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Forensic Files - December 2010

U.S. Automobile Manufacturers and Dealers: Decline Precedes Revitalization

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By Burton Marcus, PhD, ASA, Partner – Advisory Services(13)

Automobile manufacturers sold 10.4 million new automobiles and light trucks, such as sport utility vehicles and passenger and cargo vans in 2009. This represents a decline of 21.2% from the 13.2 million units sold in 2008 and was the fourth year in a row that unit sales declined. In fact, new vehicle sales in the U.S. in 2009 represented more than a 25-year low in unit sales —  the steepest decline in U.S. auto sales since World War II after adjusting for population.(8)  In contrast, China sold 12.9 million vehicles in 2009 to become the world’s largest and fastest growing automobile market.(12)

This article briefly summarizes facts relating to the current U.S. automobile manufacturer and dealer markets, and discusses the trends facing these organizations.

A Shrinking Domestic Market Share for U. S. Manufacturers

The sales decline through 2009 weighed more heavily on US manufacturers than foreign companies, as the US firms have collectively lost almost 10% of US market share to non-domestic automakers since 2006. According to Standard & Poor’s (S&P), this loss reflects the financial difficulties of US companies, well-received new products from foreign rivals, and the growing attraction to Asian and European nameplates in the U. S. Consequently, every major non-US company (i.e., Toyota, Honda, Nissan, Hyundai, Kia Motors, Volkswagen, Daimler, BMW, Subaru and Mazda) gained U.S. market share in recent years.

The extent of the drop of the Big-3 U. S. manufacturers’ domestic market share is illustrated by examining domestic and foreign auto sales between 1965 and 2009. As can be seen in the following table, the market share of GM, Ford and Chrysler declined from 90.6% in 1965 to 43.7% in 2009—an incredible drop of just over half these manufacturers’ original market share for the period addressed. However, industry experts believe 2009 will have established the bottom of the current downward sales trend.(9)

Year GM Ford Crysler Total
1965 49.6% 26.8% 14.3% 90.6%
1970 38.9% 28.3% 14.9% 82.2%
1980 44.2% 20.5% 9.1% 73.7%
1990 35.2% 23.8% 12.0% 71.0%
2000 28.0% 22.6% 14.2% 64.7%
2009 19.6% 15.3% 8.8% 43.7%
Source: Ward’s Automotive, U.S. Total Vehicle Sales Market Share by Company, 1961-2009, wardsauto.com.

On the brighter side, early sales statistics through July 2010 indicate total light vehicle sales were improving.  Hence, industry experts are raising sales estimates, with S&P predicting sales of total light vehicles to increase to 11.71 million units in 2010, and to 13.48 million in 2011.(9)  This is believed to reflect a small but steady strengthening of the U. S. economy, continued aging of the U.S. auto fleet, smaller inventories of late model used vehicles, higher priced used cars, and wider availability of consumer credit to stimulate recovery of new vehicle sales of all brands.(5)

In general, a turnaround for U. S. manufacturers is expected in the coming years.  Ford Motor Company’s sales statistics are already demonstrating this, with the Company actually gaining market share since 2008 and with such models as the Fusion, Focus, Edge, Escape and F-Series truck among the top-selling vehicles in 2010.  General Motors is very slowly following – even prior to the introduction of its new all electric Volt which it is hoped will make a major difference for the company. On the other hand, the success of Fiat-Chrysler remains to be determined.

A Competitively Changing Auto Dealerships Environment(6)

There are approximately 45,000 new and used vehicle dealers in the U. S.  Their combined annual sales are $600 billion. The larger dealers in the industry include AutoNation, Penske Automotive Group, Sonic Automotive, and CarMax. But as large as they are, the top 50 companies (which in turn own many individual dealerships of the same and different brands) still only account for less than 15 percent of vehicle sales. The rest of the sales are from smaller, privately held dealerships operating one or at most several dealerships of similar or multiple brands. Although much smaller than the very much larger regional or national dealerships, they are still larger than the former years’ traditional small dealerships, and some even offer several different brands of automobiles under one or multiple roofs.

In 2009, total sales of the estimated 18,458 new-vehicle dealerships in the US amounted to $486.9 billion, which represented 13.2% of all retail sales in the US.(4) Average sales per dealership were $26.4 million. New-vehicle dealerships employed a total of 912,000 persons, and averaged 49 employees per dealership. However, while new cars comprised 52.3% of total dealership sales, they contributed only marginally, if at all, to profitability. In contrast, used vehicles comprised 32% of total sales, but provided significantly more to dealership profitability. Parts and service represented the remaining 15.7%, and also provided well to dealership profitability. Because of the decline in total vehicle sales, in today’s dealer environment, service, parts and financing account for the majority of dealership operating profit.

The major factor impacting dealer sales and profitability include changing economic conditions, competitive product offerings, consumer confidence, interest rates, inflation, and fuel prices. In addition, sales for particular brands of automobiles are particularly influenced by evolving consumer preferences and manufacturer ability to appropriately respond to consumer trends and market conditions. Although dealerships typically report gross margins of about 15% of sales, during economic downturns, dealer margins shrink and the dealerships often barely break even, if they do not lose money, on new vehicle sales.

Although the industry was hit hard by the current economic recession, the auto dealerships are currently making significant progress towards cost reduction and improved profitability.

Trends Impacting Auto Manufacturers

Key trends impacting the auto industry include pricing challenges, declining customer brand loyalty, volatile gas prices, hybrid and alternative-fuel vehicles, and increasing safety standards.

Pricing Challenges
The weak automotive pricing environment has led to reduced sales and strong competitive pricing. When one manufacturer offers incentives, such as rebates or discounted financing, the others generally follow in order not to risk losing market share in an arena in which customers have learned to drive a hard bargain with manufacturer cost and pricing information and rapid response dealer timely Internet communication.(9)

Declining customer brand loyalty:(6)
With increased vehicle choices, intense competition among dealers, and increased use of the Internet, car buyers are becoming more fickle and less loyal. According to Experian Automotive, the percentage of customers consistently purchasing the same brands decreased from 49 percent to about 40 percent between 1998 and 2008. Consumers who were the most loyal tended to lease vehicles or finance purchases through car manufacturer programs. But while the overall decrease in customer loyalty could be perceived as a threat, it also represents an opportunity for astute marketing programs.

Volatile gas prices:(6)
The significant volatility in gas prices experienced in recent years is also affecting auto sales. The average retail price of gas exceeded $4 per gallon in summer 2008, dropped to below $2 in early 2009, and returned to $3 plus some in 2010. Such fluctuations have motivated many consumers to seek fuel-efficient cars. In response, some car manufacturers are scaling down or discontinuing production for certain lower-mileage SUVs and trucks. Weak demand for gas guzzlers has also resulted in increased demand for small cars and hybrids and heavy discounting on some new and used SUVs and trucks.

Hybrid and alternative-fuel vehicles:(9)
All domestic and most foreign automakers are developing the technology to use alternative fuels (such as ethanol, methanol, propane, or natural gas) or electricity derived from batteries or solar power. Citing a J.D. Power and Associates report, S&P expects the US hybrid-electric vehicle market to see a 424% rise in sales volume between 2009 and 2014, from about 292,000 vehicles in 2009 to 1,237,000 in 2014. As a percentage of US market volume, this translates into an increase from 2.8% of total vehicle sales in 2009 to 7.6% in 2014. Hybrid vehicles, those with two or more sources of energy, have met with resistance from US automakers. The hybrid market, however, has become difficult to ignore, and although foreign companies took the lead, GM and Ford now both offer hybrid vehicles. Benefits of hybrid and alternative fuel vehicles include cleaner emissions and lower operating costs.

Increasing safety standards:(9)
Safety standards have been rising. In particular, the number of airbags in new vehicles is escalating, with automakers adding side airbags and inflatable curtains. Knee airbags also are beginning to appear in luxury vehicles, although they are not generally included as a standard feature.

As a result of Toyota’s safety issues that began in late 2009, Congress held hearings in May 2010 and introduced new automobile safety legislation. The new rules, which would impose heavy penalties for violations, would set safety standards requiring data recorders, electronic controls, push-button ignition systems, and new criteria for car braking speed.

Trends Affecting Automobile Dealerships

Key trends impacting automotive dealerships include continued industry consolidation, increasing consumer frugality, increasing used auto prices, and reduced vehicle inventories.

Continued Industry Consolidation:
The number of franchised dealership outlets in the US has declined continually over the past several decades. It decreased from 24,725 in 1983 to 18,607 at year-end 2009.  And most of these closures were of domestic brand dealerships.

In the period between 2005 and 2007 there were approximately 225 closings a year, but in 2008 there were more than 1,000 dealerships closings.  This rapid consolidation continued in 2009, due to the increasingly competitive and challenging environment, the reduced availability of credit for dealers and customers, and forced dealership closings by Chrysler and GM.(9)

As a result, the total number of small dealers in the US declined by more than 20 percent between 1998 and 2008.  On the other hand, the number of large dealers increased by 4%.  Additionally, with some domestic car manufacturers decreasing the variety of models offered, many single franchise dealerships were forced to merge with other dealerships.(6)  According to NADA Data 2010, the net closure rates of dealerships was 1,550 during 2009, but were expected to decrease to approximately 500 net closures in 2010.(10)

Increasing Consumer Frugality:
Consistent with the impacts of the recession, consumers are choosing to keep their vehicles longer, to stay away from short-term leases, and are more likely to purchase a used-car if they are forced to buy a vehicle — especially “lightly used” cars when seeking value. (11)   However, although the trend of buying increased numbers of used cars as opposed to new vehicles negatively affects automaker sales, it positively affects dealers because they generally generate higher profits from the sales of used cars than from the sale of new ones.(7)

Increasing Used Auto Prices:
The often-used indicator of pricing trends in the used vehicle market, the Manheim Used Vehicle Value index, reached a 15-year high of 122.9 in October 2010.(3) In 2009, used prices saw steady gains, especially with the “cash-for-clunkers” program which helped to decrease the supply of older vehicles. This trend too is positive for dealers, as it leads to higher selling prices for used vehicles.

Reduced Vehicle Inventories:
Because of the tenuous economic state of many dealers, manufacturers are less likely to load dealers with excessive inventories. This permits dealers to secure increased new vehicle transaction prices, free up working capital that would otherwise have been allocated to flooring new vehicle inventory, and keep their focus on selling vehicles—new and used.

Conclusion

One recognized industry source predicts that the total value of the market in 2010 will be $169.5 billion, which although 5.5% higher than in 2009 is still significantly below 2008.(1)  Although the automotive market is showing signs of recovery, the outlook is for a gradual and modest recovery, with pre-recession sales levels to be unlikely until at least 2013.(2)

However, although the industry continues to face significant challenges during the current difficult economic conditions, the overall outlook for the automotive industry for both manufacturers and dealers is one of cautious optimism.

 

  1. Business Monitor International, Monthly Car Sales Fall Amid Recalls and Snowstorms, 48 AMERICAS AUTOMOTIVE 7 (Apr. 2010).
  2. Mergent Industry Reports, “Automotive – North America”, Apr. 1, 2010 (pin-cite is available from the author upon request).
  3. Manheim Consulting, Current Monthly Index:  Manheim Used Vehicle Value Index, MANHEIMCONSULTING.COM, Oct. 2010, http://www.manheimconsulting.com/Used_Vehicle_Value_Index/Current_Monthly_Index.html
  4. National Automobile Dealers Association (NADA), Annual Contributions of the United States’ New-Vehicle Dealers, NADA.COM, 2010, http://www.nada.org/NR/rdonlyres/EB112555-3EDF-4FBD-AB6C-3CDE12BF9EC7/0/DrivingtheUSEconomy2010.pdf
  5. Jerry Hirsch, U.S. Auto Sales Fuel Hopes of a Rebound, L.A. Times, Jan. 6, 2010, at A1.
  6. R. James Alerding CPA/ABV, ASA, CVA, Kevin R. Yeanoplos CPA/ABV/CFF, ASA, & Carl Woodward, CPA, at the Valuing Auto Dealerships BVR Webinar:  Industry Spotlight Report (Jul. 29, 2010) (pin-cite is available from the author upon request).
  7. Michelle Krebs, June Car Sales Remain Weak, Edmunds.com Forecasts, EDMUNDS AUTO OBSERVER, Jun. 25, 2010, http://www.autoobserver.com/2010/06/june-car-sales-remain-weak-edmundscom-forecasts.html
  8. Kevin Krolicki, Ford Surges as U.S. Auto Sales End '09 on Uptick, REUTERS, Jan. 5, 2010, http://uk.reuters.com/article/idUKN0523751620100105
  9. Efraim Levy, CFA.  Standard & Poor’s Industry Surveys:  Autos & Auto Parts, Standard & Poor’s, pp. 1-26, Jun. 24, 2010.
  10. NADA, Nada Data: Dealership and Industry Review, NADA.COM, 2010 (available at http://www.nada.org/Publications/NADADATA/2010/default
  11. Recession and Gas Prices Impacting Used-Car Value Stability: Kelley Blue Book's November Market Report Now Available, PR NEWSWIRE, Nov. 11, 2009, http://www.prnewswire.com/news-releases/recession-and-gas-prices-impacting-used-car-value-stability-69741112.html
  12. Tim Dunne, The View from China: World Auto Crown Lacks Full Luster, J.D. POWER AND ASSOCIATES, Dec. 1, 2010, http://businesscenter.jdpower.com/Default.aspx?f=/jdpacontent/corpcomm/Worldwide/China/China_Library.htm
  13. Burton H. Marcus is a partner in the Advisory Services Group of Marcum LLP’s Los Angeles Office – Dr. Marcus’s practice includes the determination of business value and the assessment of economic damages (read more about Dr. Marcus’ expert testimony experience). The author would like to thank William W. Thomsen, MBA, CFA, ASA for his contributions to this article.

 

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