Morgan Stanley's auto team, led by analyst Adam Jonas, seems to be convinced that the auto trade is officially over prompting him to slash over 11 million units from his North American SAAR forecast over the next 4 years. Jonas attributes his controversial call to the fact that OEMs have been so aggressive in implementing policies designed to pull forward sales (e.g. longer loan terms, higher loan mix to subprime borrowers, etc.) that they've actually started to pressure used car prices to the point that they're cannibalizing new sales.
We had held to a ‘higher-for-longer’ thesis on the assumption that the OEMs could keep pulling forward demand from the future… For several years, we have expressed our concern over the sustainability of used car values and powerful forces that could drive a multiyear cyclical decline, impairing the ability for consumers to transact and the willingness of financial institutions to lend as aggressively as in the past. Up to this point, we had believed that competitive forces, particularly the ability of the captive finance subs to find new ways to lower the monthly payment and put 'money on the hood’, would help extend the US auto volume cycle a few more years to new heights.
8 years into the biggest auto cycle on record, we appear to be hitting a point of diminishing returns where the tactics required to attract the incremental consumer may be putting even more pressure on the second hand market, leading to adverse conditions for selling new vehicles…
As such, for the first time this cycle, we are directly incorporating our views of used car value erosion into our US light vehicle sales forecasts, resulting in substantial SAAR reductions of several million units per annum through 2020.
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