News Column

Studies Offer Conflicting Previews of Auto Sales

May 18, 2011
People shopping for a new car

While one trusted automotive study suggest that the U.S. auto market will bounce back to 16 million sales by 2013, another report says Americans are scrapping cars faster than buying replacements and plan to do so for some time, potentially slowing the industry's recovery.

Consulting firm A.T. Kearney's annual automotive study, released Tuesday, presents the optimistic case. Americans will buy 13.2 million new vehicles this year, 15.2 million in 2012 and return to pre-recession level of 16 million vehicles in 2013. Consumers will continue to replace aging vehicles kept during the worst of the 2008-2009 recession. Lenders who stopped financing people who lost jobs or houses are expected to be slightly more willing to make higher-risk loans.

But Itay Michaeli, Citi Investment Research auto analyst, has put forth a more cautionary view, concluding that the industry sales won't rise above 14.5 million vehicles by 2013.

He says Americans are buying new vehicles more slowly than they are scrapping old ones -- a trend that has never happened before and that will be a strong deterrent to the future sales recovery.

"Essentially, society accumulated too many vehicles over the past several years, for which it is now correcting," Michaeli said Tuesday.

According to R.L. Polk, the Southfield, Mich.-based automotive research firm, consumers scrapped 2.1 million more vehicles than they replaced with new ones since 2008.

"This severity of this flush was caused both by the deep economic downturn and the 'over-buy' that occurred since the 1990s, unquestionably aided by incentives and credit," he wrote.

The ratio of vehicles per driver hit an all-time high of 1.18 in 2006 at the peak of the housing bubble. Today, it is still high at 1.14. But if it falls to the 1.04 to 1.08 range, Michaeli predicts annual sales won't exceed 14.5 million by 2013.

Michaeli's research for Citi Investment is based on a survey of 2,700 consumers every five months since March 2010.

The last survey, conducted earlier this month, included three questions: How many vehicles does your household have? How many do you expect to have two years from now? Why will you add or subtract vehicles? While 10 percent of respondents expected to add a vehicle, 14 percent expected to have fewer. That is the largest gap between potential buyers and sellers since the first survey in March 2010.

"The recession has weighed on their long-term view of how prosperous their lives will be," Michaeli said.

Dan Cheng, leader of A.T. Kearney's automotive practice, said the average vehicle on U.S. roads is now 10.4 years old, a post-World War II high. But the need to replace the aging fleet will drive new vehicle sales higher sooner. Cheng estimates American consumers have kept about 32 million vehicles since 2007 that they would have replaced if the downturn had not occurred.

About 9 million of those will be replaced by new vehicles by 2018. The remaining 23 million will be replaced by relatively newer used vehicles.

Another reason for optimism: banks and automotive finance companies are beginning to reconsider "subprime" borrowers, those with credit scores below 620. From mid-2008 through 2010, fewer than one of every five such sub-prime borrowers were approved for car loans. Cheng estimated that if banks approve just two of every five subprime auto loan applicants, that would result in 800,000 additional new vehicle sales.

Source: Copyright Detroit Free Press 2011

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