Curves On The Road Ahead Light Vehicle Market Outlook November 2018 Charles Chesbrough Senior Economist
A g e n d a Economic Outlook and New Vehicle Sales Affordability Threat and the Used Vehicle Market Dealers Perspective and Tariff Concerns 3
E c o n o m y S t r o n g B u t T h r e a t s R i s i n g Economy is strong and so is vehicle demand: High confidence + low unemployment + credit availability = the perfect storm for robust auto sales. Vehicle affordability a growing concern: Rising interest rates, gas prices, vehicle prices coupled with low wage growth, inflation = strong headwind. Trump Tariffs are major threat to vehicle sales: Prices will rise for new and used products, and parts. Weaker economy will lower demand further. Vehicle demand to shift toward used as off-lease vehicles flood the market: Affordability and product mix will capture new buyers. New car/entry segments under greatest threat. 4
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 L a b o r M a r k e t s A r e H i s t o r i c a l l y S t r o n g Initial Unemployment Claims 700,000 600,000 500,000 400,000 300,000 Unemployment Rate 12 10 8 6 4 2 200,000 0 Source: Department of Labor 5
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 S a l e s P a c e S t r o n g B u t D i c h o t o m y I n c r e a s i n g Monthly Sales SAAR (millions) 22 20 18 16 14 12 10 8 6 4 2 0 Total Car Light Truck Source: US Bureau of Economic Analysis 6
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 E m p l o y m e n t a n d Ve h i c l e S a l e s C l o s e l y L i n k e d Employed Rate (100-U3) 98 97 96 95 94 93 92 91 90 89 88 New Light Vehicle Sales (millions) 20 18 16 14 12 10 8 Employed Rate - L Total LV Sales - R Sources: US Bureau of Economic Analysis, Dept of Labor, 12 month moving average 7
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 O p t i m i s m C r i t i c a l To Ve h i c l e S a l e s Consumer Sentiment (100=base) 110 105 100 95 90 85 80 75 70 65 60 Incentive Bubble New Light Vehicle SAAR (millions) 18 17 16 15 14 13 12 11 10 9 8 Consumer Sentiment - L LV SAAR - R Sources: University of Michigan Survey, US Bureau of Economic Analysis, 12 month moving average 8
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 K e y D u r a b l e s R e c o v e r i n g A t D i f f e r e n t S p e e d s Housing Starts (thousands,12m avg) 2,100 1,900 1,700 1,500 1,300 1,100 900 700 Housing Bubble New LV SAAR (millions,12m avg) 18 17 16 15 14 13 12 11 500 10 Housing Starts - L LV Sales - R Sources: US Bureau of Economic Analysis, US Census Bureau, 12 month moving average 9
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 W a l l S t r e e t F u n d e d Ve h i c l e M a r k e t R e c o v e r y Motor Vehicle Loans Outstanding (billion $) $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 S&P/Experian Default Indices 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% First Mortgage Auto Loan Bankcard Source: Federal Reserve; Experian 10
2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018 B o r r o w i n g C o n d i t i o n s V u l n e r a b l e US Average Amount Financed (new vehicle) Auto Loan Availability (net percentage YES) $31,000 $30,000 $29,000 $28,000 $27,000 $26,000 $25,000 $24,000 30 25 20 15 10 5 0-5 -10-15 -20 Stronger Demand for Auto Loans Tighter Standards for Auto Loans Source: Federal Reserve, Loan Officer Survey 4q avg 11
1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 R i s i n g H e a d w i n d s To S l o w N e w M a r k e t New Light Vehicle Sales Scenarios (millions) 18 17 16 15 14 13 12 11 10 9 8 Base View Mild economy-wide decline in 2019, but no trade war, coupled with higher interest rates (75bps), cause 4% sales decline from 2018 s likely 17.1m finish. Sales fall to 16.6m in 2019 and 16.5m in 2020 before starting gradual recovery. Optimistic Little economic inflation from modest wage growth slows FRB rate increases, tariff changes remain modest, recession avoided, higher vehicle prices and market satiation keep sales post peak as sales level at 17.2m. Pessimistic Inflation rate increases causing more aggressive FRB policy, trade war intensifies, credit availability deteriorates, consumer spending contracts and resulting recession leads to market bottom of 16.0m in 2020 before recovering. Source: Cox Automotive Forecast, November 2018 12
A g e n d a Economic Outlook and New Vehicle Sales Affordability Threat and the Used Vehicle Market Dealers Perspective and Tariff Concerns 13
B u y i n g C o n d i t i o n s C h a n g i n g S i n c e R e c o r d Ye a r 2016 2018 Change New Vehicle Sales 17.5m 17.1m -400K Avg Transaction Price $34,353 $35,762 $1,409 Avg 5 year Loan Rate% 4.1 4.9 0.8 Federal Funds Rate% 0.4 1.7 1.3 Income Growth 1.7% 2.8% 1.1% Inflation 1.3% 2.5% 1.2% Gasoline Price $2.15 $2.76 $0.61 Source: Cox Automotive 14
S h a r e O f M a r k e t L e s s T h a n $ 3 0, 0 0 0 D e c l i n i n g New Vehicles - Transaction Price Market Share (2012-2018) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% <= $20,000 $20 - $30K $30 - $40K $40 - $50K $50 - $60K $60 - $70K $70 - $100K 2012 2013 2014 2015 2016 2017 2018 Source: Cox Automotive/KBB 15
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 A f f o r d a b i l i t y C r i t i c a l To B u y e r s D e c i s i o n Used Vehicle Buyer Average Household Income $100,000 $95,000 $90,000 $85,000 $80,000 $75,000 $70,000 $65,000 $60,000 $55,000 $50,000 Vehicle Model Year Source: Cox Automotive Estimates, IHS registrations 16
Jan-2014 Jan-2015 Jan-2016 Jan-2017 Jan-2018 Jan-2014 Jan-2015 Jan-2016 Jan-2017 Jan-2018 R i s i n g L e a s e P a y m e n t s I m p a c t i n g C h o i c e s Monthly Payment (3m avg and Trend) $575 $550 $525 $500 $475 $450 $425 $400 $375 $350 Payment Differences (3m avg and Trend) $175 $150 $125 $100 $75 $50 $25 $0 New Lease (36m) New Loan (69m) Used Loan (66m) New Loan-Lease New Loan-Used Loan Lease-Used Loan Source: Cox Automotive Estimates 17
P r e v i o u s L e a s i n g C r e a t i n g M a j o r H e a d w i n d Off-Lease Maturities (annual volume, millions) 4.5 4.0 3.5 3.0 2.5 2.0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: Cox Automotive Estimates 18
M a n h e i m U s e d Ve h i c l e Va l u e I n d e x I s S t r o n g Manheim Index (1995=100) 150 140 130 120 110 100 90 Jan-1995 Jan-2000 Jan-2005 Jan-2010 Jan-2015 Source: Cox Automotive 19
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 R e c e s s i o n I m p a c t i n g U s e d Ve h i c l e S u p p l y Total US Registrations (270 million) 18,000,000 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 Vehicle Model Year Source: Cox Automotive/IHS Registrations 20
R e t e n t i o n Va l u e s S t a b i l i z i n g I n 2 0 1 8 Retention Values as % of MSRP 64% 62% 60% 58% 56% 54% 52% 50% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec CY 2015 CY 2016 CY 2017 CY 2018 Source: Kelley Blue Book Auction Values as a % of MSRP, 1-3 year old group, and New Vehicle Sales Weighted 21
Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017 Jan-2018 U s e d M a r k e t To R i s e W h i l e N e w D e c l i n e s Total Registrations By Model Year (12m average) Used Sales (annual, millions) 12,000,000 11,000,000 40 39.4 39.5 39.5 39.2 10,000,000 39 9,000,000 8,000,000 38 7,000,000 6,000,000 37 5,000,000 4,000,000 36 35 2012 2013 2014 2015 2016 2017 2018 2019 2020 MY 0-4 MY 5-8 MY 9-12 MY 13-16 MY 17+ Source: Cox Automotive analysis of IHS Registrations 22
A g e n d a Economic Outlook and New Vehicle Sales Affordability Threat and the Used Vehicle Market Dealers Perspective and Tariff Concerns 23
OVERALL RANK What are the Factors Holding Back Your Business? Q3 18 Q2 18 Q3 17 1 Limited Inventory 38% 36% 34% 2 Market Conditions 37% 43% 43% 3 Credit Availability for Consumers 35% 36% 34% 3 Competition 35% 28% 34% 5 Expenses 29% 25% 30% 6 Interest Rates 17% 16% 7% 7 Consumer Confidence 16% 15% 18% 8 Consumer Transparency in Pricing 15% 14% 11% 9 Staff Turnover 12% 11% 11% 10 Credit Availability for Business 9% 9% 11% 11 Regulations 7% 12% 11% 11 Dealership Systems/Tools 7% 7% 6% 13 Too Much Retail Inventory 5% 7% 9% 13 OEM Mandates/Restrictions 5% 6% 5% Significant decrease vs previous quarter Significant increase vs previous quarter Dealer Sentiment Index Q3 2018 24
Import Tariff Impact (Full Breakout) OVERALL Q3 2018 Positive Impact 11% No Impact 51% Negative Impact 38% FRANCHISE Positive Impact 9% No Impact 35% Negative Impact INDEPENDENT 56% B Positive Impact 11% No Impact 57% A Negative Impact 32% Q: Which of the following best describes the impact on your business profitability next quarter if tariffs are imposed on imported vehicles and parts? A/B Indicates significant difference between groups at the 95% confidence level. Dealer Sentiment Index Q3 2018
The US Market Is Heavily Dependent on a Complex Global Supply Chain Composition of New Vehicles Sold in the US by Major Segments and Major Regions of Origin 35% 30% 25% 20% 15% 10% 5% 0% COMPACT CAR LUXURY CUV VAN PICKUP MIDSIZE CAR SUV USA MEXICO+CANADA JAPAN SOUTH KOREA EUROPE Source: Cox Automotive estimates based on IHS Markit Registrations 26
Each Brand s Exposure To Tariffs Differs Based On Non-USA Production 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 99% 0% 1% 89% 81% 76% 64% 64% 62% Domestic Share Import Share 86% 82% 73% 71% 64% 66% 67% 69% 53% 53% 53% 54% 51% 49% 49% 51% 52% 47% 47% 47% 48% 46% 36% 36% 38% 36% 34% 33% 31% 29% 27% 24% 19% 18% 14% 11% 7% 93% 100% 0% ALFA ROMEO ASTON MARTIN AUDI BENTLEY FERRARI FIAT GENESIS JAGUAR LAMBORGHINI LAND ROVER LOTUS MASERATI MAZDA MCLAREN MINI PORSCHE ROLLS ROYCE SMARTCAR VOLVO Source: Cox Automotive 27
1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018 Te s l a H a s F i n a l l y A r r i v e d Model 3 having huge initial success: 72,000 sold since July Biggest selling luxury car 400,000 orders still to be filled MSRP: Model X $104K, Model S $100K, Model 3 $62K (with features well above $35K target). Trump tariffs could be a huge plus for Tesla Made in USA Success may be short lived: Selling to fans today will broader market be so forgiving? Direct to customer has many risks repairs difficult Lots of competition coming many new OEMs will enter the space, many luxury electric nameplates from current brands. Tesla Sales 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Model 3 Model S Model X 28