US Automotive Industry Update Q2 2012

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Q2 2012 Auto Industry Analysis presented by BBVA Research

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  • I like that you started off with the fact ...
    'Auto sales are linked to growth of real p g per-capita disposable income. Growth here p p requires expansion in real wages and/or more workers, but full employment will not return until after 2014.' It puts it all in perspective.
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US Automotive Industry Update Q2 2012

  1. 1. U.S. Automotive Industry April2012
  2. 2. Index1 Automotive Demand2 U.S. Dealerships 2
  3. 3. Auto Demand: Key Messages• Manufacturers are l ki abroad for sales growth: i 2009 China became the world’s M f t looking b df l th in 2009, Chi b th ld’ largest auto market. In the U.S., auto sales will increase gradually over the next four-five years• Auto sales are linked to growth of real p g per-capita disposable income. Growth here p p requires expansion in real wages and/or more workers, but full employment will not return until after 2014. There is currently a glut of automobiles relative to employment, and working age population growth is slowing• Consumers are d l C de-leveraging and reducing their debt burdens: particularly in the i d d i th i d bt b d ti l l i th mortgage market. Outstanding auto debt is no longer declining, and delinquency rates appear to have stabilized. Autos remain essential for transportation to/from work in most areas of the country• The U.S. still remains the largest market defined by total expenditure and total amount financed. High per-capita wealth supports higher unit prices of autos, and the U.S. financial system allows all types of buyers to finance a car within their budget• Leasing is attractive f many buyers : lower down payments, attractive lease deals put L i i tt ti for b l d t tt ti l d l t consumers in a new car for a low monthly payment. Leases are significant among luxury autos 3
  4. 4. Autos: A Global Market Global auto manufacturers will focus on emerging markets during this decade as households move up the income ladderAutomobiles Production Global Auto PenetrationMillions of Units 600 Italy Germany 70 France Switzerland 500 England Japan USA als g Belgium Vehicles per 1000 individua 60 Slovenia Norway N Spain Mature markets: 50 400 CzechPortugal Republic Higher auto spending per- Latvia 40 capita and access to credit 300 Poland 30 p Slovakia 20 200 South Korea Markets with high growth 10 Brazil rates, potential for credit Mexico 0 100 South Africa expansion, and rising Turkey household incomes 2007 2010 China 0 India Resto of the Rest del Mundo BRICS BRICS 0 10,000 20,000 30,000 40,000 world Income per capita, USD Source: BBVA Research & PWC Source: BBVA Research & VDA 4
  5. 5. Autos: China and Brazil In China, a growing middle class has created the world’s largest auto market. A tightening labor market in Brazil supports new demand China: Housing Prices and Auto Sales Brazil Prices, yoy % change (left); Autos, millions, annualized (right) Unemployment Rate & Auto Sales (Annual units)14 25 10.0 2.6 Home Prices (left)12 Auto Sales (right) 2.5 9.510 20 2.4 9.08 2.3 15 8.56 2.2 8.04 2.1 10 7.5 752 2.0 7.00 Unemployment rate (lhs) 1.9 5 6.5 1.8-2 Auto Sales (millions of units, rhs)-4 0 6.0 1.7 05 06 07 08 09 10 07 08 09 10 Source: Bloomberg Source: Bloomberg 5
  6. 6. U.S. Market Size Sales of new vehicles declined precipitously during the recession; however, the U.S. remains the world’s largest market by sales value and finance opportunities world s Size of Finance Market for New Vehicles, $Bn Annual New and Used Vehicle Sales (1990-2010) (Sales of new vehicles x average amt. financed x 90%) (Left scale, thousands of vehicles) 45070 400 Used New 35060 300 25050 200 15040 100 90 92 94 96 98 00 02 04 06 08 10 12 1430 Source: Federal Reserve / Haver Analytics and BBVA Research New:20 90% Financed Average Market Amount Finance Bank % Leased Annual 201410 Sales Total Bank Pool Pct. Pct.0 New 15M $25,500 ~$380B $380B 70% 20% 45% ~$120B $120B 90 92 94 96 98 00 02 04 06 08 10 Source: Bureau of Transp. Statistics / Bloomberg Used-Retail 12M $16,600 ~$200B 70%* n/a 33% ~$50B 2010 - Estimate (Dealers) Used -Other 6 28M n/a $100-$160B * Assumption based on new car financing
  7. 7. U.S. Auto Demand Strains from the financial crisis and slowing growth of the working age population imply a moderate recovery of salesTotal Vehicles in Use and Registrations Per-Capita Summary of Projections(Left scale, millions of vehicles) (M = millions of units)300 0.85 Ne Additions orking Age Pop. Growth280 0.80 Used Sales rappage Ne Sales Per Year260 0.75 Rate ew ar240 Yea et Scr Wo 0.70220 0.65 1990- 1.2% 4.5M 5.6% 41M 15.9M200 2007 (93-07) 12M 0.60180 2011- 0.54% 2.4M 5% 38- 13- 0.55 0 55 2015 12M-13M 12M 13M 40M 16M160 Registrations (L) 0.50 2015- 0.48% 3.1M 5-6% 40M+ 16M+140 Proj. Registrations 2020 13-14M120 Registrations Per Capita (R) 0.45 Proj. Regis. Per Capita100 0.40 0 40 70 75 80 85 90 95 00 05 10 15 20 Sources: BBVA Research Dept. of Motor Vehicles, Census 7
  8. 8. U.S. Auto Demand Furthermore, there is currently a glut of capacity relative to employment. A low labor participation rate implies a lower need for new autos Auto registrations of passenger cars and light trucks per civilian employee Non-Agricultural Employment 1970-2009 Thousands1.8 150 145 140 7 yrs1.7 4 yrs 1351.6 130 A normalization of 125 credit markets and1.5 lending standards will 120 help bring down this ratio to around 1.65 115 3 yrs1.4 110 Employment Forecast 1051.313 100 70 74 78 82 86 90 94 98 02 06 90 94 98 02 06 10 14 Source: BBVA Research Source: BBVA Research 8
  9. 9. U.S. Auto DemandA de-leverage process hampers credit growth, and savings rates are near 5%. However, auto loan delinquency rates have peaked below other forms of debt and newly delinquent auto loan balances are decliningHomeowner Financial Obligations Ratio Loan DelinquenciesFinancial obligations payments to disposable personal income, SA Percent of Loans 90+ Days Delinquent 12 10 9 11 8 Autos 10 7 All: Mortgage, HELOC and All M t d 9 Cons. Credit 6 8 5 Mortgage Consumer 4 7 3 6 Approaching a stable 2 5 level; however, mortgage-related debt 1 strains budgets 4 0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 99 01 03 05 07 09 11 Source: Federal Reserve / Haver Analytics Source: Federal Reserve Bank of New York / Haver Analytics 9
  10. 10. U.S. Auto Demand Autos remain affordable buoyed by lower rates and longer terms. A lower average principal and debt-to-income ratio posit sustainable financing for consumers debt to income Implied payments for new and used vehicles and debt-to-income ratio Terms of New Car Loans (Banks vs. Finance Co.) Debt-to-income (%) Interest Rate (Left), Months to Maturity (Right) Payment calculated from average finance amount and current rate10 $550 14 66 Bank (48 Mo.) Finance Co. 649 12 $500 Finance Co. Term (R) 62 108 $450 60 87 58 Debt/Income (Left) 6 $400 Implied Mo. Payment (New) 566 Implied Mo. Payment (Used) 4 54 $3505 2 524 $300 0 50 99 00 01 02 03 04 05 06 07 08 09 10 90 92 94 96 98 00 02 04 06 08 10 Source: BBVA Research Source: Federal Reserve / Haver Analytics 10
  11. 11. U.S. Auto Demand Total outstanding auto loan balances are up 1.4% on the year in 1Q11. Attractive terms and labor market uncertainty are boosting new vehicle leasingAuto Loans, Accounts and New Installment Loans Percentage of New Cars LeasedTotal Outstanding, $Bn; Accounts, Millions; New Loans, $Bn %900 140 30 Trending upward once again. Nearly800 130 28 50% of entry-level luxury cars are leased700 120 26 110 24600 100 22500 90 20400 80 18300 Total Auto Loans 70 16200 60 14 Accounts with Balances100 (Right) 12 Auto Loan Issuance (Right) 50 0 40 10 99 00 01 02 03 04 05 06 07 08 09 10 05 06 07 08 09 10 11 Source: Federal Reserve Bank of New York / Haver Analytics Source: Edmunds.com / Bloomberg 11
  12. 12. U.S. New Vehicle Market• Rising home prices and net worth combined with easy credit and home equity extraction to explain the upward shift in sales between 2003-2007: approximately 1-2 million additional vehicles purchased above trend per year• The additional vehicles purchased in these years help to explain the sharp fall in sales in 2009, as declines in equity and housing prices erased over $10 trillion from household balance sheets• We do not envision a scenario of pent up demand boosting new car sales rapidly, as the de pent-up de- leveraging process continues and consumers are saving more and keeping cars longer• The median age of vehicles Median Age of Vehicles in Use in use continues trending upward, Years and is now over 9.4 years y 10• Sustained high oil prices pose a 2008 9 favorable outlook for fuel-efficient Upward Trend vehicles. The used market reflects 8 expectations of continued oil price increases as prices of compact i i f 7 vehicles are rising, while those of 6 larger vehicles are declining• Entry-level luxury brands will remain 5 attractive for leasing 4 70 74 78 82 86 90 94 98 02 06 Source: Bureau of Transportation Statistics / Haver Analytics 12
  13. 13. U.S. New Auto Sales Forecast The series average of approximately 15 million units per year, should return in 2014 Population growth will drive sales above 16 million units in the latter 2014. half of the decade New vehicles: millions of annual sales New Auto Sales 2011 2012 2013 2014 201522 12.6 12 6 13.3 13 3 14.2 14 2 15.0 15 0 15.7 15 7 21 Jan. 1999-Dec. 2007: Average 16.8 mn units20 •Tight labor market • Attractive financing offers continue to19 •Equity extraction support sales – for those who are18 •Low finance rates employed 17 • Key to higher than average sales lies16 with job creation and income generation 15 • Consumer de-leveraging is restraining14 sales growth 13 • Consumers are financing lower amounts 12 for longer terms 11 Auto Sales • Popularity of leasing is growing10 Forecast • Temporary drop in sales due to effects 9 of Japan’s earthquake fJ ’ th k 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: Census / Haver Analytics 13
  14. 14. U.S. Used Auto Market Currently experiencing a surge in value related to labor market uncertainty and supply shocks to new auto production Value of used vehicles vs new auto inventory Thousands of Autos (left), Index (right)2,000 130 Behind the rise in values1,800 125 • Fuel efficient, late model years are in1,600 high demand 1201,4001 400 • High unemployment, historically low 115 new auto inventories, and low financing1,200 rates are supporting values1,000 110 • We expect prices to appreciate in the 800 near term as inventories of new vehicles 105 remain tight, but they should begin to 600 moderate as production and inventories 100 400 are restored Inventories of New Autos 95 • In any case, elevated uncertainty will 200 Manheim Index (1995=100) keep values and demand above average 0 90 • These transitory supply factors have 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 boosted dealer profit margins over the Source: BEA, Manheim / Haver Analytics 14 prior year
  15. 15. Index1 Automotive Demand2 U.S. Dealerships 15
  16. 16. Auto Dealers: Main Messages• U.S. auto dealer profit margins are highest for parts and services. Used vehicles often entail higher margins than new vehicles• Higher operating margins have returned due to transitory supply disruptions, historically low inventories of new vehicles, fervent demand for used vehicles, and a greater intensity of service work per dealer due to the reduction of franchised dealerships• In the last few years the number of dealerships have plummeted along with sales of years, new cars. Currently, large public automotive groups are adding store locations to gain market share• In the near-term, dealers will enjoy higher margins with less competition and experience further ownership consolidation by large dealership groups• Ultimately, the U.S. dealer model is positioned to survive due to high entry barriers and franchise agreements that the manufacturers control 16
  17. 17. U.S. Dealerships: Market Size New car dealers comprise the bulk of industry revenue due to the higher unit sales prices of new vehicles Revenue at parts and auto stores should continue at a strong pace as vehicles. consumers are holding onto cars longer and need maintenance Retail Sales Total Industry Revenue, 2011 Motor vehicles and parts ($bn) % of total900850 ~$80Bn800 12%750700650600 Parts and Tire Stores550 Used ~ $575 Bn500 New car 88% New dealerships450400 Used U d car 00 01 02 03 04 05 06 07 08 09 10 11 dealershipsSources: First Research and Census 17
  18. 18. U.S. Dealerships: Business ModelNew and Used Car Dealerships•New car dealers have franchise agreements to sell cars, parts and services within a specified market area•Dealers acquire new vehicles from manufacturers through an allocation system based on historical sales•Dealers have limited influence over the colors and featuresUsed Car Dealerships•Companies buy used vehicles from trade-ins, auctions, other dealers, leasing companies, and rentalcompanies•Used dealers consider a cars age, mileage, and condition to set each vehicle’s price•Used vehicles generally require reconditioning prior to sale; vehicles unfit for retail resale are generallysold through wholesale auctions.•Some manufacturers allow dealers to sell certified pre-owned (CPO) vehicles with extended warrantiesServices and Parts at the Dealership•Service and parts operations may offer repair maintenance body work and warranty services repair, maintenance, work,•A typical service department has 18 service bays and handles over 13,000 repair orders annuallySource: First Research 18
  19. 19. Dealer Revenue Segmentation While the bulk of revenue for franchised new car dealers stems from new auto sales, profitability is maintained through after purchase service New Car Dealers: 17,700 establishments Used Car Dealers: 37,500 establishments Share of Total Industry Revenue Share of Total Industry Revenue 4% New vans & trucks 3.1% (retail) 3.8% 5.0% New passenger cars Passenger cars (retail)3.9% (retail) 6% 23.7% Used passenger cars (retail) ( ) Passenger cars (wholesale) 7.3% All nonmerchandise receipts 22% Vans, minivans, trucks, & buses (retail) Used vans, minivans, 8.4% trucks, & buses (retail) 56% Vans, minivans, trucks, b t k & buses Vans, trucks & cars 13% (wholesale) 21.7% (leased) Other 10.6% Used passenger cars (wholesale) 12.5% 12 5% Automotive tires, tubes, tires tubes batteries, parts, accessories Automotive parts, new and rebuilt, including 19Source: Economic Census, 2007 wheels
  20. 20. Profitability: New Car Dealers Parts and services contribute nearly 50% of profit due to high margins. Revenue from finance and insurance business helps to stabilize profits over the business cycle Gross Profit Gross Margins % of total profit 2006-2011 Average, % Penske AutoNation Group Parts and services 45.3% 44.8% 8.2 New Vehicles Retail 6.9 New vehicles Penske Group 21.2% 26.3% AutoNation 7.9 Finance and insurance Used Vehicles Retail 19.7% 14.8% 10.3 Used vehicles 12.5% 13.3% 56.8 Parts and Services 43.6 Other Oth 1.3% 0.69% 0 20 40 60 Source: Bloomberg Source: Bloomberg 20*Auto Nation and Penske Group were selected as they are public companies that own 568 dealerships across the U.S.
  21. 21. U.S. Dealerships: Consolidation A highly fragmented industry that has recently undergone a wave of consolidation: the prospect of bankruptcy and government bailouts enabled manufacturers to slash the number of franchised dealerships. Large auto groups are buying weak or failed dealerships to expand their footprintFranchised New Car Dealers in the U.S. Dealer Operating Margin and Store Ownership(Thousands) Trailing 12M % (left); Number of Stores (right)27 9 35026 For every 10 8 30025 dealership 7 establishments, 25024 6 there are 9 firms23 5 20022 4 15021 3 10020 2 5019 118 0 0 05 06 07 08 09 1017 Operating Margin (left) AutoNation 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 Sonic Group 1 Asbury Penske Source: NADA, Carmax, Census Source: Bloomberg, BBVA Research (Penske interpolation) 21
  22. 22. Entry Barriers: High • Significant initial investment • Capital intensive industry • Franchise agreements • Exclusive market areas ar ealers s • Further consolidation Bargaining Power of Buyer Bargaining Manufacturers: High Power: Strong • Switching costs of buyersNew Ca De •C t lf Control franchise hi among dealers are minimal agreements and incentives Competition: in new car market Intense • Most buyers are unlikely to • Dictate inventory Dealers must become frequent clients of • Set wholesale price compete on particular dealership • Provide floorplan financing quality of service •S Sensitive to quality and l d • Offer consumer financing reputation rankings of manufacturer • Desire “a good deal” and Threat to Profitability of want incentives Substitutes: Medium • Retail outlets such as oil change centers, tire stores and independent service shops compete with dealers’ service options • Consolidation of dealerships implies more service work per dealership • Customers choose service work due to imperfectSource: First Research and BBVA Research 22 information in auto repair market
  23. 23. SWOT: Auto Dealers Strengths Weaknesses • Volatile demand due to economic conditions• Exclusivity agreements to cover specific areas and energy prices• Parts and services represent a stable source of • Interest rates affect both sales volumes and income dealer costs• Marketing and financing provided by • Complete dependency on car manufacturers manufacturers • Lack of customer loyalty to dealers: more loyalty• Accounts receivable are absorbed by third-party towards brands institutions, reducing liquidity problems • Subject to supply disruptions Opportunities Threats• Extend service hours• Expand services and complementary products • Growing competition in the services segment such as accessories, financing and insurance accessories • Greater efficiencies in manufacturing, transport• Intensify the sale of certified pre-owned cars and inventory management allow manufacturers to sell directly, transforming local• Nontraditional sales techniques like websites that dealerships into distribution and service allow to track inventories, negotiate and get locations financing online g • Aging population that reduces car usage• Leverage environmental concerns by promoting hybrid vehicles and improving the environmental • Weak job creation and an anemic housing friendliness of the vehicles that they sell market that curtail new auto sales 23
  24. 24. U.S. Automotive Industry April2012

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