Automotive Recovery hits red-hot Stage 2

Strong March sales show surge has gone beyond 'need to replace' crowd.

This year's faster-than-expected sales recovery has entered a key new phase: "Want" buyers are joining the "need to replace" buyers who have been carrying the market.

With the strong February selling rate continuing into March, optimistic carmakers and analysts are boosting full-year industry sales forecasts. Last week, Volkswagen Group of America CEO Jonathan Browning said the company has increased its industrywide outlook to 14.0 million from 13.7 million.

Executives, dealers and analysts say pent-up demand has been unleashed, and lenders are making it easier for shoppers to do deals.

"Customers are having no trouble getting financed," said Nissan Division sales boss Al Castignetti.

But in a new development, they say consumers who simply want a slick new ride are turning up in showrooms, not just buyers who are trading in high-mileage vehicles.

"We're getting some 'want to buys' now," TrueCar.com analyst Jesse Toprak said. "The 'need to buys' are 13 million [a year] at best, so the industry needs those 'want' buyers."

Toprak is among those who have revised 2012 sales forecasts upward this year, in his case to 14.0 million from 13.8 million. He's considering a second 200,000-unit bump upward but will wait until March sales are reported April 3.

Dealers across the country sound confident, especially at high-flying brands such as Hyundai.

"Sales are tracking better than our best month ever," said Andrew DiFeo, CEO of Hyundai of St. Augustine in Florida. "The automotive market is really coming back."

March volume may not match February's 15.1 million selling pace. This month has no extra leap day, and the freakishly warm weather and stock market rally lack the surprise pop they had last month.

But most analysts expect a seasonally adjusted annual sales rate in the mid-to-high 14 millions, matching or exceeding January's 14.2 million SAAR.

Between August and February, the light-vehicle SAAR jumped 3 million units, "increasing our level of conviction for a continued recovery in demand," said Sterne Agee analyst Michael Ward.

Still, at least one potential cloud is on the horizon: rising fuel prices that Ward believes will hit household disposable income and consumer confidence enough to limit the March-to-May SAAR to 14.5 million.

But IHS Automotive analyst Rebecca Lindland says high fuel prices may drive auto sales because buyers want more fuel-efficient rides.

"Whatever they are trading in, it doesn't get nearly as good mileage as what they can replace it with," she said.

Hot brands are trying to ride the sales momentum. If Chrysler dealers either matched their total January sales by March 23 or sold half of their March target by March 15, Chrysler will increase their monthly volume bonus by 25 percent, said one dealer who asked not to be named.

The dealer said he's on pace for his best sales month in five years.

"The early March trend is through the roof," he said.

What's driving the surge? The improving economy, increased credit availability, a flurry of new products, and the aging vehicle population are all factors, analysts say.

Vehicle owners can't delay replacement purchases any longer. Noting the average U.S. vehicle is a record 10.8 years old, Morgan Stanley analyst Adam Jonas described the current U.S. fleet as "not just old, but creaky" with many vehicles having more than 100,000 miles.

Dealer principal Steve Landers of RLJ-McLarty-Landers Automotive of Little Rock, Ark., agrees.
"Lots of our trade-ins can't make it to the dealership driveway," he said. "We send the tow truck to their houses."

Kjell Bergh, chairman of Borton Volvo in Minneapolis, said he noticed a shift in buyer attitudes at the Twin Cities auto show this month.

"This year, people were going to the show because they intend to buy a new vehicle," he said. "We're moving out of the 'buy to replace' crowd to people with the confidence to vote with their dollars.

"Before, car owners were spooked. But now they are saying 'I don't have to replace my car but I want something new.'"

Jeff Schuster, top forecaster for the Americas at LMC Automotive, said: "Buyers are starting to loosen up a bit, finally. It's normally a fine line between 'want' and a 'need to replace but don't have to.' But we're seeing consumers much more willing to make a big purchase."

Overall, consumers are becoming less sensitive to bad news, many say.

"The mind-set is: 'It's OK to buy a car,'" Toprak said.

Consumer confidence has been rising, though it dipped slightly this month, which chief economist Scott Brown of Raymond James & Associates attributed to the pocketbook pinch of fuel prices.

Credit availability is much wider, and subprime lenders are expanding. Because Exeter Finance Corp. could securitize $200 million in auto loans, the subprime specialist is expanding to all 50 states this year from 13 states a year ago, CEO Mark Floyd said. "It's a pretty competitive market," he added.

Also, attractive new models are reaching the market, said Kelley Blue Book analyst Alec Gutierrez.
"Subcompact car sales will be especially strong," he said. "Not only are they cost effective, but [they] are of significantly higher quality than just a few years ago."

Two analysts have increased their North American production outlook. Sterne Agee's Ward raised his production forecast by 400,000 to 15.2 million units, including heavy trucks. Citing a 23 percent output increase in the first two months this year, LMC's Schuster hiked his light-vehicle forecast by 200,000 to 14.2 million.

Toprak said vehicle buyers are not spending beyond their means in 2012.

"This sales level seems to be sustainable and not a blip," he said. "The industry is healing its wounds on its own."

Jesse Snyder  Automotive News -- March 26, 2012