Q: Why do my fleet suppliers have limited numbers of new cars available, and why are the prices so much higher?
- Eric Dabata, Thrifty Buffalo
A: When I first sat down to answer this question I had a fairly clear view of the coming fleet year. However, the stupidity in Washington has greatly reduced consumer confidence and increased the uncertainty of the future.
The Japanese earthquake and following tsunami caused a deeper economic impact than most economists recognized at the time. Japanese manufacturers canceled fleet orders to be able to have cars for retail.
Shortages of key parts caused other manufacturers to reduce production of certain vehicles. This economic blow not only affected the Japanese manufacturers but also suppliers, transportation companies, and thousands of dealers and their employees. With reduced selection and no incentives at Toyota and Honda dealers, consumers went to other dealers for new vehicles. This benefitted the Korean manufacturers especially, and in turn they moved cars from fleet to retail and canceled fleet deliveries.
Meanwhile the price of used cars increased week after week as dealers scrambled to put vehicles on their lots. Rental fleet managers found themselves between a rock and a hard place. High prices for used cars offered instant profits, yet not enough cars to meet their rental needs meant unhappy customers. In late July, used car prices went past the point the market could bear and the used car market seized up. These high prices — along with the fear that Toyota would return to the market with major incentives to recover market share — put dealer purchases on hold.
All this comes on top of a fleet market that was disrupted by the GM and Chrysler bankruptcies and a recession. Most rental companies kept their cars and drove them much longer than normal. These high-mileage cars now need to be replaced.
Yet there is a great deal of uncertainty for the manufacturers as well. They would rather sell cars to retail customers than fleet customers because they make more money and protect their residuals.
Consumer confidence is low and unemployment is stagnant — yet both drive retail sales. Consumers have been and will continue to keep their cars longer because of this. There is pent-up demand at the retail level for new cars and any improvement in the economy will increase retail sales. The non-Japanese manufacturers have increased market share and they want to maintain those increases. When Toyota and Honda have more vehicles to sell, expect a major increase in retail incentives by all the manufacturers.
The manufacturers have also suffered substantial increases in the cost of materials. Foreign manufacturers have seen increased currency conversion costs. For example, the Japanese yen has risen versus the dollar by 12 percent in the last year.
With Toyota expected to be back at full strength in the fall, we will still see a reduced number of fleet vehicles, and fleet prices will continue to increase. Look for limited fleet supply until the spring of 2012. Used car prices will continue to soften, though that will be mitigated by a substantial drop in lease returns this fall.
Dealers who normally depend on lease returns as a source for used cars will be forced into the market for two- to three-year-old rental cars with higher mileage.