5 Warning Signs For The Auto Industry

Even as the auto industry basks in the glow of 2015’s record year in the showroom, several looming threats pose risks to the industry’s momentum.

Here are five key warning signs, from discussions at the J.D. Power Automotive Forum hosted jointly with the National Automobile Dealers Association on the eve of the New York International Auto Show.

• Negative equity. The percentage of car owners facing negative equity — meaning they owe more than their vehicle is worth — is expected to hit a 10-year high in 2016, according to J.D. Power projections.

At 31.4%, the negative equity rate means that nearly one-third of car owners are underwater on their purchase. That’s even higher than the negative equity rate of 30.7% in 2006, when easy credit temporarily juiced sales before the industry crashed. When a car is underwater, the buyer is stuck with the vehicle until they pay it off, unless they have enough in savings to make up the difference.

• Subprime is rising. The rates on subprime loans — which are higher risk because of the buyer’s weaker credit history — will hit 17.5% in 2016, according to J.D. Power. That’s the highest rate since it was 19.6% in 2007. To be sure, the auto industry is much more cognizant of the risks of subprime loans than it was before the Great Recession. John Humphrey, senior vice president of global automotive for J.D. Power, cautioned that automakers must avoid the perilous path of chasing volume and market share with easy credit and heavier discounts.

“The industry has to be disciplined in the upcoming period of slower growth,” he said.

• Millennials don’t care as much about cars. Amid the rise of ride-sharing apps such as Uber and Lyft, young adults are less likely than ever to drive.

A recent University of Michigan Transportation Research Institute study showed that just over three in four people ages 20 to 24 had a driver’s license in 2014. The exact figure — 76.7% — represented a sharp decline from 79.7% in 2011, 82% in 2008 and 91.8% in 1983.

BMW North America CEO Ludwig Willisch told the J.D. Automotive Forum that Millennials remain an extremely important part of his brand’s future. But auto executives are highly aware of the threat ride-sharing, autonomous vehicles could one day pose to their business models.

• Fleet sales are up. Growth in fleet sales has outpaced retail sales in nine of the last 12 months, Humphrey said. Since fleet sales — which go to rental car companies, commercial customers and governments — are less profitable, increases have historically been viewed as a strategy to gain volume. But the profit compromise poses a risk to the industry’s bottom line if it continues.
• Loan lengths are growing. With average transaction prices at an all-time high of $30,600,  Americans are taking out longer loans. In fact, 72-month loans now represent 34% of sales, rising for a sixth consecutive year.

Yes, longer loans may partially reflect the fact that buyers are keeping their vehicles longer than ever. But longer loans also weigh on consumers’ financial health and make it less likely that they’ll buy new vehicles until their loans expire.