Japan’s Disasters Still Felt in Auto Financing and Supply
Three months after a killer tsunami and earthquake engulfed parts of Japan, one of the outcomes is shaping up to be an opportunity for U.S. car manufacturers and shoppers.
Japan-based companies are reporting dried-up inventories of certain car models. According to consulting firm A.T. Kearney, the roughly 197,000 car buyers who were leaning toward buying a Japanese brand this summer could increase to 328,000 by the fall. Industry watchers are saying those car shoppers may have to look elsewhere given the shortage of Japanese cars such as the Prius hybrid.
An A.T. Kearney study forecasts 13.2 million new autos will be sold in the U.S. this year. The study further anticipates an upward trend toward prerecession levels of about 16 million units by 2013. Since 2007, total new and used pent-up demand has accumulated to 32 million units, of which more than nine million will materialize in the new vehicle market over the next five to seven years. The remaining 23 million units will sell in the used-car market.
Still, Japan’s troubles, along with the availability of financing and total cost of ownership, are expected to impact vehicle sales, according to Kearney. Indeed, the forecast’s wild card is Japan, where in the aftermath of the earthquake and tsunami, parts shortages will impact 2011 U.S. new vehicle sales by 200,000 units. Situations such as Chrysler Group LLC’s recent payback of $5.1 billion in Troubled Asset Relief Program loans could put manufacturers on better footing to go after shoppers who favor Japanese models.
"Given what we know about production downtime, in 2011 we see 328,000 U.S. customers of the affected brands up for grabs, and more if the time to wait for a particular brand begins to extend," said Dan Cheng, partner and leader of A.T. Kearney’s automotive practice.
For credit unions that have been grappling with dismal auto loan activity since the recession, expanding their portfolios continues to be among their highest priorities, said Joe Greenwald, vice president of marketing and communications at CU Direct Corp. One of the challenges will be competing against those banks that have returned to auto financing.
"The banks are back and in many cases, are more aggressive on loan rates," Greenwald said.
Credit unions shouldn’t be intimidated by the competition, he offered. Instead, they have to figure out where they’re going to add value such as through preapprovals and getting to members early. Greenwald said even though rates offered by some might be lower, it may not be the best way to go. Credit unions can still be more flexible with the terms.
"The thing that changes here is as prices go up, how aggressive are credit unions willing to loan against [manufacturer’s suggested retail price]," Greenwald said. "With the MSRP on a car, in the past, you would pay a certain percentage. That percentage may go higher. As a lender, you’re probably going to be looking at some pressure on pricing."
The need for borrowers to get that higher percentage is common in the financing environment right now, Greenwald said, adding that some financial institutions might be more comfortable with an elevated threshold.
Meanwhile, consumer pricing, credit availability, consumer confidence and overall economic growth are a few factors that stand to impact how lenders will capture business from auto shoppers, according to Kearney. Pent-up demand and whether the recent downturn will resemble prior recessions added additional factors, as does vehicle age and the need to replace older cars, the current average age being 10.4 years.
"They’re still dying to see more new auto loans," said Dave Colby, chief economist at CUNA Mutual Group, referring to credit unions. "We’re seeing some additional supply chain disruptions. One of the byproducts of Japan is temporary plant closures. When inventories get low, there is a tendency to get less aggressive on pricing. This may or may not include discount financing."
A number of credit unions have launched programs to help members with less-than-stellar credit scores. The recession has created 15 million new subprime consumers, Kearney found. From this group, the firm estimates that at current loan approval rates, approximately 530,000 customers would be locked out of the new vehicle market. This represents a $3.2 billion contribution opportunity for the original equipment manufacturers.
"Auto lenders who understand that lending has more nuance to it than a FICO score and are able to accurately size up credit risk in a lower FICO-score environment will better avail themselves of the opportunity to help buyers finance new car purchases," Cheng said.
For the most part, credit unions are still uncomfortable with new auto loan activity, Colby said. Concerns with the credit crisis, defaults in European economies and an active regulatory climate weigh on their decisions.
"In the grand scheme of things, it’s a competitive market," Greenwald said. "For credit unions, it’s being proactive with members, making them aware of their lending capabilities and providing shopping tools that shorten up the transaction and make the process easier."