Off-lease vehicles could send U.S. sales tumbling, analyst warns

DETROIT -- An incoming "tsunami" of returning off-lease vehicles could send U.S. new-vehicle sales tumbling as low as 13 million by 2021, according to one Wall Street analyst.

John Murphy, an analyst at Bank of America Merrill Lynch, said weaker new-vehicle demand so far this year could spell trouble for the industry moving forward. That's because the market might not prove to be large enough to absorb roughly 3.5 million off-lease vehicles set to return to dealership lots this year.

Murphy said his new-vehicle sales forecasts of 17.9 million in 2017 and 18 million for 2018 could prove to be too optimistic, given that the industry is on pace to generate sales of 17.1 million units this year, down from a record 17.5 million in 2016. That could prove problematic, since the industry needs to sell at least 17.5 million new vehicles this year to absorb the off-lease vehicles and prevent a significant decline in used-vehicle pricing.

"The industry is getting a little bit too comfortable with the idea that a 17.1 million sales rate through the first four months of the year is a reasonably good number," Murphy said Thursday at an Automotive Press Association meeting in Detroit. "Because that number, relative to what we're seeing on the leasing side … is putting the industry at some pretty extreme risk."

That could create a downward cycle as lease returns climb to a record 5 million cars and light trucks by 2021. Should the market not be able to absorb the huge number of lease returns over the next few years, low used-vehicle pricing could send new-vehicle deliveries falling to 13 million units by 2021, well ahead of the bank's current forecast -- between 13 million and 14 million units in the mid-2020s.

"If the industry is not large enough to absorb the 3.5 million units coming off lease this year, we may see significant pressure on used-vehicle pricing ensue this year in a very material way and spike down the cycle faster and more furiously than even we're expecting," Murphy said.

Murphy's comments reflect growing concern in the U.S. auto industry that the market is at the beginning of a downward cycle following seven years of growth. The seasonally adjusted, annualized sales rate is expected to fall below 17 million for a third consecutive month in May, matching the total number of months with sub-17 million rates seen in the previous two years combined.

Murphy said other risks to the industry's sales outlook include the possibility of a significant tariff on light-vehicle imports as the Trump administration targets trade deals to boost U.S. factory jobs, the effects of Brexit on the marketplace and a potential spike in raw-materials prices.

Murphy commented on the health of the U.S. market while discussing Bank of America Merrill Lynch's annual "Car Wars" report, which examines the state of automakers' product pipelines for the U.S. and how the plans might impact sales and market share.

The report projects Toyota Motor Corp. and General Motors will gain U.S. market share by the 2020 model year. Ford Motor Co. and Honda Motor Co. are expected to remain at roughly the same level, while Fiat Chrysler Automobiles, Nissan Motor Co. and European and Korean automakers are projected to lose ground.

Murphy said automakers are projected to launch an average of 57 new or redesigned models annually from 2018 to 2021. He said the product cadence would typically be a great sign for the industry as new cars and restyled light trucks draw customers back to dealerships. But a declining market could change that, he said.

"If we're in a market that's actually starting to decline and there's all this investment and new product and it's being launched ... the market is going to get a lot more crowded and create some real pricing risk if the market is turning as we expect it to."

Many of the new models will be crossovers, which fueled the industry's growth following the Great Recession. Reflecting in large part upcoming launches from luxury brands such as BMW and Mercedes-Benz, Murphy said there will be 110 crossovers by 2021, up from 78 today.

Crossovers are expected to account for 35 percent of new models launched between 2018 and 2021, up from 29 percent between 2008 and 2017, Murphy said. Light trucks, including SUVs, will account for 26 percent of the market, up from 20 percent, while every car segment is projected to lose share.

GM could stand to benefit from high demand for crossovers and light trucks over the next four years, Murphy said. About 92 percent of GM's new models between the 2018 and 2021 model years will be light trucks or crossovers, "which should support market share and pricing," Murphy wrote in the report.

GM is set to launch several major redesigned vehicles over the next four years, including the Chevrolet Silverado and GMC Sierra pickups.

FCA is in a similar situation, with 89 percent of its new or redesigned model volume from 2018 to 2021 coming from light trucks, including a redesigned Jeep Grand Cherokee and Wrangler, and all-new Jeep Grand Wagoneer. However, FCA will need "robust volumes and stellar financial performance" to pay for the significant investments it is spending for product outlays, Murphy wrote.

Ford will see the average age of its car and light-truck models jump to about four years in 2018, as it stands to replace few vehicles over the next two model years. However, a "heavy concentration" of new and redesigned light-truck launches in the 2019 and 2020 model years -- including a new Ford Ranger, redesigned F-150, and all-new Ford Bronco SUV -- should allow Ford to gain share in the long run, he said.

Toyota stands to at least maintain its market share, even if it does not grow over the next four years, Murphy said. The company is slightly overexposed in the car segment, but a consistent replacement rate and a renewed focus on Lexus will help it maintain share or grow, Murphy said.

Honda's product cadence is set to lag behind the industry average, as strong replacement rates in 2018 and 2021 are offset by weak years in 2019 and 2020, Murphy said. Honda is set to launch just three new or restyled vehicles combined in 2019 and 2020, compared with 12 in the other two years.

Murphy said that while automakers are set to introduce several new or redesigned hybrid and electric vehicles over the next four years, they are likely to remain niche products because of relatively higher sticker prices and other factors, notably a lack of EV refueling stations.

"The reality is it doesn't make any economic sense right now," he said. "Battery costs need to come down quite dramatically. As those battery costs come down and other costs come down in the EV powertrain and the EV itself, the industry will embrace them."

A slowdown in U.S. sales could also delay the adoption of alternative powertrains and autonomous technology in new vehicles, Murphy said. If sales slow, it will be harder for automakers to obtain capital on Wall Street to fund new product investments, he said.

"If we hit the skids on the cycle right now, a lot of investment and implementation may get delayed," he said. "Then, on the recovery end of the cycle, all of this technology will come back in a supercharged fashion."