CoVid-19 Industry Updates

CoVid-19 Industry Updates (101)

Subaru of America Inc. recently reported 51,458 vehicle sales for July 2020, a 20 percent decrease compared with record July 2019. These results reflect the impact of the COVID-19 global pandemic and the uncertainty surrounding economic recovery. Following 11 consecutive years of sales records, Subaru reported year-to-date sales of 318,572, a 21 percent decrease compared to the same period in 2019.

July marked the third consecutive month of 50,000+ vehicle sales for the automaker. As the top performing carline by volume, Forester sales increased 4 percent in July 2020 compared with the same month a year ago. WRX/STI posted a 6 percent increase, while BRZ posted a nearly 60 percent increase compared to July 2019.

“Given our low supply of key models such as Forester, Outback, Crosstrek and Ascent, overall, we were extremely pleased with our sales results which were delivered by our retailers, who are also persevering through the COVID-19 pandemic,” said Thomas J. Doll, president and CEO, Subaru of America Inc.

The growing number of COVID-19 cases and overall economic uncertainty continue to stifle a more robust recovery, according to a report released by Cox Automotive.

Cox forecasts that  the seasonally adjusted annual rate (SAAR) of auto sales in July is expected to be 13.3 million, up from last month’s 13.0 million pace, but down from last year’s 16.9 million level. Sales volume in July, forecast at 1.13 million units, will be down 19 percent from July 2019.

According to Charlie Chesbrough, senior economist at Cox Automotive, “The market has been making slow but steady gains since April’s low, but there are many headwinds hampering our recovery.” 

Consumer sentiment for the most part drifted downward throughout the month of July as surges in COVID-19 cases in the South and the West dominated the news headlines. Concerns over high unemployment, a troubled U.S. economy and the resulting severe recession also weighed heavily on potential auto buyers, keeping many out of the market. Shoppers who stayed in the market were likely impacted by a limited supply of product at dealerships.

Buyers are turning more to online shopping for cars
Buyers are turning more to online shopping for cars

Based on Cox Automotive analysis of vAuto Available Inventory data, there was only 67 days of inventory available in mid-July based on the current sales pace—far below the July 2019 level of 86 days. Lean supply can be a positive for dealers and automakers, as it often leads to less aggressive incentive spending and high grosses, according to Cox analysts. However, low inventory will also drive down market volume, as vehicle shoppers may not find the product they want. Toyota and Subaru had the tightest inventory among larger brands in July, both below 40 days of supply. At the other end of the scale, Chrysler, Dodge and Ford all had days of supply above 90 days in July. Mitsubishi had the most inventory on hand in July, with 135 days of supply.

Penske Automotive Group Inc. announced second quarter and six-month 2020 results. For the three months ended June 30, 2020, the company reported income from continuing operations attributable to common shareholders of $45.0 million, or $0.56 per share, compared to $117.7 million, or $1.42 per share in the prior year. Foreign exchange had no impact on earnings per share. Revenue was $3.7 billion compared to $5.8 billion in the same period last year.

Second quarter performance was highlighted by the company’s diversification, with retail commercial trucks and Penske Transportation Solutions offsetting the challenging automotive retail environment early in the second quarter. In April and May, many of its U.S. and Germany dealerships were impacted by shelter-in-place orders while operations in Italy, Spain, and the U.K. were closed. As a result, same-store new and used automotive retail unit sales declined 71 percent in April and 50 percent in May when compared to the same month last year. In June, as operations began to reopen, same-store new and used automotive retail unit sales decreased 1 percent.

“The operating environment in the second quarter was one of the most challenging in memory,” Chairman Roger Penske said. “Since the COVID-19 pandemic began impacting operations, our teams took action to protect the safety of employees and customers, control costs, manage vehicle inventory, maximize gross profit and preserve liquidity. Through these actions, our business experienced sequential improvement from month to month in units retailed, service/parts gross profit and overall profitability.”

Penske continued, “Starting in late March, we furloughed approximately 15,000 employees, or 57 percent of the workforce. At the end of June approximately 14 percent of our employees remained on furlough. Additionally, we have reduced our workforce by approximately 8 percent as of June 30.”

For the six months ended June 30, 2020, the company reported income from continuing operations attributable to common shareholders of $96.6 million, or $1.20 per share, compared to $217.8 million, or $2.60 per share in the prior year.

 

In the week ending July 18, the advance figure for seasonally adjusted initial claims was 1,416,000, an increase of 109,000 from the previous week’s revised level. The previous week’s level was revised up by 7,000 from 1,300,000 to 1,307,000. The 4-week moving average was 1,360,250, a decrease of 16,500 from the previous week’s revised average. The previous week’s average was revised up by 1,750 from 1,375,000 to 1,376,750. The advance seasonally adjusted insured unemployment rate was 11.1 percent for the week ending July 11, a decrease of 0.7 percentage point from the previous week’s revised rate. The previous week’s rate was revised down by 0.1 from 11.9 to 11.8 percent. The advance number for seasonally adjusted insured unemployment during the week ending July 11 was 16,197,000, a decrease of 1,107,000 from the previous week’s revised level. The previous week’s level was revised down by 34,000 from 17,338,000 to 17,304,000. The 4-week moving average was 17,505,250, a decrease of 758,500 from the previous week’s revised average. The previous week’s average was revised down by 8,500 from 18,272,250 to 18,263,750.

The advance number of actual initial claims under state programs, unadjusted, totaled 1,370,947 in the week ending July 18, a decrease of 141,816 (or -9.4 percent) from the previous week. The seasonal factors had expected a decrease of 247,115 (or -16.3 percent) from the previous week. There were 196,382 initial claims in the comparable week in 2019. In addition, for the week ending July 18, 49 states reported 974,999 initial claims for Pandemic Unemployment Assistance. The advance unadjusted insured unemployment rate was 11.2 percent during the week ending July 11, a decrease of 0.7 percentage point from the prior week.

 

Ally Financial reported total net review of $1.61 billion, up 4 percent year-over-year, with adjusted total new revenue of 1.53 billion down 2 percent year-over-year.

Net income was $241 million, with $0.64 EPS and $0.61 adjusted EPS.

On the auto finance side, pre-tax income of $329 million was down $130 million year-over-year, primarily due to higher provision for credit losses associated with COVID-19 variables and lower net financing revenue.

Jeffrey Brown CEO of Ally Financial
Jeffrey Brown CEO of Ally Financial

Net financing revenue of $989 million was $33 million lower year-over-year, driven by lower commercial auto portfolio yield and balance and losses on off-lease vehicles, partially offset by higher retail auto portfolio yield, which increased 20 basis points (bps) year-over-year to 6.77 percent, excluding the impact of hedges. Provision for credit losses increased $76 million year-over-year due to COVID-19 variables. The retail auto net charge-off rate was 0.76 percent, down 20 bps year-over-year. Consumer auto originations decreased to $7.2 billion from $9.7 billion in the prior year period and included $4.3 billion of used retail volume, or 60 percent of total originations, $2.0 billion of new retail volume and $0.9 billion of leases. End-of-period auto earning assets decreased $11.6 billion year-over-year from $114.7 billion to $103.2 billion, as an increase in consumer auto earning assets was more than offset by a decline in commercial earning assets. End-of-period consumer auto earning assets were up $0.3 billion year-over-year, driven by growth in operating lease assets. End-of-period commercial earning assets of $21.7 billion were $11.9 billion lower year-over-year, driven by industry-wide vehicle inventory declines.

“Against a difficult and shifting backdrop, we remain focused on serving our customers at the highest level, and our solid operational and financial foundation positions us to continue supporting our customers,” said Ally Chief Executive Officer Jeffrey Brown. “We finished the quarter with robust capital and liquidity levels and observed improved trends across our key businesses. Our resilient and adaptable auto finance business saw meaningful improvement toward the end of the quarter, delivering $7.2 billion of consumer originations, and maintaining estimated retail auto originated yields above 7 percent for the ninth consecutive quarter, a tremendous accomplishment given the low interest rate environment.”

Urban Science and The Harris Poll released information from a June 2020 study of 1,505 consumers indicating that 61 percent of consumers agree that the entire vehicle purchase process will change forever due to COVID-19.

More than three-quarters (78 percent) see some benefit to shopping for a new vehicle entirely online versus in-person, with about a third or more citing less pressure from salespeople (38 percent) and the convenience (37 percent) or safety (32 percent) of not having to leave the home. Though they see the benefits, even more (93 percent) express some concern with an entirely online new-vehicle purchase process. 

89% OF Dealers agree they must find alternate ways to sell
89% of Dealers agree they must find alternate ways to sell to car buyers

“It’s important to note that one-third of consumers (36 percent) agree that there is no reason to ever visit a car dealership again,” said Simon Bradley, global practice director, at Urban Science. “While this sentiment could change as we return back to normal, this potentially indicates alternative retail formats may play a role in changing consumer sentiment.”

Further, 71 percent agree that they would limit the number of dealerships they visited if they were purchasing a new vehicle right now due to health and safety concerns. Long-term, a quarter of adults think fewer people will do in-person test drives before buying/leasing (27 percent) and that more people will be willing to use virtual or augmented reality to experience a vehicle (25 percent) with nearly one-third (31 percent) believing sales departments will do more mobile visits to customers' homes. Finally, even once the pandemic subsides, over half say having dealership sanitation measures in place both within each vehicle (55 percent) and throughout the building (54 percent) are must haves to help customers feel safe when visiting the dealership.

The Federal Trade Commission released the final agenda for a July 13, 2020 virtual workshop that will seek input on proposed changes to the Gramm-Leach-Bliley Act‘s Safeguards Rule, which requires financial institutions to develop, implement, and maintain a comprehensive information security program.

The virtual workshop will examine some of the issues raised in response to amendments the FTC has proposed to the Safeguards Rule. In 2019, the FTC sought comments on the proposed amendments to the rule.

The virtual workshop will feature five panel discussions examining such issues as: the costs and benefits of information security programs; how information security programs and practices scale to smaller businesses; continuous monitoring, penetration, and vulnerability testing; accountability, risk management, and governance of information security programs; and encryption and multifactor authentication.

The workshop will be held online. Information about how to view the workshop will be posted on the event page.

FCA US LLC reported second-quarter sales of 367,086 vehicles – a 39 percent decline over the same period a year earlier – as the economic havoc caused by the COVID-19 pandemic in April was partially offset by the stronger than expected retail sales rebound in May and June.

Fleet sales were impacted in the quarter as customers initially delayed or reduced their orders, in addition as production restarted deliveries have been focused on the dealer channel.  

“This quarter demonstrated the resilience of the U.S. consumer,” said Head of U.S. Sales Jeff Kommor. “Retail sales have been rebounding since April as the reopening of the economy, steady gas prices and access to low interest loans spur people to buy. Our fleet volume remained low during the quarter as we prioritized vehicle deliveries to retail customers. As a result, we have built a strong fleet order book, which we will fulfill over the coming months.”

This was also the first quarter consumers could completely purchase their vehicles online through the company’s new Online Retailing Experience (ORE). ORE is accessible through the Chrysler, Dodge, Jeep, Ram, FIAT and Alfa Romeo websites, participating dealer sites and a variety of social media applications. Customers simply click on the link to begin the process. About 20 percent of new sales leads now come from online retailing compared with about 1 percent a year earlier.

“ORE is another tool dealers can now use to reach those consumers who like shopping from their home computer,” Kommor said.

The coronavirus pandemic has had a significant impact on the fleet management industry, resulting in a sharp reduction in vehicle sales across the world, according to Beroe Inc., a  provider of procurement intelligence and supplier compliance solutions.

As manufacturers return to production, global automotive sales forecast is revised to 20 percent reduction from the previous forecast of 22 percent, with sales of approximately 72 million units, according to Beroe Inc.. The impact of COVID-19 is high on car manufacturers and alternate mobility, and medium on leasing companies.

Car manufacturers in the U.S. and Europe are returning to production with limited capacities and adequate health safety measures, according to Beroe. There has been a slow resumption of fleet activities across the globe, majorly by the essential service operators. It is almost certain that the demand for fleet vehicles has reduced worldwide. OEMs are expected to offer high discounts, as the residual value is likely to reduce. Lease prices are expected to go up as residual values and profitability reduce.

New-vehicle retail sales in June are expected to be down from a year ago, according to a joint forecast developed jointly by J.D. Power and LMC Automotive. Retail sales are projected to reach 1,002,600 units, a 5.7 percent decrease compared with the J.D. Power pre-virus forecast and 11.3 percent decrease compared with June 2019. Reporting the same numbers without controlling for the number of selling days translates to a decrease of 14.7 percent over last year. (Note: June 2020 contains one less weekend and one less selling day than June 2019).

“The industry continues to show signs of recovery in June, with retail sales down only 6 percent compared with the J.D. Power pre-virus forecast,” said Thomas King, president of the data and analytics division at J.D. Power. “This represents a significant improvement from May when retail sales were off 20 percent from the pre-virus forecast. The combination of pent-up demand, states relaxing coronavirus-related restriction and elevated incentives are all providing a tailwind for the industry.”

Total sales in June are projected to reach 1,085,600 units, a 25.1 percent decrease compared with June 2019. Reporting the same numbers without controlling for the number of selling days translates to a decrease of 28.0 percent over last year. The seasonally adjusted annualized rate (SAAR) for total sales is expected to be 12.8 million units, down 4.4 million units from a year ago.

Remarkably, in markets like Detroit (one of the most severely affected areas by COVID-19), retail sales are on pace to exceed 2019 levels.

Record levels of manufacturer incentives for the month of June are supporting the sales recovery. Incentive spending is on pace to reach $4,411 in June, the highest ever for the month and an increase of $445 from June 2019. Incentives on cars are expected to be up $459 to $4,031, with trucks/SUVs up $407 to $4,524.

Transaction prices continue to set records and are on pace to rise by 3.9 percent to $34,981, the highest level ever for the month of June. Record prices are being supported by the ongoing shift in consumer demand from cars to trucks/SUVs. Car sales are on pace to account for just 24 percent of new-vehicle retail sales in June, the lowest level ever for the month of June and the third month in a row below 25 percent. As the industry shifts towards more expensive products, SUV mix is expected to reach a record 56 percent.

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