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Auto Focus

By Melissa Anderson
Vice President, IRN Inc.
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It’s possible that the only good thing you can say about the year 2009 for the auto industry is that it makes everything else look much better in comparison. As we wind toward the conclusion of 2010, IRN is projecting that we will end the year with U.S. sales of 11.6 million units, up from 10.4 million last year and largely consistent with the view that we have held all year.

A certain amount of recovery was bound to happen, given that around 14 million vehicles on the road are scrapped each year and many of those need to be replaced. (As someone whose car was totaled in October 2009, this author can attest to the fact that sometimes new vehicle purchases are a necessary evil.) In addition, even modest indicators of better economic health (housing sales, consumer sentiment, consumer spending, etc.) would nudge Americans back into the market to this level after such a dramatic pullback.

Several factors are holding back a more pronounced improvement in auto sales this year, though. The main one is the level of unemployment, reported by the U.S. Bureau of Labor Statistics at 9.6 percent in September. If you include the number of people who have stopped looking for work and those who are employed part-time but want full-time work, the BLS reports that figure as 17.1 percent. We need a stunning and sustained increase in the creation of new jobs to climb out of that hole. Unfortunately, with many manufacturers, including auto suppliers, being much more cautious before adding back permanent jobs, unemployment is likely to remain high throughout 2011.

A factor that might be less well-known is the current state of consumer loan approval rates. During the sales heyday of 16 million vehicles per year, 95 percent of applications from prime borrowers and 85 percent for near-prime borrowers were approved. Individuals in the sub-prime borrower category were getting approvals in the range of 65 percent to 70 percent. Over the past couple of years, approval for sub-prime applicants has fallen to 10-20 percent or less. This is not surprising, given the narrative that emerged to explain the economic downturn, laying significant blame at the doorstep of subprime mortgages.

Credit scores are intended to be an objective indicator of risk of default, based on calculations of payment history, ratio of credit available to credit used, and so on. It is worth noting that the credit scores of people relegated to the sub-prime category are not necessarily downright poor scores, and many of those individuals do have the means to make monthly auto loan payments. Also, during the economic downturn, banks and credit companies adjusted their categorization schemes, so a consumer’s attractiveness as a loan recipient may have fallen based on the bank’s internal dynamics, even if their financial behavior or profile did not change.

The car companies recognize that access to credit is critical to selling more cars, and their historical experience with sub-prime borrowers has been positive enough that they want to continue to serve that segment of the population. Having sold a majority share of its captive finance arm GMAC Financial Services in 2006, General Motors got back into the game on Oct. 1 when it acquired AmeriCredit Corp. with the intent of making more leasing and loan options available for non-prime customers.

We believe that, for the industry to get back to 14-15 million units of annual sales, approvals in the sub-prime category need to be in the range of 40-50 percent of applications. The banks and credit companies are not likely to return to servicing an appropriate level of these consumers. The former GMAC, for example, now Ally Financial, only offers prime lending financing, a likely consequence of its acceptance of Troubled Asset Relief Program funding and a corresponding amount of government scrutiny. GM said in July that its subprime customers were at just 1 percent of annual sales, so there is room to grow in a way that benefits the public and the company. The economic and automotive recovery continues, haltingly but positively, and the car companies are committed to figuring out more answers to the classic salesperson’s question, “What will it take to put you in a new car today?”

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