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Westward Expansion

January 2013, F&I and Showroom - Feature

by Paul Chavez

The auto industry stands poised to sustain its recovery in 2013, with California leading the campaign to emerge from hard-hitting economic and natural disasters that have challenged auto dealers nationwide.

The favorable outlook this year can be attributed largely to the availability of low interest rates for new-car buyers, a revived real estate market and the need for consumers to replace aging vehicles.

“Most people are watching what’s happening in California,” says Brian Maas, director of government affairs for the California New Car Dealers Association (CNCDA), based in Sacramento. “California is the largest car market in the country; one out of every eight vehicles sold is in California. The largest number of new-car dealers is here. It’s a very robust market.”

Tim Dunne, director of global automotive analysis for J.D. Power and Associates, also believes California will continue to set the pace. “It is 12 percent of the population and one of the wealthiest states,” Dunne notes. “So what happens in California definitely has some impact on what happens in the [rest of the] country.”

The Golden State already has been shining fairly bright in terms of auto sales and financing.

A November report from J.D. Power and Associates noted that, in 2010, the state accounted for 10 percent of all national retail sales. By late 2012, California dealers caught up to their population, making up 12 percent of national retail sales.

Driven by Credit
In another indication of California’s clout, sales showed a 23 percent year-over-year increase, compared to 13 percent for the entire United States, according to the same J.D. Power study.

Paul Taylor, the NADA’s chief economist, says improving home prices should help sales in 2013.
Paul Taylor, the NADA’s chief economist, says improving home prices should help sales in 2013.

Credit markets in 2012 also loosened well beyond the norm in California, with 44 percent more retail sales to car buyers holding the lowest D-level credit score of 624 or less compared to 2011, according to the report. In comparison, the national average increased 29 percent. California also had a double-digit lead in retail sales growth among all FICO scores compared to the rest of the country.

The low interest rates have been a big help at Volkswagen Santa Monica, the top-volume Volkswagen dealer in California, says Billy Rinker, general sales manager at the beachside dealership. It has been in operation since 1974 under the LAcarGUY family.

“When it’s at zero percent, 1.9 percent and 2.9 percent, those programs create public awareness and the perception that it’s a good time to buy a car,” Rinker says. “And that always helps.”

Rinker says he worked at the auto group’s Toyota Santa Monica dealership during the brunt of the worst economic downturn since the Great Depression. “We were one of the only groups to show a year-over-year sales increase during 2009, when everyone else was doing rough business due to the recession and other factors,” Rinker recalls.

The Volkswagen dealership now typically sells about 225 new cars per month and about 80 used. Rinker attributes the dealership’s success to his team’s ability to focus on generating sales rather than worrying about the economic situation. And by that he means his employees increased their customer outreach efforts.

The graphs illustrate California’s importance to industry sales. Last year, the state’s share of national retail sales equaled its share of the U.S. population at 12 percent. California also led the rest of the country in sales growth last year.
The graphs illustrate California’s importance to industry sales. Last year, the state’s share of national retail sales equaled its share of the U.S. population at 12 percent. California also led the rest of the country in sales growth last year.

Paul Taylor, chief economist with the National Automobile Dealers Association (NADA), says the historically low interest rates have had the added benefit of aiding floorplan-financing costs. “We’re looking at some interest rates we haven’t seen since Harry Truman was our president,” Taylor explains.

In December, dealers reported an average of $72 in floorplan assistance coming in for every new vehicle, Taylor notes, compared to several hundred dollars during strong growth periods.

Credit accessibility was still fairly tight 12 to 18 months ago, but slackened considerably in 2012, J.D. Power’s Dunne says. He also points to recent reports of a rebounding real estate market as a positive sign for the auto industry and the economy as a whole.

“Housing is the backbone of the U.S. economy, and it’s been looking better since the spring of 2012,” Dunne says.

All Eyes on Housing
The NADA’s Taylor also has been monitoring the real estate market state-by-state since the recession took hold in late 2007. His annual forecasts always include a note about the strong link between car sales and the performance of home prices. And in the third quarter, prices in California increased 7.2 percent from a year ago for homes under $1 million, he shares.

“Home equity is the nest egg of the typical middle-class household,” Taylor explains. “It’s very important for the state of California that housing prices are on the way back up.”

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