civic, which is slated to return to full production by November.  Honda projects a return to full global production by the end of the year.

Japanese Incentives Rising
Chart 2-Honda Toyota Average Discount from MSRP May-Sept 2011.jpgNaturally, as supply continues to increase, prices will become more competitive. Although it is likely too soon to see a substantial impact on prices, Edmunds.com has found that incentives are already increasing for the hardest hit manufacturers. For example, Honda, whose discount from Manufacturer’s Suggested Retail Price (MSRP) averaged 12 percent in 2010, had average discounts of 8.2 percent in May to June versus 9.5 percent in July to August. Similarly, Toyota discounts from MSRP, which averaged 13 percent in 2010, fell to less than 9 percent in May, then slowly climbed all summer, topping 11 percent in August. Both automakers’ discounts fell in September, however, as substantially more 2012 model year vehicles appeared in the mix of vehicles sold.

Non-Japanese Supply Tight Too

Several Korean and domestic automakers benefited from the Japanese supply issues with increased sales, especially in the smaller, more fuel-efficient vehicle segments. As a result, supply tightened for these automakers as well. In particular, Hyundai was not able to immediately expand production. Hyundai restocked 100 percent of its inventory on average each month in 2010, but only 90 percent on average during May through July. Subsequently, its inventory replenishment rate improved to 98 percent in August and 103 percent in September.

Accordingly, discounts from MSRP fell for these automakers throughout the summer. For example, Hyundai’s discounts dropped from 11.5 percent in 2010 on average to 6.6 percent in August. However, supply is now expanding for Hyundai, thanks to recent increases in production, which will soften prices. In addition, prices in general should respond further in the coming months as Japanese auto supply increases and these makes become more competitive again. Price competition from increased supply also should limit price increases on new 2012 model year vehicles. Still, given the extent of inventory recovery still needed, competitive activity should fall short of an all-out price war this year.

Gas Prices Help Supply
Chart 3- Monthly Motor Gasoline Retail Price _Sept 2011.jpgFalling gas prices should also help to relieve supply and pricing issues this fall. Throughout the spring, rising gas prices led to higher demand for more fuel-efficient vehicles. This combined with the earthquake to increase demand and contribute to tight supply and higher prices. Nationwide average gas prices for all grades rose to $3.96 per gallon in early May and have been falling slowly ever since, coming in at $3.67 per gallon in September. According to the Energy Information Administration (EIA), gas prices are expected to fall even more in the coming months, to $3.43 per gallon in December. And, in the past few weeks, expectations of a global economic slowdown have led the EIA to revise down its projected gas prices for 2012 to $3.54 per gallon, compared to $3.56 per gallon in 2011. Lower—and stable—gas prices can affect buying conditions by shifting the mix of what consumers buy. In particular, reduced demand for fuel efficient vehicles will combine with increased supply to help prices improve faster.

Interest Rates Remain Low
Chart 4- New Car Loan Average APRs.jpgFinally, buyers can expect to continue to benefit from low interest rates for the foreseeable future, a key factor for an industry in which over 75 percent of purchases feature at least some financing. New car finance rates have averaged in the mid-4 percent range since March 2010, historic lows following a general decline since the early 1980s when rates peaked at nearly 18 percent. Rates are likely to stay low for two key reasons. First, the recent downgrade of U.S. debt is not likely to boost auto loan interest rates in the near term, despite concerns to the contrary. Second, Federal Reserve policy will further contribute to keeping auto loan finance rates low. The Fed announced in August that it intends to continue to support lower interest rates across the spectrum until at least 2013.

Beyond Buying Conditions
Expected improvements in supply and prices make a strong case for deferred demand to release this fall and boost auto sales. Some consumers delayed purchases earlier this year due to limited availability and higher prices. Many others have put off new car purchases due to economic conditions. Both groups could potentially return to market if conditions are right. September auto sales already demonstrate that consumers are responding to stronger buying conditions. But buying conditions are only one component in a consumer’s decision to buy or lease a new vehicle. Consumer confidence ultimately determines whether or not they will decide to buy. For now, confidence represents a strong deterrent to car sales and is expected to constrain 2011 sales.

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