Glut of off-lease SUVs may slow new-vehicle sales

Nora Naughton
The Detroit News

The heyday of the automotive industry’s post-recession rally is in the rear-view mirror, but the seven-year growth streak is still leaving ripples.

A decline in U.S. auto sales expected this year is due in part to the industry’s success in previous years — particularly the record-breaking sales of 2015 and 2016. Roughly 4 million vehicles on U.S. roads will come off lease this year. That’s about 1.5 million more than is considered normal, according to economist Jonathan Smoke.

All of those late-model vehicles hitting the used-market is a good thing for buyers, who increasingly are being priced out of the new-car market as prices of larger and more-tech-heavy SUVs and crossovers continue to rise. But it could pose a challenge for automakers, who may find that the used-sides of dealer lots are stealing sales from the new-car sides.

One-third of the off-lease vehicles hitting the used-car market this year will be the popular crossovers that automakers introduced at the peak of the sales boom to meet sizzling customer demand for sporty SUVs. This will represent the first time the small-SUV market, the fastest-growing segment in 2017, will have to compete heavily with its more-affordable pre-owned ancestors.

“These are the vehicles consumers changed (cars) for a few years ago,” said Smoke, who works for Cox Automotive, the parent company of Kelley Blue Book and AutoTrader. “Crossovers, SUVs and pickup trucks are where all the growth is with manufacturers competing for new-vehicle sales. And all the growth enjoyed over last several years was without competition in the used-vehicle market.”

Smoke says the industry is not headed toward dangerous territory yet. Cox’s forecast of 16.7 million new-vehicle sales in the U.S. for 2018 is still a very healthy auto market, even if it falls off the 17-million precedent set in previous years. But automakers could see pressure on new-vehicle demand and pricing that they haven’t seen since before the recession.

Still, demand for SUVs and crossovers isn’t expected to cool anytime soon. SUV and crossover sales grew 5.7 percent in January, driven by a 9.6-percent increase in small-SUV sales and a 9.1-percent increase in sport-wagon and crossover sales, according to Autodata Corp.

“I don’t think demand changes at all,” said Mike Ramsey, an automotive analyst for research firm Gartner. “What changes is whether the automakers are going to be able to keep making as much money on SUVs.”

There is an upside for dealers, however, if the mix of used vehicles heading to their lots is moving away from the money-losing sedan market.

“The last thing a dealer wants is a bunch of Ford Focuses or Fusions coming back to them,” Ramsey said. “It’s hard enough to move the new cars, so what it could mean is a very big year for dealers as mix shifts to benefit them.”

It’s a different story for automakers: The SUV and crossover segments aren’t just driving growth, they’re driving profits. Rising transaction prices of these popular vehicles drove profits at Ford Motor Co., General Motors Co. and Fiat Chrysler Automobiles in 2017, and the Detroit Three are counting on that gravy train to keep running in 2018.

GM introduced a whole slate of SUVs and crossovers last year, the popularity of which led the company to a record-matching pre-tax profit in 2017. The Detroit automaker hopes to ride that wave through the first half of 2018, until its all-new Silverado pickup hits the market.

Both GM and Fiat Chrysler introduced new pickups at the Detroit auto show. The average transaction prices on these full-size trucks, which are offered with a wide array of options and luxury features, reached an average of $47,500 last year. That outpaced the industry average by $10,600.

As vehicles get bigger and more infused with technology, prices are rising out of reach for a large number of buyers. Couple that with a forecast of rising interest rates, and the ballooning average monthly payments on new vehicles become out of reach for a large segment of customers. That’s especially true for those in in their 20s and 30s, who are strapped for cash and opting to buy used more often than their parents.

“If you look at who is most likely to be subprime (borrower), it’s someone under the age of 35,” Smoke said. “Challenges facing that generation, like student loans, make monthly payments a big part of purchase decision-making.”

Cox data show that those millennials and even buyers age 35 to 54 are most likely to buy used, with the 55-and-older demographic most likely to buy new. While conventional wisdom holds that millennials will eventually buy new cars just like their parents, Smoke says they could break that trend. Consumers from the generation who grew up with the internet do a lot of research before they make a purchase, and they’re very proud of their buying habits.

“It’s possible we’ll see a new level of loyalty (to used cars) from this generation,” Smoke said.

Still, Ford announced this week it’s investing in its Kentucky Truck Plant to ramp up production of its profit-driving behemoths: the all-new Lincoln Navigator and Ford Expedition. The Blue Oval says it’s a necessary move heading into a lower-volume, lower-profit year.

But production could be a sticking point as automakers attempt to strike the right balance amid the industry’s plateau. It’s not easy for automakers to pull back on production by cutting workforces and shifts.

“All of the discipline needs to be on the production side,” Ramsey said. “While there’s evidence that demand is still quite strong ... where companies get into the most trouble is over-estimating production demand, and then they end up with too much inventory.”