Youtube
In a new note, Morgan Stanley's Adam Jonas says he has heard evidence of how auto dealers may be facilitating stronger sales numbers that may not actually be translating into top-line gains for carmakers.
Mostly, the alleged juicing has been in the form of extended auto loan terms, of up to 70 months, Jonas says. That has the effect of making the monthly payment more affordable, though ultimately the consumer doesn't pay any less.
This allows dealers to sweeten the offer, permitting them to notch sales, giving the appearance of stronger upfront revenues even when the payment period has been extended.
Jonas imagines something like the following conversation is taking place at dealerships across America:
Customer: So I want to buy this SUV.
Dealer: Got plenty in stock and can get you out the door in a base version for $521/mo ($30k loan, 60 mth term, 1.7% APR). Whatcha say?
Customer: Darn… my budget is $500/mth and I really can't go any higher than that.
Dealer: Hmmm... lemme talk with the folks in finance and see what we can come up with.
(Dealer steps away, comes back 5 minutes later and hands the Customer a sheet of paper)
Dealer: Good news, we got your payment down to $409/mo ($30k loan, 84 mth term, 4.0% APR). We got a deal?
Customer (looking down at term sheet, a broad smile forms from ear to ear): Not only do we have a deal, but now I can get 4WD and the tech package! How'd you do that?
Dealer: They're running a special on 7 year loans at a modestly higher rate. Everything else is the same.
(Satisfied customer drives away in an SUV with an ATP [average transaction price] nearly 20% higher than the base price).
"At the end of the month the published data shows higher sales and higher ATPs, giving the image of improved mix when precisely the opposite is occurring," Jonas writes. "We think more attention should be paid to the risk of consumers being taken out of their normal trade cycle, creating a vacuum."
Hmmm...