Morgan Stanley Warns Of "Unprecedented Buyer's Strike" In Autos; Slashes Car Sales Forecast

Morgan Stanley's auto team, led by analyst Adam Jonas, seems to be convinced that the auto trade is officially over prompting him to slash over 11 million units from his North American SAAR forecast over the next 4 years.  Jonas attributes his controversial call to the fact that OEMs have been so aggressive in implementing policies designed to pull forward sales (e.g. longer loan terms, higher loan mix to subprime borrowers, etc.) that they've actually started to pressure used car prices to the point that they're cannibalizing new sales.

We had held to a ‘higher-for-longer’ thesis on the assumption that the OEMs could keep pulling forward demand from the future… For several years, we have expressed our concern over the sustainability of used car values and powerful forces that could drive a multiyear cyclical decline, impairing the ability for consumers to transact and the willingness of financial institutions to lend as aggressively as in the past. Up to this point, we had believed that competitive forces, particularly the ability of the captive finance subs to find new ways to lower the monthly payment and put 'money on the hood’, would help extend the US auto volume cycle a few more years to new heights.

 

8 years into the biggest auto cycle on record, we appear to be hitting a point of diminishing returns where the tactics required to attract the incremental consumer may be putting even more pressure on the second hand market, leading to adverse conditions for selling new vehicles…

 

As such, for the first time this cycle, we are directly incorporating our views of used car value erosion into our US light vehicle sales forecasts, resulting in substantial SAAR reductions of several million units per annum through 2020.

So just how bad does MS see new car sales getting?  In aggregate, they cut 11.3 million units out of their 4-year forecast and slashed their 2019 estimate by 4.2 million units, or 22%.

Our cuts for the out-years are more substantial. Our 2018 US SAAR forecast is cut to 16.4 from 18.9mm, implying a further 7% decline from 2017 to 2018. Our 2019 and 2020 forecasts are cut to 15.0mm units both years units from 19.2mm and 18.7mm respectively. This pace of sales is equal to levels last seen in 2013. In our view, to maintain a 15mm SAAR and no worse we may need to see government support for new car purchases in the form of an incentive program similar to 'Cash for Clunkers'.

 

The cuts to our 2019/2020 forecasts are driven by our extensive work over potential used car price erosion due to technological obsolescence at a time when the powertrain (from ICE to EV) and driving policy (from human to automated) is changing in an unprecedented way. In the US, roughly 9 out of 10 new car purchases involve a trade-in or off-lease vehicle making used values a consumer's currency. Our more recent work on the 'Osborne Effect' explores the potential for a buyers' strike whereby consumers delay purchases to wait for an significantly improved product just a few years away.

 

And while shifting consumer patterns and technology upgrades will always have an impact on the timing of large-ticket purchases, Morgan Stanley's prediction that used car prices will crash up to 50%, over the next several years, was the primary reason behind their call.

 

Of course, such a catastrophe in the used car market will only serve to exacerbate the minor issue that negative equity in America's passenger rolling stock is currently at an all time high.  And, since Americans don't really like to save cash, that puts a real damper on their primary source of a down payments: trade-in values.

 

That said, ridiculously high inventory levels....

 

...and soaring off-lease volumes probably won't help new car sales and/or prices either.

 

Meanwhile, lending standards probably can't get all that much worse...

 

...which means that the industry is pretty much capped out in terms of sales that can be pulled forward.

 

Welcome to the other side of the "plateau."

Plat

Comments

Luc X. Ifer evoila Fri, 06/09/2017 - 00:57 Permalink

Correct - partially :). It is not only them, it is the fact of seeing at work, in practice the dawn of electric, autonomous car and the mess of a moribund economy based on petroleum. Why would one buy a new gas personal car now when in 5 years most likely - if not sooner, it is going to be an useless piece of mixed iron & plastic shit?!

In reply to by evoila

CRM114 evoila Fri, 06/09/2017 - 12:49 Permalink

Autonomous in the city, maybe.Find me one that will make it up a dirt track in the Spring.Everybody out here in the country either drives a pickup truck or a ratbox chevy/honda. Autonomous won't replace the first because they are working vehicles, and the second because they are too expensive, and pooled vehicles will take far to long to reach anybody.

In reply to by evoila

LetThemEatRand Thu, 06/08/2017 - 22:48 Permalink

This article (and everything the underlies why it exists) is why the news is filled day in and day out with the shitshow that we saw today.  And the volume of the fake news will only get worse as the real news that no one is paying attention to gets worse.

pparalegal Thu, 06/08/2017 - 22:52 Permalink

Most new cars are worthless time bombs in about 7-10 years when that $8,000.00 10 speed trans or some other turbos, modules and sensors go bad. Much less one decent impact crash and 6-12 new air bags.  Someone will find a way to securitize 30 year loans with rollovers every 5 just to keep the bowling ball moving. 

spdrdr pparalegal Thu, 06/08/2017 - 23:02 Permalink

OK, I agree with an airbag deployment crash rendering an ordinary car an effective insurance write-off.  However, I think that "all" complex transmissions and turbos etc do not usually fail between 7-10 years, simply because of Consumer Protection Laws.Some of them might - but I believe that the bulk (>50%) will happily continue on through their apparent design life of 12+ years. Herein lies the problem for the OEM's.

In reply to by pparalegal

yarpos pparalegal Fri, 06/09/2017 - 03:30 Permalink

People talk about complexity of modern cars,  and there is always the your ICE car has 1000's of moving parts from the EV fanboys.   Back in reality this stuff is very mature and the side of the road isnt exactly littered with broken down cars,  at least where I live.I have a 30 year old electronic ignition collector car that was going fine.  I chose to change out all those pesky sensors purely as I thought I had got my moneys worth and I do love a bit of preventative maintenance.   I think the whole topic is a red herring.

In reply to by pparalegal

spdrdr Thu, 06/08/2017 - 22:51 Permalink

The whole problem is Consumer Protection Laws - the end result is that normal "planned obsolescence" has been legislated out of existence, and any used car is going to go the distance for the next ten or more years.If you have a product life-span of 12+ years, your consumer base is going to disappear in the absence of a "Keep up with the Joneses" mentality.  Given the constraints currently arrayed against the Middle Class, private (i.e. not corporate/deductible) decisions are being made to purchase used rather than new.Unless new vehicles are radically different and align with a conceptual "I'm better than you!" sociological approach (Tesla?), new sales are going to falter because of the vastly improved quality of the used market.

LetThemEatRand spdrdr Thu, 06/08/2017 - 23:01 Permalink

I'm not so sure Consumer Protection laws made that big of a difference.  Japan pretty much took the planned obsolescence concept and shoved it up Detroit's ass in the 70's/80's, forcing all manufacturers to prioritize longevity and quality.  There's a reason Honda still ranks so high in sales despite the fact that it makes pretty boring cars, IMO.  The fact is that buying a used car is no longer a fool's errand, and that's a good thing for consumers, bad thing for manufacturers who are not either really good at making quality cars or really good at making not-so-quality cars that people want for other reasons.

In reply to by spdrdr

spdrdr LetThemEatRand Thu, 06/08/2017 - 23:10 Permalink

OK, I tend to agree - let's look at it as market forces, as opposed to legislative forces - isn't it the exact same result?  New autos being pumped out have been better and better in terms of longevity and reliability (the Japanese model) - isn't the result exactly the same? Unless there is some tax deduction/social/aspirational incentive, the end consumer is going to go for a "good" used car over new.Not a good forecast for either the manufacturers or importers.

In reply to by LetThemEatRand

spdrdr LetThemEatRand Thu, 06/08/2017 - 23:42 Permalink

Yes, there will always be demand for new cars - from .gov, and anyone else who can write off the cost against income.For private buyers, it will become a choice between new cars, and a good used example.  I don't particularly agree with your view that used prices will catch up to new - can you elaborate on this?However, I fully agree that the middle class is fucked and tapped out.

In reply to by LetThemEatRand

meditate_vigorously Thu, 06/08/2017 - 22:54 Permalink

A "buyer's strike"? Really? Not doing something is now an hostile act? Did this start with Obamacare, or is it just making a come-back from some other insane period in history?

GooseShtepping Moron Thu, 06/08/2017 - 22:55 Permalink

Ignore the economic reporting and pay attention to what your eyes are telling you. Just drive around any major metropolitan area and you can see that there are way too many cars on the road. There is no way that in this no-growth economy, people are doing well enough to afford all this outright. It just isn't believable.

VWAndy Thu, 06/08/2017 - 23:09 Permalink

 That industry is heading into the dumper. The thing that bugs me most about it is they are doing it with intent. They cant wait for the next bailout. 

SantaClaws Thu, 06/08/2017 - 23:13 Permalink

Morgan Stanley's people have it backwards.  Demand is falling because the newest cars have far too much unnecessary and costly technology.  Simplify the vehicles and lower the cost.  Improve the durability.

Oberst-Gruppenfuhrer Thu, 06/08/2017 - 23:17 Permalink

Reading on what the next big 'new car technology' will be you might want to buy a car now.  The next generation of cars will be self-driving, AI, and will lock you in and drive you directly to your local kommisar to explain yourself why do you make anti-government on zerohedge.  Oi vey goyim...do you not see what (((they're))) building?