Auto incentives and consumer spending on vehicles Ted Chu, Senior Economist General Motors Corporation June 3, 2004
Agenda Incentive pressures and consumer affordability Dept of Commerce Bureau of Economic Analysis (BEA) vehicle revenue revisions US auto industry revenue projections Page 2
10 Incentives were not a reaction to changes in total private consumption expenditures Quarterly Percentage Change at Annual Rate, Chained 1996$ 5 0-5 -10 80 82 84 86 88 90 92 94 96 98 00 02 04 Page 3
Main driver of incentives: Intensified competition Page 4
Incentives and market share: chicken and egg? 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 0 74 500 72 1000 1500 2000 2500 3000 3500 70 68 66 64 62 60 58 4000 56 Page 5 Average Big 3 per vehicle incentives ($) Big 3 market share (%) Avg incentives Share of Big 3 Source: Ward s
Incentives have driven down new vehicle CPI 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 0 AverageBig3per vehicleincentives($) 500 1000 1500 2000 2500 3000 3500 Avg incentives 4000 6 4 CPI: New Autos (yoy % change) 2 0-2 -4-6 90 92 94 96 98 00 02 04 Source: BEA Nominal Real Page 6
Consumer s perception may be different from CPI One reason KAR was so effective: cars were believed to be overpriced Question: Which do you feel are fairly priced, and which are overpriced in the US today (Feb 2001)? % saying overpriced New car prices 80 Credit card interest charges 76 Doctor fees 71 Brokerage commissions 47 Mutual fund fees 33 Mortgage rates 33 Source: DYG SCAN, Money Magazine national survey Page 7
EU vehicle prices had been more in line with income over last 25 years Source: MartecGroup.com, 4/2002 fuel econ Page 8
US auto deflation is very mild compared with other manufacturing sectors even after KAR Percentage price change (3/02-3/03) 15 10 5 0-5 -10-15 -20 Outsourced to low cost countries, large productivity gains -17.7 Computer -12.3 TV Set -3.6 Clothing -1.5-1.2 New Car Furniture 4.3 4.6 5.2 Health Care Daycare Cable TV 7.3 College Tuition 8.9 Value-added in the US, hard to automate manual operations, and more leverage to pass on higher labor costs Auto Insurance Source: US Labor Dept. Business Week, Cheap to Buy, Pricey to Own, 3/19/2003 Page 9
Incentives have improved affordability 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 35 30 25 20 15 10 5 0 AUTO AFFORDABILITY INDEX WEEKS OF MEDIAN FAMILY INCOME REQUIRED TO PURCHASE NEW VEHICLE Source: Comerica Bank Page 10
Bad Time to Buy Car/Truck (inverted scale) Surveys of Consumers, University of Michigan 12 16 20 24 28 32 36 40 44 48 Nov '03 15 Oct '03 18 Nov '02 17 90 92 94 96 98 00 02 04 3-Month Moving Average Average: 1953-2002 Page 11
Incentives and total industry volume: hardly related 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 74 Average Big 3 per vehicle incentives ($) 500 1000 1500 2000 2500 3000 3500 Avg incentives Share of Big 3 72 70 68 66 64 62 60 58 Big 3 market share (%) 4000 56 Industry volume up/below trend million units 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5-2.0-2.5-3.0 Page 12 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Incentives have reduced volume/pce* 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 74 Average Big 3 per vehicle incentives ($) 500 1000 1500 2000 2500 3000 3500 Avg incentives Share of Big 3 72 70 68 66 64 62 60 58 Big 3 market share (%) 4000 56 2.8 Industry volume per PCE 2.6 2.4 2.2 2 1.8 1.6 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 * PCE: personal consumption expenditure. Page 13
Notable Changes in BEA GDP Data Source: www.bea.gov/bea/articles/2003/12december/1203niparev03.pdf Page 14
Notable Changes in BEA Auto Data The biggest change was in used truck spending (max 39% chg) Method is now consistent with used car accounting Still no direct measures Estimates of dealer margins and net transaction prices (from corp, government, etc.) were refined New auto spending adjustment mostly after 1996 (max 14% chg) New benchmark to 1997 input/output estimates International trade and transportation costs were refined No changes to auto lease estimates No adjustments to subsidized loans Only cash rebates have been incorporated with BLS data May overestimate PCE since late 2001 Page 15
Notable Changes in BEA Data (current previous data) (bn US$) % chg(bn US$) % chg(bn US$) % chg(bn US$) % chg(bn US$) % chg(bn US$) % chg GDP DPI Total PCE Auto PCE New Auto Used veh 1990 0 0% -8-0.2% 8 0.2% 6 4% 0 0% 6 15% 1991 10 0.2% -11-0.2% 15 0.4% 11 6% 0 0% 11 24% 1992 19 0.3% -3-0.1% 26 0.6% 13 7% 0 0% 13 26% 1993 15 0.2% -23-0.5% 23 0.5% 11 6% 1.5 1.1% 10 18% 1994 18 0.3% -14-0.3% 27 0.6% 17 7% 1.6 1.1% 16 24% 1995-3 0.0% -14-0.3% 7 0.1% 17 7% 0.8 0.5% 16 22% 1996 4 0.0% 11 0.2% 19 0.4% 27 10% 2.9 1.9% 25 30% 1997-14 -0.2% 21 0.3% 18 0.3% 39 13% 6.6 4.1% 32 35% 1998-35 -0.4% 40 0.6% 23 0.4% 45 14% 5.6 3.1% 39 39% 1999-6 -0.1% 68 1.0% 36 0.6% 49 14% 6.0 3.0% 43 39% 2000-8 -0.1% 74 1.0% 56 0.8% 47 13% 6.1 2.8% 41 37% 2001 19 0.2% 76 1.0% 58 0.8% 45 12% 7.0 3.0% 38 34% 2002 39 0.4% 27 0.3% 84 1.2% 41 10% 8.0 3.2% 34 31% Note: There is no change in new auto leasing data except for 2002 (-0.6 bn$, -1.7% change.) Source: BEA Page 16
Implications of BEA Data Change: Consumer spending on autos has been significantly above historical average since mid 90s (but data may have overestimated spending over the last few years) PCE auto share DPI auto share Before After revision Before After revision 1990 4.6% 4.7% 4.1% 4.2% 1991 3.9% 4.1% 3.4% 3.7% 1992 4.1% 4.4% 3.6% 3.9% 1993 4.4% 4.6% 4.0% 4.2% 1994 4.6% 4.9% 4.2% 4.5% 1995 4.6% 4.9% 4.2% 4.5% 1996 4.5% 5.0% 4.2% 4.6% 1997 4.5% 5.2% 4.2% 4.8% 1998 4.6% 5.4% 4.3% 4.9% 1999 4.8% 5.6% 4.6% 5.2% 2000 4.8% 5.4% 4.5% 5.1% 2001 4.9% 5.5% 4.6% 5.2% 2002 4.8% 5.3% 4.5% 5.0% Changes bump up historical averages by about 0.2 percentage point. Source: BEA Page 17
6.0% US Vehicle Expenditures as a Share of PCE 5.0% 4.91% period avg 4.0% 3.0% 2.0% 1.0% 0.0% 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 New Motor Vehicle Purchases Used Motor Vehicle Purchases New Motor Vehicle Leasing Source: BEA Page 18
6.0% Vehicle Expenditures as a Share of Disposable Personal Income By Type of Vehicle Expenditure 5.0% 4.4% period avg 4.0% 3.0% 2.0% 1.0% 0.0% 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 New Motor Vehicle Purchases Used Motor Vehicle Purchases New Motor Vehicle Leasing Source: BEA Page 19
500 450 Billion Dollars US New Vehicle Expenditures by Ownership 7.4% avg annual growth 400 350 300 250 200 150 100 50 0 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Private Business Public Source: BEA Page 20
Average Transaction Prices (000) 30 25 Annual avg price increase (1967-2003, BEA): 5.8% Annual avg price increase (2001-2003, BEA): 4.0% Annual avg price increase (2001-03, PIN) : 1.5% 20 15 10 5 BEA PIN 0 67 70 73 76 79 82 85 88 91 94 97 00 03 Source: BEA, J.D. Power PIN Implied spending diff by PIN data: 2001-2.5 2002-13.6 2003-23.6 Page 21
Total Vehicle Revenue as Share of GDP 6% 5% 4% avg: 4.2% 3% 2% 1% 0% 67 70 73 76 79 82 85 88 91 94 97 00 03 Implied share by PIN data: 3.8% in 2003 Source: BEA Page 22
Updated Historical Data GDP PCE DPI Pri Auto Total Auto Ind Vol ($bn) ($bn) ($bn) ($bn) ($bn) (000) 1990 5803 3840 4286 135 224 14153 1991 5986 3986 4464 113 205 12544 1992 6319 4235 4751 127 229 13120 1993 6642 4478 4912 139 257 14201 1994 7054 4743 5152 151 294 15413 1995 7401 4976 5408 148 299 15119 1996 7813 5257 5688 153 320 15460 1997 8318 5547 5989 162 340 15501 1998 8782 5879 6396 180 371 15966 1999 9274 6282 6695 202 414 17418 2000 9825 6739 7194 214 420 17814 2001 10082 7045 7469 235 419 17475 2002 10446 7385 7857 249 428 17144 2003 10947 7752 8200 266 440 16966 Source: BEA Page 23
Spending on new vehicles as share of total PCE 6.0% 5.5% BEA TCE PIN 5.0% 4.5% 4.0% 3.5% 3.0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: BEA, TCE survey, JD Power Page 24
Spending on new vehicles as share of total PCE probably declined in 03 5.5% 5.0% BEA BEA mv avg PIN mv avg PIN 4.5% 4.0% 3.5% 3.0% Jan-98 May-98 Sep-98 Jan-99 May-99 Sep-99 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Source: BEA and JD Power Page 25
Changes in private inventories of autos (bn $) Total New 1992-0.3 0.1 1993 2.9 2.0 1994 2.2 1.6 1995 4.1 3.1 1996-3.4-5.5 1997 0.6-0.6 1998 3.2 2.5 1999 1.4 1.2 2000 2.1 1.2 2001-6.1-6.7 2002 7.4 7.0 Source: BEA Page 26
Annual change in spending Total New Auto PCE PCE BEA TCE PIN 1993 5.8% 10.2% 14.6% 1994 5.9% 11.1% 17.5% 1995 5.4% 1.6% 8.2% 1996 5.4% 5.2% 9.9% 1997 5.6% 6.7% 5.1% 1998 5.9% 9.9% 6.0% 1999 6.7% 12.1% 3.9% 2000 7.0% 6.2% 7.1% 2001 4.5% 7.4% 2.4% 2002 4.5% 3.8% 0.0% -0.6% Source: BEA, TCE survey, JD Power Page 27
Spending on cars, motorcycles, and other vehicles as share of total consumer spending 1997 1998 1999 2000 2001 2002 France 3.5% 3.8% 4.2% 4.2% 4.3% 4.2% Germany 6.3% 6.7% 6.8% 6.8% 6.9% 6.7% UK 5.6% 5.6% 5.1% 4.9% 4.8% 4.7% Canada 7.1% 7.0% 6.6% 6.8% 6.8% 6.8% Mexico 1.8% 2.2% 1.6% 1.6% 1.7% 1.7% Japan 2.2% 2.5% 2.2% 2.2% 2.2% 2.3% Source: Euromonitor International Page 28
20000 Auto Revenue and Industry Volume 2013 18000 2000 1986 2003 16000 1978 Industry volume (000) 14000 12000 1973 1991 1975 10000 1982 1967 8000 0 100 200 300 400 500 600 700 800 Auto Revenue ($bn) Page 29
US: Nominal Shares of Major GDP Components 80 70 60 50 40 30 PCE Gross Private Domestic Investment Governent C & GI Net Exports 20 10 0-10 1959.1 1969.1 1979.1 1989.1 1999.1 2009.1 Page 30
Improving affordability may not lead to higher sales Ownership saturation and lack of killer apps in PC market 2000 Average PC Prices 18 US Personal Com puter Sales 1800 16 1600 14 Constant 2003 dollars 1400 1200 1000 800 600 Millions 12 10 8 6 400 4 200 2 0 0 1993 1994 1995 1996 1997 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 Source: Consumer Electronics Association, NYT 3/6/2003 Page 31
It may even lead to decline in total spending PC s share of PCE peaked in 1996, the year prices peaked 20000 0.30% PC spending (millions 2003 dollars) 18000 16000 14000 12000 10000 8000 6000 4000 2000 PC spending as share of PCE 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 0.25% 0.20% 0.15% 0.10% 0.05% PC spending as share of PCE 0.00% Source: Consumer Electronics Association, NYT 3/6/2003, Haver Analytics Page 32
Revenue of US long distance phone market Revenue (bn dollars) 120 100 80 60 40 20 0 AT&T Total Ind AT&T sh 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 AT&T market share Source: FCC, NYT 6/1/2004 Page 33
Concluding Remarks Incentives were a response to competitive pressure Incentives vs Everyday low prices Latest BEA data revision on consumer spending on vehicles was significant New data show higher spending Evidence so far shows incentives having only a slight negative impact on revenue Comparison with PIN data suggests that BEA data not fully reflective of incentive impacts Incentives induce customers to move up market In the context of manufacturing sector, incentives have only been a relatively mild deflationary shock to demand The value of the dollar and other competitive pressure could be key drivers of incentive levels Page 34