Analyst: Industry's 'Goldilocks' period is ending; here come the bears
Raw material prices, which have been historically low for several years, are expected to rise sharply in the next year or two, Murphy said. Photo credit: Reuters
DETROIT — Enjoy them now. The good times in the auto industry are ending, a Bank of America Merrill Lynch analyst says.
Many industry and broader economic factors are combining to end the industry’s “Goldilocks” era and usher in a tougher period for dealers with lower new-vehicle sales, more expensive new product and shrinking profitability from used-vehicle sales.
Speaking Thursday to the Automotive Press Association here, John Murphy, managing director with Bank of America Merrill Lynch, painted a complex image of an industry about to be pinched by higher raw material prices, rising interest rates and concentrated competition in formerly high-profit segments. And added to those headwinds will be consumers who are less able to afford new vehicles and more motivated to keep driving what they have.
“We’ve gone through a real Goldilocks type cycle for the industry,” Murphy said. “We’re just now starting to see the industry moving in the other direction.”
Murphy, presenting the bank’s annual “Car Wars” look at the industry over the coming four years, predicted:
• The seasonally adjusted annual rate of sales, which fell below 17 million vehicles in May for the first time this year, will continue to trend lower, falling to between 13 million and 14 million in 2021 before rebounding to a mid-17 million rate by 2025.
• Used-vehicle prices will soften, in part because of a previous overreliance on new-vehicle leasing that created a bubble of returning off-lease vehicles. Coupled with rising interest rates, tightening credit and increased costs of added technology, the falling used-vehicle values will push monthly payments higher, making it harder for most consumers to afford new vehicles.
• Automakers have backloaded their new-vehicle launches for later years, with an average of 63 new-vehicle launches scheduled for between 2019 and 2022, compared with a previous average of 39 launches per year since 1999. The planned new-vehicle launches will drop the average age of new product in showrooms to 2.8 years from 3.1 years.
But more than 60 percent of planned new-vehicle launches will be light trucks, increasing competition for market share and making it tougher to maintain pricing discipline. Product mix, which “is about as rich as it possibly can get” right now, Murphy said, will degrade as a result of increased competition within the crowded light-truck segment.
• Raw material prices, which have been historically low for several years, are expected to rise sharply in the next year or two, Murphy said, increasing financial pressure on automakers and suppliers.
• Consumers looking to buy will face higher vehicle prices at the dealership, lower values for their trade-ins and higher interest rates. Murphy said previous quality advancements are also a headwind for automakers, and by extension their dealers, as consumers opt to stay in their vehicles longer.
The annual “Car Wars” report is traditionally more of a look-ahead at product. Murphy said Thursday that the number of crossovers in the U.S. are set to grow by another 50 percent to 125 nameplates by 2022, and unsurprisingly, automakers will continue to expand higher-cost hybrid and battery-electric offerings to meet regulatory requirements, harming overall profitability.
All automakers have tightened their product planning cycle, Murphy said. Volkswagen Group has the most to gain from upcoming planned product launches, while Honda is at a trough in its product planning cycle.