Pent-up demand for new cars fuels hope for U.S. auto sector

It's hard to blame Americans for their generally negative outlook for the U.S. auto industry. Decades of management errors and cost overruns; management that has failed to aggressively respond to competition; and a massive government bailout have soured U.S. consumers on American automakers. The industry is at its low point. Some industry analysts argue that the sector may not survive, period.

It's a sobering forecast, one that begs the question, are there any rays of light for the sector? Indeed there are. One simple one is the future demand for vehicles.

Pent-up vehicle demand growing

Lawrence Summers, director of Obama administration's National Economic Council, told attendees at recent conference that Americans will need to buy 14 million vehicles per year -- roughly the production level before the recession and financial crisis started -- The New York Timesreported.

So far in 2009, vehicles have been selling at a 9-million-unit annual pace. Hence, the auto market is amassing pent-up demand of about 4-to-5 million vehicles per year. Most investors know why: job layoffs and job insecurity that current workforce participants feel has convinced many that now is not a good time to consider a new vehicle purchase, and the poor 2008/2009 sale totals for both domestic and imported cars testify to this sentiment.

However, though some new vehicle sales will be displaced by consumers who economize or "downgrade" by purchasing a late-model used car instead of a new one, historical data indicates the bulk will buy a new car, with the National Association of Auto Dealers estimating the minimum replacement rate at 10.5 million vehicles per year, based on a median, 15-year service life for a vehicle (pdf). Add an economic recovery, and one can see how U.S. vehicle purchases could quickly rise by 2 or 3 million vehicles per year.

One typical U.S. tire-kicker

Connecticut-based C. Leonard Bauer, a financial advisor and consultant, told DailyFinance that he's one of those Americans who's in the market for another car.

Bauer's Maserati does 185, but unlike American guitarist/rock musician Joe Walsh, Bauer has his license and, yes, he still drives.

"The problem is the Maserati gets like 15 miles per gallon with a tailwind," Bauer said. "And that's when I'm doing only 60 [mph] on the highway." That, Bauer adds, is not often. Earlier in the year, Bauer lent a second car he owns to his sister, so he needs another car. "Maseratis are best driven on Sunday trips with light traffic and even less radar," he said. "It's not an everyday car."

Bauer's outlook is telling regarding what the U.S. auto sector must do to court customers.

Bauer said he'd consider a Ford (F) or General Motors (GM) car, "if they show the quality, durability, ride, performance, and handling that I need." He knows in certain car categories styles are similar across manufacturers, so style is not a major selling point. "The biggest factor is drive-train [engine-transmission]. I want a vehicle that's dependable, and worth the $40,000 expense," Bauer said. The model and make, he's currently leaning toward? "A 2009 Nissan Maxima with the sports package," he said, "but I can be convinced otherwise."

Auto Sector Analysis: And there may rest the fate of Ford, GM, and Chrysler: the demand for new vehicles exists in the U.S. That demand may not appear this year, but eventually, the surge will come from Americans who have delayed the purchase of a new car by one, two, or even three years. But demand does not guarantee that Americans are going to run into American car showrooms. As Bauer's case demonstrates, the Big Three must have the craftsmanship, relevant models, and warranties to compete with the likes of Nissan (NSANY), Toyota (TM), Honda (HMC), et al.

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