In some rare good news for the UK, Ian Dewsnap finds the
recovery of the US auto market is definite and steady.
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Recovery in the US auto market is definite and steady. New car
sales are back perhaps to 12.5m units annually, from 11.6m in 2010,
but still short of the days of 15m-17m.
What has happened is that with the
major US manufacturers ‘right-sizing’ their businesses to the
market, the over-supply to keep factories running has calmed. The
lower production and sales level of the past 2-3 years, combined
with the tendency for consumers to keep vehicles longer, has led to
a shortage of lower mileage used cars and an increase in used
values from their previous lows.
In financing terms, the impact of
this reaction to the crisis has been a move by captives and banks
to lower their new lease residuals, as a result of their risk
experiences. This has broadly meant an end to the residual value
losses. The US has also seen a newer phenomenon of customers opting
to buy out of their leases and realise equity in their cars.
I guess this adds to the
frustration that dealers feel in not being able to source so many
ex-lease cars, resulting in the fact prospecting among service
customers to get them to trade-in selected cars is becoming a
sensible thing for dealers to do.
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By GlobalDataTraditionally this was seen as hard
work compared to other prospecting methods, and particularly when
good used cars were plentiful at auction.
Of course the big three
manufacturers either exited or slowed down their lease underwriting
during the 2008-09 period, with banks not really picking up much of
the slack, other than in the prime areas.
As a result, delinquencies are
under control, and the level of repossessed cars is down from
2009’s peak of 1.9m units to, probably, 1.3m this year – which is
still more than most world markets’ total new car sales.
Electronic efficiency improvements
for lenders have also slowed down.
Subprime has not lent itself to
using all electronic processes – the fraud risk remains too high
and lenders still want to see payslips and to phone employers
before making a decision, so these remain manually intensive deals
to handle.
Electronic signatures have not
really made much impact, but dealers rarely get to speak to anyone
about an underwriting any longer.
With systems such as DealerTrack
and RouteOne handling almost all the franchise network
applications, deals are either accepted or declined. Again, this
doesn’t hold true for subprime, where making a deal by negotiating
terms remains possible.
But now funding is becoming more
freely available – at a price admittedly – and competition is
returning more aggressively to the market. Rates are trending
downward and margins getting hit a little.
Memories are indeed short, and
while underwriting was strong in the recession as lenders got back
to their roots, there are already signs that people are beginning
to waiver from the disciplines and starting to stretch credit
acceptances and regain a subprime appetite.
Market forces are logical and none
of this is a surprise, though how much the lessons have been
learned remains to be seen.
If residuals get talked up above
common sense levels, and buying goes deeper to people who are tight
to afford the repayment, who is to say the cycle won’t repeat
itself? Hopefully, not as painfully as before.
Ian Dewsnap is director of
BenchMark Consulting International’s UK operations
