May brought some hope of a return to normalcy with most states easing lockdown restrictions and stay-at-home orders. With this easing of orders, businesses were optimistic that their economic struggles may be alleviated as their customers could finally return. However, the effects of shutting down an entire global economy do not go away as soon as lockdowns end with major supply chain disruptions contributing to bottlenecking and inconsistent inventories. This issue will be prevalent across many industries and auto dealers won’t be exempt. The industry will be impacted by manufacturing slowdown problems.
May SAAR Update
After a devastating April SAAR (a measure of Light-Weight Vehicle Sales: Auto and Light Trucks), predictions for a rebound in May proved to be correct. Vehicle sales in the month jumped with SAAR increasing 38.6% to 12.2 million. Though this was a 29.7% decline from May 2019, the uptick from April and March numbers point to a recovery. Dealers are hopeful that April was the lowest the SAAR would reach, and with this new data, feel greater confidence in their predictions.
May vehicle sales jumped with SAAR increasing 38.6% to 12.2 million.
As we mentioned in our April SAAR post, many of these sales reflected dealers embracing online technologies and incentive programs to get cars out the door. Recently released data for May from Edmunds.com showed that the annual percentage rate (APR) on new financed vehicles averaged 4% last month. This was a drop compared to the April average of 4.3%. More strikingly, however, was the difference from the year-ago average of 6.1%. May’s 4% rate is the lowest average interest rate since August 2013.
While auto dealers were able to use different methods to increase sales, factories that supply auto parts and cars did not have such flexibility. The reopening of plants for General Motors, Ford Motor, in mid-May came after an almost 2-month production hiatus. Furthermore, though plants have begun reopening, they are not running at full capacity. Jamie Butters, Chief Content Officer of Automotive News, noted that disruptions in both Mexico and the U.S. manufacturing industries from the virus and social distancing measures threatens to cut the flow of vehicles and vehicle parts. According to a report from industry research firm LMC Automotive, fewer than 9 million vehicles are expected to be produced in 2020, the lowest since 2011 when an earthquake in Japan disrupted the global supply chain. If volumes are going to snap back like some have forecast, this will either require a pivot to used vehicles, or an increase in the expectations for vehicle production.
Dealership Inventory Headwinds
Even if auto dealers wanted to reopen their dealerships at 100% capacity, they need the pipeline of inventory to do so. Dealers who liquidated inventory (sometimes at fire sale prices) may have trouble sourcing popular models if production can’t ramp back up quickly enough. As the Lansing State Journal notes, “Every vehicle that is sold is a catch-22 for the industry. Every sale depleted inventory but with manufacturing all but frozen those inventories could not be replenished.”
According to data from the BEA, April saw an inventory-to-sales ratio of 3.6, its highest level since February 2009. This likely says more about severely depressed sales than any excess in inventory. Prior to the pandemic, this ratio was actually below 2.0 for four consecutive months, a figure that has only occurred twelve times since 2000. Although BEA data for May inventory has not been released yet, according to Motor Intelligence, new-vehicle U.S. inventory fell 32% in May, to about 2.6 million, the lowest in recent years. Among the vehicles in the shortest supply are large pickup trucks. In a research note Monday, Barclays warned of a “critical risk of supply shortages” of large pickups, estimating dealers had only 44 days of inventory before running out of models such as the Ford F-150 and GM’s Chevrolet Silverado. The truck stock is half of what it was earlier in the year.
Barclays isn’t the only bank focused on inventory. John Murphy of Bank of America asked all of the public auto dealers about the potential for short inventory in the summer months, and many acknowledged the potential for shortages. Below are some select quotes regarding the topic from the earnings call:
- “At the end of March, our total new vehicle inventory was $861 million, and our day supply was 105, up 18 days from the prior year. In April, we were able to drop our new car inventory approximately $120 million from March 2020. While these levels may seem high, because the OEM factories have been shut down, we believe we could run into a low day supply for the summer selling season. […] in some of our luxury and some of our domestic specifically, we could run into a lower day supply of some of the models.”
–Dan Clara, SVP Operations Asbury Automotive Group
- “But I think we’re going to have a big issue on incoming inventory from all the manufacturers. You’ve seen the German manufacturers starting and then stopping from the standpoint of a new production. I know from Daimler’s perspective in Mexico. They pushed off heavy duty trucks like two months. It’s not the fact that they don’t want to open or not meeting the protocols in the plant is the fact that the supplier base — in the old days, maybe back in ’08 and ’09 at least OEMs are more vertical from the standpoint of the supplier their parts for their vehicles. That’s not the case today. So, they have to rely on many, many suppliers and I think that’s going to be key.”
– Roger Penske
Rental Company Decline
Rental car bankruptcies could result in a high number of used cars diluting an already crowded used car market.
A decline in the rental car industry may compound the problem. In late May, Hertz and the parent company of Advantage Rent A Car filed Chapter 11 bankruptcy due to debt and global travel being wiped out from the COVID-19 pandemic. New vehicle sales to rental car companies accounted for about 10% or 1.7 million vehicles last year. That demand came to a screeching halt due to the COVID-19 pandemic, and some analysts expect no more than 250,000 such sales in 2020. While the disruption in the rental car industry most directly impacts automakers, used car dealerships could find themselves in trouble as well. With downsizing expected among restructuring efforts, the rental car bankruptcies could result in a high number of used cars diluting an already crowded used car market and impacting overall used car prices. Although this may mean a good deal on a vehicle purchase for consumers, trade-in values would decrease and lower values could damage auto brands and impact newer model pricing.
Despite the prospects of inventory shortages and used vehicle surpluses later in the summer, as long as there is not another major disruption to the supply chain and travel, these issues may not be long lasting. As Chris Holzshu of Lithia Motors noted in their earnings call, “Once the ramp up starts, it takes about 30 days for a vehicle to get completed on the production line and make it to one of our stores.” Though a month of disruption is not ideal, it can be managed. Dealers will hope to get through short supply by nudging customers towards less in-demand models. As travel picks up in the future, rental car companies can expect to see increased activity and thus, less saturation of the used car market.
While the rest of the country began to try to start fresh after months indoors, I decided that I needed a change in my own household as well in the form of an Australian Shepherd puppy. As you can see, Bobby loves Mercer Capital and the auto dealer industry team just as much as I do. We follow SAAR and other key industry trends to gain insight into the private dealership market. To discuss how recent industry trends may affect your dealership’s valuation, feel free to reach out to us.