Plante & Moran Automotive Consultant Offers Insights
— Does this week’s good news that U.S. vehicle sales were up 11% in December indicate the long-anticipated pent-up demand for new vehicles will be unleashed in 2011? Yes and no, according to Jim Eagan, CPA, an automotive consultant and partner in the automotive dealer practice at Plante & Moran PLLC.
“The announcement that auto sales steadily increased in 2010 was happy news indeed, but it was not unexpected,” says Eagan, who has provided financial and management consulting to hundreds of automotive dealerships in his 30+ year career. “Recent sales figures and trends alone do not drive the metrics for determining when new vehicle sales levels will return to pre-2008 levels, especially given that pent-up demand is still combating foreclosure and consumer confidence woes.”
Still, Eagan sides with other analysts who believe that, from an industry standpoint, there is currently a large pent-up demand for new vehicle purchases among U.S. consumers that has been growing since 2007. The critical question is when will the tipping point be reached, unleashing this pent–up demand and filling dealership’s new vehicle showrooms with customers. Eagan looks to the following factors to quantify how much actual new vehicle pent-up demand there may be:
- In the five years prior to the 2008 sales tumble, the average U.S. new vehicle seasonally adjusted annual sales rate (S.A.A.R) for the industry was approximately 16.6 million per year.
- Currently, about 15 million new cars and light trucks are scrapped and are taken out of circulation from U.S drivers each year.
- The average U.S. new vehicle sales for the three years 2008 – 2010 is approximately 11.7 million.
- The U.S Census Bureau recently announced that the U.S. population was 305 to 312 million. Over the past two decades, the country’s population has been steadily growing at the rate of approximately 1 percent per year. This implies the number of vehicle drivers in the U.S. is steadily growing, too.
- There has been no major shift in the U.S. of individuals giving up their personal vehicles for mass transportation alternatives.
“Given the above, conservatively, the pent up new vehicle demand generated over the past three years could easily be over 15 million vehicles right now,” offers Eagan. “Based on an anticipated U.S. 2011 new vehicle sales seasonally adjusted annual rate (S.A.A.R.) of about 13 million, the pent up demand at the end of this year could easily build to over 18 million vehicles.”
Eagan notes that dealers want to see forecasts translate into numbers soon.
“I hear continuing caution and some skepticism from dealers on the anticipated sales jump in new vehicles given how slow the U.S economic recovery, and recovery in their own communities, has been progressing,” admits Eagan. “The primary reasons cited by dealers for their caution are generally the same reasons why U.S. consumers are holding back in their spending: high unemployment and residential mortgage foreclosure rates. Other dealers however, have a more positive outlook, as evidenced by individual dealer investments in facilities, additional franchises and other long-term financial and product commitments.”
While consumers have coped temporarily with their hesitation to buy a new vehicle by holding on to their existing vehicle longer, or with a used vehicle purchase, Eagan says this scenario won’t continue indefinitely.
“According to the National Auto Dealers Association (N.A.D.A.), the average age of a vehicle on the road in 2009 was 10.2 years. With the shortage of used vehicles in the market, the rising fair market values of certain late model used vehicles has narrowed the gap between the retail cost of these used vehicles compared to the same model new. Plus, given the rapid rate of technological and gadget changes in newer models, consumer desires to have the latest and greatest, versus hanging on longer to an older vehicle, will ultimately win out,” continues Eagan.
When the joyful day arrives and pent-up demand is unleashed, will automakers be able to respond? Eagan says this is where the supplier community will be tested.
“Surviving suppliers are lean and mean now, with little excess capacity. Because they gear their production to OEM numbers, they will need to ramp up immediately when demand markedly increases. I expect they will rise to the occasion, though. It’s been a long wait,” concludes Eagan.
About Plante & Moran
Plante & Moran is among the nation’s largest certified public accounting and business advisory firms, providing clients with tax, audit, risk management, financial, technology, business consulting, and wealth management services. The firm’s auto dealership team is multidisciplinary and presently serves more than 200 auto dealership clients nationwide. Plante & Moran has a staff of more than 1,600 professionals in 21 offices throughout Michigan, Ohio, Illinois, Monterrey, Mexico, Mumbai, India, and Shanghai, China. In addition to the Detroit Free Press workplace honor, Plante & Moran has been recognized by FORTUNE magazine as one of the country’s best places to work for 12 consecutive years.