How might developing issues on the OE front and politics impact the aftermarket in the near term? Dislocations in financial
markets and the specter of additional job losses and mounting unemployment levels weighs on the minds of most Americans. Uncertainty
and general apprehension abounds, and consumer sentiment in recent months has fallen to the lowest level since the recession
of 1980. We have heard about the plight of the Big 3 and calls for the government to intervene. Though the depressed level
of new vehicle sales is not isolated to GM, Ford and Chrysler alone. In January, Honda saw its unit sales down by 28 percent,
Nissan by almost 30 percent, and Toyota by almost 32 percent.
Historically, new vehicle sales and consumer sentiment have moved very much in tandem, as individuals are more willing to
spend on new vehicles if they are feeling generally optimistic. We would also argue that the automakers had a fairly easy
go of it over much of the past decade given a relative abundance of credit (low interest rates, high LTV ratios and extended
maturities for new car loans) and the ability to draw on what appeared to be an endless pool of home equity to fund a portion
of the purchase.
There are a wide range of forecasts from economists on expectations for the length and severity of the current downturn, so
too are there many projections for the level of new light vehicle sales in the U.S. for 2009 and beyond. As to the former,
our view is that we still have a ways to go, even as the $787 billion stimulus package was just passed at press time. As to
the latter, whether new light vehicle sales in '09 ultimately prove to be better or worse than the current consensus of somewhere
in the range of 10.5 to 12.5 million, we are nonetheless at a much lower production rate than current levels of industry capacity
are equipped to handle. Unfortunately, while bridge loans can be extended to assist ailing automakers to meet short-term obligations,
at the end of the day there is simply a fundamental mismatch between supply (current auto manufacturing capacity) and demand
(new vehicle sales may not return to the 15-16 million range for another five years or more). At some point, free market economics
will prevail with the result being significant consolidation at the automaker, supplier and dealership level.
But what would an extended period of depressed new vehicle sales mean for the aftermarket? The average age of cars on the
road is likely to move higher, and with it greater demand for maintenance services and parts. Could it also be a situation
where the 1-3 percent annual growth seen in U.S. vehicle registrations slows such that new sales levels come right in line
with scrappage? At the end of the day, we think current developments set up nicely for the aftermarket. That said, it will be up to each business
operator to seek out ways to best capitalize on the changing market. We do see increased competition for aftermarket manufacturers
as some Tier 1 suppliers seek to offset losses on the OE side with an even greater focus on share gains through the aftermarket.
We think trends in general are favorable for the aftermarket over the coming months and years, but the industry as we know
it today may look a bit different.
BB&T Capital Markets is a full-service investment banking firm that focuses on specific industries, including the automotive
aftermarket industry. BB&T Capital Markets is a division of Scott & Stringfellow, LLC NYSE/SIPC. Scott & Stringfellow is a
registered broker/dealer subsidiary of BB&T Corporation, one of the nation's largest financial holding companies with $152
billion in assets.
