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Market to nosedive in 2009

Time to buy: Discounting to clear big stockpiles will continue next year.

FCAI projects a 12 per cent 2009 sales decline as discounts continue to clear stocks

General News logo16 Dec 2008


THE nation’s peak automotive industry body has forecast that just 880,000 new vehicles will be sold in Australia in 2009 – a 12 per cent decline from the million-vehicle mark it still expects to be reached this year.

The Federal Chamber of Automotive Industries’ (FCAI) first official sales projection for next year falls short of the all-time industry record of 1,049,982 sales set in 2007 by a massive 170,000 vehicles.

Consumer demand is expected to remain weak in the first half of next year due to economic uncertainty, the global financial crisis and widespread price rises as a result of the weaker Australian dollar – despite massive discounting and retail incentives to clear unprecedented stock levels.

FCAI chief Andrew McKellar stresses the 880,000 sales projection for 2009, which he describes as “cautious” and “realistic” but nowhere near as “pessimistic” as some predictions put forward at last week’s FCAI executive committee meeting, still represents a strong new-car market.

“What our outlook represents is a consensus view and we’re certainly not at the most pessimistic end of the range expectations,” he said.

“I think it’s a cautious view, it’s a view that reflects a realistic assessment that the situation that we’ve seen resulting globally in the last six months or so will have an impact on the Australian economy and inevitably that will have an impact on the new vehicle market.

“But I think that the broad assessment is that the Australian economy is positioned to weather the impact of those events better than many other leading economies and, accordingly, we are not projecting that the new vehicle market will suffer the same sorts of effects as we’ve seen in some of the other leading markets around the world.

“Clearly going into 2009 we’re going to be starting from a somewhat diminished base in terms of the early part of the year.

“The fact is we are facing some significant challenges in the economy, but I think at the end of the day the industry will pull through well and given some of the policy stimulus that’s already been provided there are reasons for measured optimism about the capacity of the industry to overcome those challenges.” Mazda has predicted 2009 sales of around 900,000 but Holden chairman and managing director and FCAI president Mark Reuss said on December 5 that he personally believed the market would be around the 850,000 – before the 22.2 per cent November sales crash was revealed two weeks ago.

“My personal figure until we released the 20 per cent drop in November was going to be around 850,000, but I need to see a December result before we publish an estimate from an FCAI point of view,” he said.

Still a million

Mr McKellar said he believed the magic million mark would still be achieved this year – the official 2008 FCAI sales forecast following last month’s shock results continued to be 1.019 million – despite the impacts of a significant buyer strike and the worldwide credit crunch reaching Australia via the December 31 withdrawal of GMAC and GE Money, two of Australia’s largest wholesale financiers of dealer floor stock.

“My expectation is that we will still achieve a million vehicle sales in 2008,” he said. “I guess to some extent it’s a story of two halves in that the first half of the year remained quite strong and we’ve obviously received somewhat of a pull-back in the second half of the year. “But nonetheless I hope an expectation would be that the December figures will hold up sufficiently to get us over the line for the million units this year.

“It’s undeniable that there’s been some impact on the real economy flowing from the global financial crisis and that has seen some pull-back in demand in the back half of this year and that will affect the starting point for this year.

“Equally there have been some issues in terms of the supply side and particularly the availability of finance and there has also been some disruption for the dealer network stemming from the pending withdrawal from two major finance companies,” he said.

Aid will help

Mr McKellar said he believed the impacts of sustained reductions in the Reserve Bank’s official interest rate and the federal government’s recently-announced automotive finance rescue plan were yet to take effect, and that he therefore hoped the market would “stabilise” in the first half of next year before recovering in the second half.

“I think on a positive note what we’ve seen is a good response in terms of an aggressive easing in interest rates which the Reserve Bank has undertaken.

“In addition we’ve seen considerable fiscal stimulus pumped into the economy to help aggregate demand by the federal government and the full impact of those policy measures is really starting to flow into the economy from this point forward.

“It would certainly be our hope that will help to underpin aggregate demand in the economy as we go forward and I guess the outlook that we are taking would see the market stabilising during the first half of next year and hopefully pulling back some level of renewed strength in the back-half of next year.

“(We expect) broadly some sort of stabilisation followed by some sort of return of demand as we get into the back half of 2009.

“I think what we’re seeking to do in this is present a cautious but realistic view, but also to paint the picture that whilst this is a pretty serious set of economic circumstances and challenges that we’re all facing.

“Equally I think it’s not all doom and gloom and realistically there is a way out of this and I think with some sound policy and intervention as we have seen, then I think we can very much see some upside as we go forward.”

Some brands may fail

Mr McKellar said he did not subscribe to the view of some industry analysts that up to eight automotive brands could disappear from the Australian marketplace as the credit crisis continues to reduce the viability of some highly-leveraged dealers, suppliers and even importer/distributors.

“It’s not something I subscribe to and certainly individual analysts are entitled to make their forecasts and their predictions, but that sounds like a fairly pessimistic view and so it’s certainly not something that I would endorse.

“Clearly the global financial crisis has meant that liquidity throughout the industry is under pressure, but with measures such as the Special Purpose Vehicle fund that is being put into place, that’s one significant step that’s been taken to address some of those pressures in the supply chain and particularly as it applies to dealers.” Mr McKellar said it was vital for two of Australia’s largest manufacturers that the US government reached agreement soon on a financial bailout package for their parent companies, particularly the financially troubled General Motors.

“Now equally manufacturers and component suppliers are not immune from some of those liquidity pressures, but that’s one of the reasons why successfully getting the so-called bailout package through in the US remains an important objective, that there is an urgent requirement there to take urgent action to address some of the immediate pressures that those global automotive companies are facing.

“Without some sort of concerted action in the US to address those issues then clearly there are very substantial pressures on some of the major players in the industry. It’s in all our interests to governments and in particular the US administration and US Congress responding to try and minimise the worst effects of the global financial crisis in that regard.”

Stockpiles still high

The FCAI chief maintains that despite unprecedented stockpiles of unsold new vehicles locally, which is likely to continue the current frenzy of discounts and retail offers well into 2009, he expected the situation to improve by year’s end.

“I think what we’ll see is a natural draw-down in stock levels to better match prevailing demand in the market and that process of adjustment will take some months.

“I think by the end of this year we will have made some substantial progress on that task. There may be a further period where adjustments in stocks need to continue into the early part of next year and that will continue to maintain very competitive levels of affordability in the early part of next year and then I think we’ll see a greater level of stability as we go through 2009.” Rather than cutting more jobs, Holden last month announced a further 25 days of production shutdowns at its Elizabeth plant in the first quarter of 2009, reducing its output by 14,000 vehicles to meet slower demand. Just over a week ago Mr Reuss admitted Holden had an unspecified number of new cars ‘on grass’, but described the situation as a “good correction”.

“The over-capacity in this time-frame, to address it these are pretty capital-intensive decisions that you make, so I think you need to moderate any decision-making around what’s currently happening with a lot of conservatism, but I think you also need to be careful you don’t over-react.

“And that’s where we’re running Holden right now. We have cars, but you know I hope this does not last forever – it can’t and I think it’s a good correction in some ways, I really do,” he said.

Ford Australia announced a further 450 job cuts by the end of 2008 in October, but president Marin Burela last month said his company’s stock levels were well in check.

“We’ve taken some very aggressive actions, clearly, on making sure that we manage our stock levels. Once again you get caught in a difficult situation when you are importing cars, because when you’re importing you need to place the orders significantly earlier than when the cars land on your shores,” he said.

“If you go back and look at all the manufacturers that are importing, that’s where the stock levels are going to be a bit of a challenge for them. We’ve managed that very well at Ford and we think that our stocking level on imported cars is currently running at about 60 days, which is okay.

“Our locally produced product, we’d normally like to be running at about a 45-day supply. We’re currently sitting at 43 and we’re going to continue to watch this space very closely between now and year end.

“However, I’m very comfortable, certainly from a Ford perspective going into 2009, that our stock level will be exactly where we want it,” said Mr Burela.

One thing the industry agrees on is that, despite the weak Australian currency driving new car prices up, significant retail discounts and incentives will continue to be offered as dealers and wholesalers attempt to clear unwanted stocks in 2009, some of which dates back to 2007.

All three local manufacturers have responded to unprecedented stock levels by establishing new car parks in outer Melbourne suburbs to store them, while some importers face similar costly measures after exhausting their allocated space at metropolitan landing yards like Glebe and pre-delivery facilities including Precar in Campbelltown.

As we reported last week, the Motor Trades Association (MTA) of NSW has written to car companies about the practice of “dumping” unwanted stocks of new cars on its dealers and has threatened to seek Australian Competition and Consumer Commission (ACCC) intervention to stop car manufacturers and distributors from doing so.

Holden has denied it forces unordered cars on its dealers and GoAuto understands the MTA (NSW) has received one verbal and one written response so far.

Rego rorting

One consequence of this is an epidemic level of what are known in the industry as ‘slipped’ cars – vehicles that are registered by dealers, which artificially inflate that particular brand’s official VFACTS sales figures.

GoAuto has learned that 51 of 55 cars within the floor stock of one metropolitan car dealer are already registered or slipped, and that 25 per cent of that brand’s total 2007 sales figure remains unsold.

The same volume importer is understood to offer, on average, between $600 and $750 per car to dealers to register them in order to boost VFACTS figures, and its direct rival is believed to currently have about 3000 slipped cars on its books.

Concerned that distributors might not take the slipped cars back in the event of financial trouble, finance companies consider them as used cars and are asking dealers for between 15 and 25 per cent of their value. This is believed to have cost one Sydney dealer around $400,000, as finance companies check factory figures against dealer figures against VFACTS figures. We also understand one luxury car brand had told its dealer body to register unsold vehicles after four weeks, a practice that goes against the FCAI’s VFACTS policy.

Finance sosts soar

At the same time, the imminent withdrawal of GMAC and GE has resulted in significant profiteering at finance level, particularly in the area of wholesale floor plans. As GoAuto reported last month, Capital Finance Australia has defended its introduction of a $10,000 application for new wholesale clients, who are reimbursed if their finance application is successful.

Separately, we understand the profit margin attracted by one wholesale dealer floor plan financier has increased from 1.5 to 2.0 per cent 12 months ago, with some dealers paying a margin of five, six and up to seven per cent today. The cash rate on which these loans are based is 4.25 per cent, while one financier is known to be charging at least 9.75 per cent.

Big discounts

To shift old stock, car companies have employed all of the usual market discounts, incentives and tactics, and then some. This has had a flow-down effect on used car values and resulted in a glut of cars for sale online, including on Ebay, where unprecedented numbers of second-hand luxury cars are advertised.

Toyota is offering drive-away prices for its HiLux WorkMate 4x2 with tray ($19,990), RAV4 CV ($30,990), Kluger KX-R 2WD ($39,990), Prado GXL petrol ($54,990) and LandCruiser GXL petrol wagon ($69,990).

80 center image Holden is offering drive-away pricing and discounts for most models including the Barina (from $13,990), 60th anniversary Astra ($21,990), 60th anniversary Commodore ($29,990), Captiva CX ($35,990), SV6 Ute ($30,990), Colorado LX 4x4 diesel crew-cab ($31,990) and Commodore SS ($39,990).

Ford is offering $1000 cash-back on all Focus models, $2000 cash-back on selected Falcon models, $3000 cash-back and a $2000 fuel card for selected Territory purchases and $4000 cash-back for private Falcon E-Gas buyers.

Mitsubishi is offering drive-away pricing to private buyers of its Lancer ES ($20,990) and Outlander LS ($29,990), plus big discounts on its Colt ES ($13,990), Triton GL 4x2 ($17,990), Express SWB ($19,990) and Triton GLX-R diesel ($37,990).

Mazda is offering free registration, compulsory third-party insurance, three-year roadside assist and extra factory warranty across its passenger car range, plus a $19,990 price for its run-out Mazda3 Neo Sport and a $27,990 price for its Mazda6 Limited sedan.

Suzuki has advertised drive-away prices for its Grand Vitara three-door ($24,990), Grand Vitara five-door ($29,990), SX4 ($19,990), Jimny ($19,990) and Swift Sport ($23,990).

Nissan is offering no repayments until 2010 on its Micra and Tiida (both which also come with drive-away pricing) and its Dualis and X-Trail - both of which come with $1000 of free fuel.

Subaru has drive-away prices advertised for all models except the Forester, while Honda is offering drive-away prices for the Odyssey and its run-out Civic Type, plus factory bonuses on the Accord and CR-V.

Hyundai is advertising drive-away prices for its 2009 Tucson (from $23,990), 2009 Getz and 2008 Elantra (the latter with free ESC), plus a $29,990 price for its 2008 Santa Fe 3.3 SX (an $8000 saving).

Dodge has cut base Avenger pricing by $4000 (to $22,990) and base Nitro pricing by more than $5000 (to $31,990), while the Jeep Compass is more than $5000 cheaper at $25,990.

On top of significant sticker price reductions, most prestige brands are currently offering zero per cent finance.

Volvo is offering three years’ free fuel and scheduled servicing on all 2008 models, including the C30 (which is also priced $1500 lower at $34,450), while Skoda is tempting with no repayments and zero per cent interest for six months.

Even HSV has slashed prices, with the VXR hatch now at $36,990 (save $6000), the ClubSport R8 at $56,490 (save almost $11,000), the GTS at $68,170 (save more than $12,000), the Senator Signature at $67,500 (save $12,500) and the luxury flagship Grange priced at $72,330 (save $14,000).

Read more:

VFACTS: November sales nosedive

NSW car dealers revolt

Car dealers get a $2 billion bailout

Future funding?

Toyota hikes prices

Lexus consolidates

Ford increases prices too

Mitsubishi joins price hikers

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