The auto industry’s party isn’t over, but some of the guests are leaving.
Last year’s sales came in at 17.1 million, the third straight year volume exceeded 17 million, a run that set an industry record.
This year, WardsAuto predicts sales of 16.4 million, largely because pent-up demand that had built up during the recessionary years has pretty much abated.
So, U.S. dealers are expected to sell about 700,000 fewer vehicles this year compared to last. That’s not great news. But there was a time when the auto industry would have considered that catastrophic.
Back then, when prospective annual sales were off by a few hundred thousand units – let alone 700,000 – headlines would scream, analysts would predict the end of civilization as we know it and automakers would knee-jerk so hard they required arthroscopic surgery.
It is different now for a couple of reasons.
One is that automakers – the big ones anyway – focus more today on profits rather than on soaring sales volumes. Sure, everyone wants to sell a lot of vehicles, but not at losses.
And although consumers likely will purchase fewer vehicles this year, they are buying “more vehicle,” Cox Automotive Chief Economist Jonathan Smoke says. They’re opting for higher-profit utility vehicles, upscale trim levels and assorted options. That beefs up transaction prices. (The average vehicle transaction price now is nearly $35,000.)
The push market of over production, heavy incentives and deep discounting in the late 1990s and early 2000s led to mounting losses despite high sales. That business model made about as much sense as fishing in man-made lakes in the desert.
Today, major automakers show greater discipline, although they overbuilt a bit in the first half of last year. “Incentive levels as a result of (mounting inventories) had to go up quicker than they should,” Hyundai Motor America Chief Operating Officer Brian Smith tells WardsAuto. He notes incentives help move slow-moving products, such as today’s sedans opposed to utility vehicles, “but it’s not the best solution long-term.”
So concerns loom as to how the industry will act and react to forecasted ebbing sales this year.
But the industry learned hard lessons from the times when automakers built vehicles no one particularly wanted, pushed them on the market and on dealers who didn’t ask for them and had to resort to selling them through deep discounting. That practice not only whacked front-end grosses, it did a number on back-end residual values.
Today, when automakers put profits before sheer sales volumes, they not only behave wisely, they also do what Wall Street wants and expects. Volume over profit is so yesterday.
Here’s another reason no one particularly is freaking out at the prospects of selling fewer vehicles this year: The last recession and its horrible effect on auto sales made the industry realize it could endure a lot. Winston Churchill said, “If you are walking through hell, keep walking.” And the recession years were hellish for new-vehicle sales.
In 2005, they were nearly 17 million, though largely propped up by slathering on those incentives. Two years later, they were down to 16.2 million.
Then the real trouble started. They dropped to 13.4 million in 2008 and hit a fiendish 10.6 million in 2009. That 6-million-unit drop in two short years represented a revenue loss of about $150 billion.
At the National Automobile Dealers Assn.’s annual convention in 2009, much talk centered on sheer survival. That year, a convention speaker, former President Bill Clinton told dealers, “Hang in there.” Most of them managed to do that, as well as to stay relatively optimistic. “It’s just the way we are,” Florida dealer Alan Starling told me during the thick of it.
Back then, Mike Maroone, who was president of dealership chain AutoNation, spoke of a better future when sales would recover and eventually reach a “sweet 16 million.”
The adjective was important, because he wasn’t referring to jacking up the numbers by whatever means necessary. Rather, he was talking about attaining a profitable 16 million. He said that would be sweet, and it was when it came about.
The recovering industry nearly hit 16 million in 2013 when sales reached 15.9 million units. The next year, deliveries not only surpassed 16 million, they came within about 150,000 units of hitting 17 million.
The industry has been on a roll ever since, and although, yes, it will slow down this year, no one is building a bomb shelter.
The annual NADA convention convenes in March. In addition to the usual business at hand, plenty of Las Vegas parties are planned. And there should be. There remains much to celebrate.