Auto Focus

Are We Heading to Overcapacity?

Yesterday at the Automotive News World Congress, AutoNation CEO Mike Jackson told the industry to contain inventory levels of unsold vehicles. If not, we could be faced with an incentive war to move the metal, he warned.

Jackson took issue with the industry’s at-the-moment 60-day supply figure, saying it includes fleet sales, so the real day’s supply is likely much higher.

This comes on top of reports of auto manufacturers opening up new domestic plants and increasing production. Volkswagen is building a new North American plant, with one already being built in Mexico. Japanese automakers Nissan, Honda and Mazda are building and opening new plants in Mexico, as well. General Motors, Ford and Toyota are ramping up production at existing plants.

This potential production issue is not limited to vehicles. The Commerce Department reported yesterday that the retail sector in general is holding more inventory, a two-year trend. Real consumer spending is supposedly healthy, yet the inventory-to-sales ratio at general merchandise stores (i.e., department stores) is worsening.

This all comes with the expectation that light-vehicle retail sales won’t sustain the double-digit growth of the past few years. On the back end, the used car market faces added inventory this year from a new influx of post-Recession lease returns, this time from the retail side.

Since the Recession, the automotive industry has done a historically good job of rightsizing production and building to demand. But recent trends have some worried. “The manufacturers are sacrificing profit for market share, which means residuals will suffer,” says one independent fleet seller, who acknowledged a higher level of year-end deal making than unusual by the manufacturers.

This fleet seller also sees a potential bubble building in the Buy-Here-Pay-Here market, as “a number of funders have jumped into the market in order to capture above-market interest rates.”

An over-fleeting scenario would lead to a quicker fleet cycle. Indeed, mileage on de-fleeted rental units is at a five-year low.

So should we be worried, as in “big picture” worried?

So far, vehicle prices are still trending upward. While used car values have declined, val¬ues are still well above lev¬els of five years ago. And demand is still strong — for new cars and used.

“The overriding dynamic in today’s used vehicle market is rebounding supply, which is putting downward pressure on wholesale prices,” writes Tom Kontos in his December commentary, released today. “However, strong retail demand is restricting this downside, as is the gradual nature of the supply increase itself.”

This demand isn’t artificially inflated, as it had been before the Recession when retail buyers used some of that adjustable-rate mortgage money to also buy cars they didn’t need.

Remember that auto production is more global than ever — so those new North American plants will also be pumping out cars for overseas markets. As well, today’s union contracts are not written with production levels that need to be reached.

Nonetheless, fleets need to keep a closer eye on the micro-market changes.

“Depreciation needs to be adjusted to reflect the changing market,” says the fleet seller, and this is backed up by the prognosticators. On average, vehicles depreciated 15% to 17% before the Recession, according to Black Book. In the Recession years — on short supply — those numbers dipped to 12% and to 13%. For 2014, Black Book estimates first-year depreciation to run 14.5% to 15%.

“The one thing you can say is ‘Fleet management is now more important than ever,’” says the fleet seller.

This, we can all agree on.

Comment On This Story

Name:  
Email:  
Comment: (Max. 10000 characters)  
Please leave blank:
* Please note that every comment is moderated.

Author Bio

Chris Brown

Executive Editor

Chris is the executive editor of Business Fleet Magazine and Auto Rental News. He covers all aspects of the fleet world.

Newsletter: Sign up to receive latest news, articles, and much more.

Read the latest

Auto Focus Blog: A blog covering fleets, auto rental and the business of cars

The Customer Isn’t Always Right

Not caving to a customer with a blatant agenda may have consequences, especially for a small rental company that relies on stellar Yelp ratings to advertise. But business integrity must prevail.

The Truth Behind Compact Van Depreciation

Why are large van values holding up better than their compact counterparts, and will it last?

Car Rental’s Call to Action on Autonomous Vehicles

The car rental industry has built-in advantages to support a world with driverless cars, but it needs to take the next step in partnering with autonomous vehicle stakeholders.

Job Finder: Access Top Talent. Fill Key Positions.