Used-car glut puts pressure on prices
All those years of rising US car sales are starting to work against car makers.
A glut of used vehicles has started to depress prices. That trend will intensify as Americans will return 3.36-million leased cars and trucks in 2017, another jump after a 33% surge in 2016, according to JD Power.
The fallout has already begun, with Ford shaving $300m from its financial-services arm’s 2017 profit forecast.
“Ford is the canary in the coal mine,” said Maryann Keller, a car industry consultant.
This drag may be hitting the rest of the industry, too. A National Automobile Dealers Association index of used vehicle prices declined each of the last six months of 2016. If used values weaken more than anticipated, it can lead to losses across the industry, hitting car makers, lenders to the industry and rental companies.
THE FALLOUT HAS BEGUN, WITH FORD SHAVING $300M FROM ITS FINANCIALSERVICES ARM’S 2017 PROFIT FORECAST
The Nada Used Car Guide’s price index dropped about 4% in 2016 from 2015’s average, the first significant decrease since the recession.
The boom in cars and trucks coming back off leases will continue into 2017, rising about 9%, JD Power estimates. The impact of falling used prices has also hit Hertz Global Holdings. The rental-car company replaced its CE in December, weeks after cutting its annual earnings forecast due to the falling value of its cars.
Car makers and lenders decide a lease customer’s monthly payment by making an assumption on the car or truck’s value when it will be returned. When vehicles are depreciating by more than companies expected, it is a blow to their bottom lines.
The average used car depreciated about 23% in 2016, faster than the average annual rate of 18%, Edwin Groshans, an analyst at Height Securities, said, citing Nada’s data.
“We expect this trend of above-average annual depreciation to continue in 2017 and 2018,” Groshans wrote. This may drag on car-finance companies, he said.
The trend has yet to put a damper on optimism at Ford’s chief rival. General Motors (GM) in January predicted profit would rise more than analysts estimate for 2017, after meeting the high end of its targets for 2016. Ford and Fiat Chrysler Automobiles are scheduled to report earnings on Friday.
To keep the momentum going, GM may have to overcome a drop in auction values that Ford has said is spreading beyond passenger cars to larger vehicles. More car makers may join Ford in reassessing profit forecasts for their captive lending arms after they made overly optimistic assumptions about the future value of used vehicles, Joe Spak, an analyst at RBC Capital Markets, wrote.