The US automotive industry has found the cure for the COVID 19 sales blues: 0% interest for 84 months.
In March, the U.S. Federal Reserve, the country’s central bank, lowered interest rates from 1-1.25% to 0-0.25% as part of efforts to boost investment and stimulate consumption. The auto industry followed suit with seven years of zero percent financing for new cars, and this attracted buyers to the showrooms despite the ongoing economic uncertainty during the pandemic.
“This quickly brought many people back to the market because it was too good a deal,” Charlie Chesbrough, senior economist at Cox Automotive, an Atlanta-based company known for a number of products including Kelley Blue Book, Dealer.com and Autotrader, told Tekk.tv.
“We are pleasantly surprised to see the market return,” he said. “It’s the consumers – not the fleet buyers – that are bringing the market back from what we saw in April,” he said.
Sales have risen sharply since the spring, when the economy came to a standstill as part of efforts to contain the spread of the virus. April sales were down 53% from 2019, the lowest since the 2008 recession caused by the collapse of the subprime housing market. At this rate, it is expected that a total of around 7.5 million new cars and light commercial vehicles will be sold in 2020.
They are not expected to reach pre-pandemic levels before 2023 or 2024. Car sales in October are expected to rise for the sixth consecutive month since the historic low in April.
The seasonally adjusted annual sales rate is expected to be around 16.4 million units, up from 16.3 million in September, but down from the previous year’s level of 16.8 million, Chesbrough said.
Inventories are tight in the current market. The three major Detroit automakers temporarily halted production last spring to contain the spread of the virus as sales have fallen sharply. Production has recovered, but some buyers are having difficulty finding a car with the accessories and equipment they want. Strong sales indicate that few remain on the sidelines. For dealers, a tight supply means higher prices and improved profit margins despite the lower sales volume.
“The industry could sell 25 million new vehicles a year if prices were lower,” Chesbrough said. “But with more expensive models, the profit is higher.”
He said this trend is likely to continue as new car buyers tend to have higher incomes and want more stylish equipment and accessories than is usually the case with cheaper cars. According to Kelley Blue Book, the average retail price of a small car in September was $21,783, $39,969 for a mid-size SUV, $42,016 for an entry-level luxury car and $97,481 for a high-performance car.
Those who have a job, especially people who can work from home and do not expect to be laid off, buy new cars, while workers on an hourly basis, including those in retail, hospitality and catering, usually look at used cars.
Dealers have adapted to the growing division of the market.
“New car buyers have not been hit as hard by the pandemic as low-income earners,” Chesbrough said. “The new car market is made up of high income people who have done quite well.
The unemployment rate reached a peak of 14.7% in April – the highest since data collection began in 1948 – and fell to 7.9% in September. In February, before the shutdown, the unemployment rate was 3.5%.
Auto Nation, the country’s largest publicly-traded retail chain, reported that third-quarter sales totaled $5.4 billion, surpassing Wall Street estimates of $5.19 billion. The company reported adjusted earnings per share from continuing operations of $2.38, a new high. Analysts expected the company to earn $1.65 per share.
“AutoNation’s third quarter results were the best ever in the company’s history,” said CEO Mike Jackson last week during a profit call with Wall Street analysts.
“We saw solid demand and a strong pricing environment due to low interest rates and increased consumer interest in car ownership,” he told analysts. “With higher demand and tight inventory levels, we adjusted our pricing and improved our margins.
AutoNation operates about 300 dealerships selling about 30 brands of new and used cars.
Some automakers have recovered from their April lows.
Fiat Chrysler achieved an operating profit of $2.7 billion in the third quarter, slightly exceeding Wall Street estimates. The company reported a net loss of $1.2 billion for the second quarter. Ford Motor Co. reported a profit of $3.6 billion for the third quarter, more than twice as much as in the same period last year. Revenues totaled $375 billion, an increase of approximately $500 million over the third quarter of 2019.
“Overall, we view the quarter positively, driven by solid margins with an encouraging road ahead,” New York investment bank Goldman Sachs said in a research report.
Ford, like other automakers, is active in the market for electric vehicles.
Between 2020 and 2040, Goldman Sachs expects global sales of electric vehicles to increase from 2 million to 52.3 million units at an average annual growth rate of 18%. In 2019, global sales of electric cars will be around 2.1 million, bringing the total worldwide number to about 7.2 million, the Paris-based International Energy Agency announced.
According to industry statistics, about 65.5 million cars were sold worldwide in 2019.
At current prices, the market for electric vehicles will probably only be open to people with high incomes. According to Kelley Blue Book, the average price for a new electric vehicle in September was $42,620, compared to $16,511 for a compact car.
But the price is only half the equation.
Chesbrough said presidential candidate Joe Biden’s “big plans” for switching to electric vehicles included building about 500,000 charging stations across the country.
“You have to have the opportunity to recharge before consumers invest in electric vehicles,” Chesborough told Tekk.tv.