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Q2 2012 Auto Industry Analysis presented by BBVA Research
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U.S. Automotive Industry
April2012April2012
Index
1 Automotive Demand
2 U.S. Dealerships
2
Auto Demand: Key MessagesM f t l ki b d f l th i 2009 Chi b th ld’• Manufacturers are looking abroad for sales growth: in 2009, China became the world’s largest auto market. In the U.S., auto sales will increase gradually over the next four-five years
• Auto sales are linked to growth of real per-capita disposable income. Growth here g p p prequires expansion in real wages and/or more workers, but full employment will not return until after 2014. There is currently a glut of automobiles relative to employment, and working age population growth is slowing
C d l i d d i th i d bt b d ti l l i th• Consumers are de-leveraging and reducing their debt burdens: particularly in the mortgage market. Outstanding auto debt is no longer declining, and delinquency rates appear to have stabilized. Autos remain essential for transportation to/from work in most areas of the country
• The U.S. still remains the largest market defined by total expenditure and total amount financed. High per-capita wealth supports higher unit prices of autos, and the U.S. financial system allows all types of buyers to finance a car within their budget
L i i tt ti f b l d t tt ti l d l t
3
• Leasing is attractive for many buyers : lower down payments, attractive lease deals put consumers in a new car for a low monthly payment. Leases are significant among luxury autos
Autos: A Global MarketGlobal auto manufacturers will focus on emerging markets during this decade as
Global Auto PenetrationAutomobiles ProductionMillions of Units
households move up the income ladder
60
70
Slovenia
ItalyFrance
BelgiumEngland
N
Germany
JapanSwitzerlandUSA
500
600
als
30
40
50
60
Slovakia
Poland
Latvia
Czech Republic
Portugal
SloveniaSpain
gNorway
300
400
per
100
0 in
div
idu
a
Mature markets:Higher auto spending per-capita and access to credit
0
10
20
2007
2010
IndiaChina
TurkeySouth Africa
MexicoBrazil
South Korea
0
100
200
Veh
icle
s p
Markets with high growth rates, potential for credit
expansion, and rising household incomes
4Source: BBVA Research & PWC Source: BBVA Research & VDA
Resto del Mundo BRICSRest of the world
BRICSIndia0
0 10,000 20,000 30,000 40,000
Income per capita, USD
Autos: China and BrazilIn China, a growing middle class has created the world’s largest auto market.
2514
BrazilUnemployment Rate & Auto Sales (Annual units)
China: Housing Prices and Auto SalesPrices, yoy % change (left); Autos, millions, annualized (right)
A tightening labor market in Brazil supports new demand
20
25
10
12
14Home Prices (left)
Auto Sales (right)
2.4
2.5
2.6
9.0
9.5
10.0
10
15
4
6
8
2.1
2.2
2.3
7 5
8.0
8.5
5
10
-2
0
2
1.8
1.9
2.0
6.5
7.0
7.5
Unemployment rate (lhs)
Auto Sales (millions of units, rhs)
5
0-405 06 07 08 09 10
1.76.007 08 09 10
Source: Bloomberg Source: Bloomberg
U.S. Market SizeSales of new vehicles declined precipitously during the recession; however, the U.S.
remains the world’s largest market by sales value and finance opportunitiesremains the world s largest market by sales value and finance opportunities
Annual New and Used Vehicle Sales (1990-2010)(Left scale, thousands of vehicles)
400450
Size of Finance Market for New Vehicles, $Bn(Sales of new vehicles x average amt. financed x 90%)
50
60
70Used New
200250300350400
30
40100150
200
90 92 94 96 98 00 02 04 06 08 10 12 14Source: Federal Reserve / Haver Analytics and BBVA Research
New:
Mar
ket
2014
An
nu
al
Sale
s
Ave
rag
eF
inan
ce
Am
ou
nt
To
tal
Pct
. F
inan
ced
Pct
. L
ease
d
Ban
k%
Ban
k P
oo
l
New 15M $25,500 ~$380B 70% 20% 45% ~$120B0
10
20
90 92 94 96 98 00 02 04 06 08 10
90%
6
15M $25,500 $380B 70% 20% 45% $120B
Used-Retail(Dealers)
12M $16,600 ~$200B 70%* n/a 33% ~$50B
Used -Other 28M n/a $100-$160B
90 92 94 96 98 00 02 04 06 08 10
Source: Bureau of Transp. Statistics / Bloomberg
* Assumption based on new car financing
2010 - Estimate
U.S. Auto DemandStrains from the financial crisis and slowing growth of the working age population
imply a moderate recovery of sales
Summary of Projections(M = millions of units)
Total Vehicles in Use and Registrations Per-Capita(Left scale, millions of vehicles)
imply a moderate recovery of sales
0.75
0.80
0.85
240
260
280
300
ar ork
ing
Ag
e p
. G
row
th
et A
dd
itio
ns
r Ye
ar
rap
pag
ete ed
Sal
es
ew S
ales
0 55
0.60
0.65
0.70
180
200
220
240
Yea
Wo
Po
Ne
Pe
Scr
Ra
Us
Ne
1990-2007
1.2% 4.5M(93-07)
5.6%12M
41M 15.9M
2011-2015
0.54% 2.4M 5%12M 13M
38-40M
13-16M
0 40
0.45
0.50
0.55
100
120
140
160Registrations (L)Proj. RegistrationsRegistrations Per Capita (R)Proj. Regis. Per Capita
2015 12M-13M 40M 16M
2015-2020
0.48% 3.1M 5-6%13-14M
40M+ 16M+
7
0.4010070 75 80 85 90 95 00 05 10 15 20
Sources: BBVA Research Dept. of Motor Vehicles, Census
U.S. Auto DemandFurthermore, there is currently a glut of capacity relative to employment. A low labor
participation rate implies a lower need for new autos
Non-Agricultural EmploymentThousands
Auto registrations of passenger cars and light trucks per civilian employee
1970-2009
participation rate implies a lower need for new autos
1.7
1.8
135
140
145
150
4 yrs
7 yrs
1.5
1.6
A normalization of credit markets and lending standards will 120
125
130
135
1 3
1.4
help bring down this ratio to around 1.65
100
105
110
115Employment Forecast
3 yrs
8
1.370 74 78 82 86 90 94 98 02 06
Source: BBVA Research
10090 94 98 02 06 10 14
Source: BBVA Research
U.S. Auto DemandA de-leverage process hampers credit growth, and savings rates are near 5%. However, auto
loan delinquency rates have peaked below other forms of debt and newly delinquent auto
Loan DelinquenciesPercent of Loans 90+ Days Delinquent
Homeowner Financial Obligations Ratio
loan delinquency rates have peaked below other forms of debt and newly delinquent auto loan balances are declining
Financial obligations payments to disposable personal income, SA
10
11
12
7
8
9
10
Autos
All M t HELOC d
7
8
9
Mortgage Consumer4
5
6
7 All: Mortgage, HELOC and Cons. Credit
4
5
6
0
1
2
3
Approaching a stable level; however,
mortgage-related debt strains budgets
9
480 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Source: Federal Reserve / Haver Analytics
099 01 03 05 07 09 11
Source: Federal Reserve Bank of New York / Haver Analytics
U.S. Auto DemandAutos remain affordable buoyed by lower rates and longer terms. A lower average principal
and debt-to-income ratio posit sustainable financing for consumers
Terms of New Car Loans (Banks vs. Finance Co.)Interest Rate (Left), Months to Maturity (Right)
Implied payments for new and used vehicles and debt-to-income ratio
Debt-to-income (%)
Payment calculated from average finance amount and current rate
and debt to income ratio posit sustainable financing for consumers
$55010
62
64
66
10
12
14Bank (48 Mo.)
Finance Co.
Finance Co. Term (R)$500
$550
8
9
10
56
58
60
6
8
$400
$450
6
7
8
Debt/Income (Left)Implied Mo. Payment (New)
50
52
54
0
2
4
$300
$350
4
5
6 Implied Mo. Payment (Used)
10
50090 92 94 96 98 00 02 04 06 08 10
Source: Federal Reserve / Haver Analytics
$300 499 00 01 02 03 04 05 06 07 08 09 10
Source: BBVA Research
U.S. Auto DemandTotal outstanding auto loan balances are up 1.4% on the year in 1Q11. Attractive terms and
labor market uncertainty are boosting new vehicle leasing
Percentage of New Cars Leased%
Auto Loans, Accounts and New Installment LoansTotal Outstanding, $Bn; Accounts, Millions; New Loans, $Bn
labor market uncertainty are boosting new vehicle leasing
24
26
28
30 Trending upward once again. Nearly 50% of entry-level luxury cars are leased
110
120
130
140
700
800
900
18
20
22
24
80
90
100
110
300
400
500
600
10
12
14
16
40
50
60
70
0
100
200
300Total Auto Loans
Accounts with Balances (Right)Auto Loan Issuance (Right)
11
1005 06 07 08 09 10 11
Source: Edmunds.com / Bloomberg
40099 00 01 02 03 04 05 06 07 08 09 10
Source: Federal Reserve Bank of New York / Haver Analytics
U.S. New Vehicle Market• Rising home prices and net worth combined with easy credit and home equity extraction to
explain the upward shift in sales between 2003-2007: approximately 1-2 million additionalexplain the upward shift in sales between 2003-2007: approximately 1-2 million additional vehicles purchased above trend per year
• The additional vehicles purchased in these years help to explain the sharp fall in sales in 2009, as declines in equity and housing prices erased over $10 trillion from household balance sheets
• We do not envision a scenario of pent-up demand boosting new car sales rapidly, as the de-We do not envision a scenario of pent up demand boosting new car sales rapidly, as the deleveraging process continues and consumers are saving more and keeping cars longer
10
• The median age of vehicles in use continues trending upward, and is now over 9.4 years
Median Age of Vehicles in UseYears
7
8
9
10y
• Sustained high oil prices pose a favorable outlook for fuel-efficient vehicles. The used market reflects expectations of continued oil price i i f
Upward Trend
2008
5
6
7increases as prices of compact vehicles are rising, while those of larger vehicles are declining
• Entry-level luxury brands will remain attractive for leasing
12
470 74 78 82 86 90 94 98 02 06
Source: Bureau of Transportation Statistics / Haver Analytics
attractive for leasing
U.S. New Auto Sales ForecastThe series average of approximately 15 million units per year,
should return in 2014 Population growth will drive sales above 16 million units in the lattershould return in 2014. Population growth will drive sales above 16 million units in the latter half of the decade
New Auto Sales
222011 2012 2013 2014 2015
12 6 13 3 14 2 15 0 15 7
New vehicles: millions of annual sales
• Attractive financing offers continue to support sales – for those who are employed18
19202122
Jan. 1999-Dec. 2007:Average 16.8 mn units•Tight labor market•Equity extraction•Low finance rates
12.6 13.3 14.2 15.0 15.7
• Key to higher than average sales lies with job creation and income generation
• Consumer de-leveraging is restraining sales growth14
151617
• Consumers are financing lower amounts for longer terms
• Popularity of leasing is growing
• Temporary drop in sales due to effects f J ’ th k9
10111213
Auto SalesForecast
13
of Japan’s earthquake990 92 94 96 98 00 02 04 06 08 10 12 14Source: Census / Haver Analytics
U.S. Used Auto MarketCurrently experiencing a surge in value related to labor market uncertainty and supply
shocks to new auto production
Behind the rise in values
shocks to new auto production
Value of used vehicles vs new auto inventoryThousands of Autos (left), Index (right)
Behind the rise in values
• Fuel efficient, late model years are in high demand
• High unemployment, historically low120
125
130
1 400
1,600
1,800
2,000
High unemployment, historically low new auto inventories, and low financing rates are supporting values
• We expect prices to appreciate in the near term as inventories of new vehicles
105
110
115
800
1,000
1,200
1,400
remain tight, but they should begin to moderate as production and inventories are restored
• In any case, elevated uncertainty will keep values and demand above average
95
100
105
200
400
600
Inventories of New Autos
Manheim Index (1995=100)
14
keep values and demand above average
• These transitory supply factors have boosted dealer profit margins over the prior year
90095 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Manheim Index (1995=100)
Source: BEA, Manheim / Haver Analytics
Index
1 Automotive Demand
2 U.S. Dealerships
15
Auto Dealers: Main Messages
• U.S. auto dealer profit margins are highest for parts and services. Used vehicles often entail higher margins than new vehicles
• Higher operating margins have returned due to transitory supply disruptions, historically low inventories of new vehicles, fervent demand for used vehicles, and a greater intensity of service work per dealer due to the reduction of franchised dealerships
• In the last few years the number of dealerships have plummeted along with sales of• In the last few years, the number of dealerships have plummeted along with sales of new cars. Currently, large public automotive groups are adding store locations to gain market share
• In the near-term, dealers will enjoy higher margins with less competition and experience further ownership consolidation by large dealership groups
• Ultimately, the U.S. dealer model is positioned to survive due to high entry barriers and franchise agreements that the manufacturers control
16
U.S. Dealerships: Market SizeNew car dealers comprise the bulk of industry revenue due to the higher unit sales prices
of new vehicles Revenue at parts and auto stores should continue at a strong pace as
Total Industry Revenue, 2011% of total
Retail SalesMotor vehicles and parts ($bn)
of new vehicles. Revenue at parts and auto stores should continue at a strong pace as consumers are holding onto cars longer and need maintenance
750
800
850
900
~$80Bn 12%
600
650
700
750
450
500
550Parts and Tire Stores
Used
New
~ $575 Bn88%New car
dealerships
U d
17
40000 01 02 03 04 05 06 07 08 09 10 11
Used car dealerships
Sources: First Research and Census
U.S. Dealerships: Business ModelNew and Used Car Dealerships•New car dealers have franchise agreements to sell cars, parts and services within a specified market area
•Dealers acquire new vehicles from manufacturers through an allocation system based on historical sales
•Dealers have limited influence over the colors and features
Used Car Dealerships•Companies buy used vehicles from trade-ins, auctions, other dealers, leasing companies, and rental companies
•Used dealers consider a car's age, mileage, and condition to set each vehicle’s price
•Used vehicles generally require reconditioning prior to sale; vehicles unfit for retail resale are generally sold through wholesale auctions.
•Some manufacturers allow dealers to sell certified pre-owned (CPO) vehicles with extended warranties
Services and Parts at the Dealership•Service and parts operations may offer repair maintenance body work and warranty services
18
•Service and parts operations may offer repair, maintenance, body work, and warranty services
•A typical service department has 18 service bays and handles over 13,000 repair orders annually
Source: First Research
Dealer Revenue SegmentationWhile the bulk of revenue for franchised new car dealers stems from new auto sales,
profitability is maintained through after purchase service
4%
New Car Dealers: 17,700 establishmentsShare of Total Industry Revenue
Used Car Dealers: 37,500 establishmentsShare of Total Industry Revenue
profitability is maintained through after purchase service
6% Passenger cars (retail)
Passenger cars23.7%
3.9%
3.8%3.1%
5.0%
New vans & trucks (retail)
New passenger cars (retail)
Used passenger cars ( )
56%
22%
Passenger cars (wholesale)
Vans, minivans, trucks, & buses (retail)
Vans, minivans, t k & b
8.4%
7.3%(retail)
All nonmerchandise receipts
Used vans, minivans, trucks, & buses (retail)
13%trucks, & buses (wholesale)Other21.7%
12 5%
10.6%
Vans, trucks & cars (leased)
Used passenger cars (wholesale)
Automotive tires tubes
19
12.5% Automotive tires, tubes, batteries, parts, accessoriesAutomotive parts, new and rebuilt, including wheelsSource: Economic Census, 2007
Profitability: New Car DealersParts and services contribute nearly 50% of profit due to high margins. Revenue from
Gross Profit% of total profit
finance and insurance business helps to stabilize profits over the business cycle
Gross Margins 2006-2011 Average, %
Penske
Parts and services
New vehicles6.9
8.2New Vehicles Retail
Penske Group
AutoNation Group
45.3% 44.8%
New vehicles
Finance and insurance 10.3
7.9Used Vehicles Retail
Penske Group
AutoNation21.2%
19.7%
26.3%
14.8%
Used vehicles
Oth43.6
Parts and Services12.5% 13.3% 56.8
20
Other
Source: Bloomberg
0 20 40 60Source: Bloomberg
1.3% 0.69%
*Auto Nation and Penske Group were selected as they are public companies that own 568 dealerships across the U.S.
U.S. Dealerships: ConsolidationA highly fragmented industry that has recently undergone a wave of consolidation: the prospect of
bankruptcy and government bailouts enabled manufacturers to slash the number of franchised
Dealer Operating Margin and Store OwnershipTrailing 12M % (left); Number of Stores (right)
Franchised New Car Dealers in the U.S.(Thousands)
bankruptcy and government bailouts enabled manufacturers to slash the number of franchised dealerships. Large auto groups are buying weak or failed dealerships to expand their footprint
24
25
26
27For every 10 dealership
establishments, 250
300
350
6
7
8
9
21
22
23
24 there are 9 firms
100
150
200
3
4
5
6
17
18
19
20
0
50
100
0
1
2
05 06 07 08 09 10
21
1781 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
Source: NADA, Carmax, CensusSource: Bloomberg, BBVA Research (Penske interpolation)
Operating Margin (left) AutoNationSonic Group 1Asbury Penske
Entry Barriers: High• Significant initial investment
s
• Capital intensive industry
• Franchise agreements
• Exclusive market areas
• Further consolidation
eale
rs
Buyer Bargaining Power: Strong
• Switching costs of buyers among dealers are minimal
Bargaining Power of Manufacturers: High
C t l f hi
Further consolidation
ar D
e among dealers are minimal in new car market
• Most buyers are unlikely to become frequent clients of particular dealership
S l d
• Control franchise agreements and incentives
• Dictate inventory
• Set wholesale price
Provide floorplan financing
Competition:
quality of service
Competition: Intense
Dealers must compete on
quality of service
w C
a • Sensitive to quality and reputation rankings of manufacturer
• Desire “a good deal” and want incentives
• Provide floorplan financing
• Offer consumer financing
Threat to Profitability of
quality of servicequality of service
Ne Threat to Profitability of
Substitutes: Medium• Retail outlets such as oil change centers, tire
stores and independent service shops compete with dealers’ service options
22Source: First Research and BBVA Research
• Consolidation of dealerships implies more service work per dealership
• Customers choose service work due to imperfect information in auto repair market
SWOT: Auto DealersStrengths Weaknesses
• Volatile demand due to economic conditions• Exclusivity agreements to cover specific areas
• Parts and services represent a stable source of income
• Marketing and financing provided by
• Volatile demand due to economic conditions and energy prices
• Interest rates affect both sales volumes and dealer costs
• Complete dependency on car manufacturersmanufacturers
• Accounts receivable are absorbed by third-party institutions, reducing liquidity problems
Complete dependency on car manufacturers
• Lack of customer loyalty to dealers: more loyalty towards brands
• Subject to supply disruptions
OpportunitiesThreats• Extend service hours
• Expand services and complementary products such as accessories financing and insurance
• Growing competition in the services segment
• Greater efficiencies in manufacturing, transportsuch as accessories, financing and insurance
• Intensify the sale of certified pre-owned cars
• Nontraditional sales techniques like websites that allow to track inventories, negotiate and get financing online
Greater efficiencies in manufacturing, transport and inventory management allow manufacturers to sell directly, transforming local dealerships into distribution and service locations
23
g
• Leverage environmental concerns by promoting hybrid vehicles and improving the environmental friendliness of the vehicles that they sell
• Aging population that reduces car usage
• Weak job creation and an anemic housing market that curtail new auto sales
U.S. Automotive Industry
April2012April2012