Figure on a slow and steady recovery in U.S. auto sales next year — a rise of about 10%, according to the consensus of analysts surveyed by Automotive News. But one outlier predicts a much bigger jump in 2011 and offers some compelling data to back it up.
The consensus is for 2011 volume of 12.7 million sales, a 10% increase if this year ends at 11.5 million units. All but one of the seven analysts predicted a market of 12.5 million to 12.9 million.
But Morgan Stanley says consumer creditworthiness is improving so rapidly that lenders are about to loosen credit dramatically — and that will rocket the market to 14 million units in 2011.
“The catalyst is credit availability — a bigger impediment to auto sales than tight inventories or low demand,” says Ravi Shanker, Morgan Stanley’s lead analyst for North America.
Morgan Stanley is far from other forecasters on 2011, but less so after that. In 2012, Morgan Stanley sees 15 million sales. IHS Automotive predicts 14.8 million, which is close to the others.
“Everybody gets to the same place,” Shanker says. “We just get there faster.”
Analysts simply don’t agree on whether auto sales will recover as fast as they fell. So far sales have not snapped back, and most analysts say we won’t get a V-shaped recovery. But Shanker thinks otherwise, citing Morgan Stanley proprietary indices of credit quality and availability.
“Credit quality and availability always move in lockstep, with availability trailing quality by three months,” he says. “Now credit quality is rising quickly and is near historic highs. Even a small change in lender attitude means more auto loans and more affordable terms.”
But too many fundamental economic factors are weak for one improvement to break the logjam, counters senior analyst George Magliano of IHS Automotive. Jobs, housing and credit are all huge drags on auto sales.
“There will be no massive surge in the short term,” he says.
Magliano says there could even be a first-half dip before sales improve in the second half.
Jesse Toprak, vice president of industry trends for TrueCar.com, says this crisis is different from previous auto sales slumps and recoveries.
“This recovery has been slower than ones we have seen in other industries, and it will stay that way,” he says.
“The auto industry needs time to recover from a decade of overproducing and selling on the deal instead of the merits of the vehicle.”
Brightening a bit, Toprak says automakers have not reverted to overproducing and excessive incentives to grab market share because they have fresh memories of where they went too far.
Dan Montague, senior analyst at PricewaterhouseCoopers Automotive Institute, is the most pessimistic of those surveyed, forecasting a market of 12.5 million for 2011.
“We still have a good bit of downside risk, perhaps as low as 12 million,” he says. “I just don’t see an environment healthy enough to put the car buyer back in the game.”
Jeremy Anwyl, CEO of Edmunds.com, says uncertainty over jobs, housing and the economic stability of Europe and emerging markets keeps prospective buyers on edge.
“None of these factors have any certainty,” he says. “It’s a lot of wild cards.”
Even the lower incentives being offered by automakers hurts unit sales because they effectively raise prices, Anwyl says. And lower volume doesn’t generate positive headlines, he adds.
“If there’s good news, confidence feeds on itself,” Anwyl says. “That’s why recoveries tend to be very steep. I’m not sure it’ll happen that way this time.”
Even if the analysts do not agree on the pace of the recovery, all expect higher sales next year.
TrueCar’s Toprak says three traditional factors — jobs, housing and consumer confidence — have been strongly linked to sales the past three years. But since January 2007, he says, the strongest predictor is the Dow Jones Industrial Average.
And the Dow has risen sharply since mid-September.
“It’s what you hear,” Toprak says. “It sets the public mood for consumption. If the Dow is up, it’s a green light for the consumer to buy.”
With the availability of credit the RV industry’s No. 1 issue, the Recreation Vehicle Industry Association (RVIA) and its industry partners have been working on several fronts to expand the alternatives for credit and have been successful with one effort to provide floorplan lending for dealers through the Small Business Administration (SBA).
The SBA will announce shortly plans to change current policy that precludes financing of RV floor plan loans through the 7(a) loan guarantee program, the RVIA stated in a news release. “This is great news since the SBA has moved with some urgency to temporarily permit floorplan lines of credit for assets which are ‘titleable’ (RVs, cars, trailers, motorcycles, and boats),” RVIA stated.
This week, the SBA told RVIA that effective on May 17, the agency will waive the floor plan lending prohibition. Using their pilot program authority, the SBA plans a “use of proceeds” program to provide dealers with lines of credit through SBA-approved bank lenders. The program will be effective May 17, 2009, through Sept. 30, 2010.
“This policy change should improve the availability of credit for many RV dealers to purchase new inventory from manufacturers. Details of the program as described to us are outlined below. A Federal Register Notice announcing the program should be released next week,” RVIA said.
Among the features are the following:
- Asset-based line of credit between $500,000 and $2 million, available for “titleable” assets through existing SBA lenders (does not have to be an existing floorplan lender).
- Since some states do not require titling of all trailers and truck campers, the SBA may address assets that require a Vehicle identification number (VIN) instead of “titleable asset.”
Applicants must meet SBA 7(a) program eligibility requirements including:
- The program is limited to businesses with a tangible net worth of $8.5 million or less and an average net income in the last two completed fiscal years of $3 million or less, excluding carry over losses.
- Rules of affinity apply toward the size standard (example of family-owned business with affiliates owned by other family members–all would count toward size standard.
- “Credit Elsewhere” Policy Applies - Requires financial statements of owners with 20% or greater ownership to determine whether their liquid assets are an alternative source of funds.
- Personal Guarantee - Requires a personal guarantee from each owner with 20% or more ownership.