Today’s new-vehicle market will generate (ultimately) the used-vehicle market of tomorrow. If there is a decrease in new-vehicle sales, there will be a corresponding decrease in the future number of used vehicles in the marketplace.
Even though there is a lot of nervousness in the market, no one is anticipating a dramatic decrease in new-vehicle commercial fleet orders for the 2009 model-year. However, the same cannot be said for the retail new-vehicle market. The projection is for the 2008 model-year to close out with an anemic 14.7 million new-vehicle sales, perhaps lower. This compares to16.1 million new-vehicle sales in 2007, 16.5 in 2006, and 17 million in 2005.
New-vehicle sales seem to be moving from weak to weaker. "New-vehicle sales in June represented a seasonally adjusted annual selling rate of just 13.6 million units. That is the slowest pace since August 1993," said Tom Kontos, executive VP customer strategies & analytics for ADESA. Kontos blames the drop in new-vehicle sales on macroeconomic conditions – tighter credit, higher fuel prices, and a weaker labor market.
In a July 14 press conference, GM said it is prepared for total U.S. new-vehicle sales to be as low as 14 million for the next two years. One thing is certain, in the near-term, there will be much fewer trucks built than in the immediate past. GM Chief Operating Officer Fritz Henderson said the automaker intends to reduce truck production capacity by 300,000 units. Likewise, all other OEMs are also reducing their truck production.
Manufacturing Used Vehicles
The wholesale used-vehicle market has been a real challenge for fleet managers since the first of the year. However, if you accept the truism that new-vehicle retail sales "manufactures" the used vehicles of tomorrow, then we should anticipate a smaller inventory of used vehicles in the wholesale market in the future.
"If we’re not building as many new vehicles, where will the future used-vehicle supply come from?" said Darrin Aiken, assistant vice president, remarketing for Wheels Inc. "If we have weak new-vehicle markets in 2009 and 2010, there is a distinct possibility there may be a shortage of used cars three years afterwards. When there is a shortage of inventory, experience tells us that resale prices will increase."
Others agree with this assessment. "With the recent announcements by Ford and GM, some vehicle segments are dropping drastically for 2008, 2009, and beyond. Will this lower supply of future used vehicles be the catalyst for higher used values two to four years down the road? Quite possibly," said Ricky Beggs, VP and managing editor of Black Book.
Light at the End of the Tunnel
There is a lag time in the "used-vehicle manufacturing" process. For instance, the 2009-model vehicles that fleets are starting to order will not enter the wholesale used-vehicle market until 2011 or 2012. It’s safe to say that the market conditions of 2012 will not be the same as 2009. (If they are, then we’re all in a lot of trouble.) Once the economy begins its inevitable cyclical upswing, the secondary fleet market should return to its historical purchasing levels. In that case, there may be a tight supply of used vehicles, especially trucks, due to the pent-up needs of the construction industry, which is deferring the purchase of replacement vehicles.
Beggs also cites the country’s growing population as another factor that will stoke used-vehicle demand. "With the country’s population and the number of drivers expected to grow to significant levels in the next four to five years, the need for used vehicles is expected to increase, thus creating an upward push on values," said Beggs.
These and other factors will be the catalysts triggering market supply-and-demand dynamics. A lower supply of used vehicles means that demand (especially in a recovering economy) will exceed supply. This will create a rising tide effect of stronger demand for all used vehicles, resulting in higher resale prices.
This is the light at the end of the dreary tunnel through which we are currently trudging.