Join Wealthion Host James Connor and Brian Sponheimer, Portfolio Manager at Gabelli Funds, for an in-depth analysis of the auto industry’s current trends, economic implications, and what investors should be watching in 2024. From the impact of the overall auto industry, what trends we should expect from EVs and autonomous vehicles, to the latest on what’s happening within the used car market. Sponheimer also shares his insights on vehicle affordability and investment opportunities. This episode conversation provides the perfect overview for anyone interested in understanding the auto sector’s current influence on the economy and what current trends in the industry can tell us about the economy in 2024.
James Connor 0:05
Hi, and welcome to Wealthion I’m James Connor. And before I introduce you to our guest, I have one ask and that is subscribe to our channel, Wealthion.com. And also hit that notification button to be kept up to date on future events. We release interviews five days a week, and we have some amazing speakers coming up in the coming days, all of which will help you navigate these financial markets. And now I want to introduce you to Brian Sponheimer. Brian is a portfolio manager and auto annalistic ability funds and capabilities an asset manager based in Rye, New York and manages over $29 billion in assets. Brian is going to take us through the auto industry in the health of the auto industry and determine if now is a good time to buy a car. Brian, thank you very much for joining us today.
Brian Sponheimer 0:46
Thank you very much for having me.
James Connor 0:48
Before we do the deep dive on the auto industry, I want to get your thoughts on the broader economy. And if there’s anything that concerns you about the current economy, or if there’s anything that keeps you up at night?
Brian Sponheimer 0:58
Yeah, certainly, you know, I guess our job is to worry here about, you know, any and everything that can that can get in the way of economic progress and what and what can help the stock market. But I think broadly speaking, the economy is is in a decent glide path right now. You know, on January 31, you had Fed Chair Powell stating that the Fed needs to see more evidence that that falling inflation is sustainable. I think we’ve seen some economic indicators show that either an economic deceleration is in fact underway, which puts some hope that the Fed will start to reduce interest rates in the the middle to the back half of this year. Obviously, as an auto analyst, you know that one of the things that we’re always worried about is vehicle affordability. And the interest rates that consumers are paying on their on their loans, is in some ways, directly correlated to the Federal Reserve’s that funds rate. So, you know, it’s somewhat encouraging, but right now, you know, vehicle affordability, whether it’s across new vehicles used vehicles. Is, is what’s what’s first and foremost on my mind. And I think we’ll probably talk about that as we as we get into, into the next half hour, 40 minutes or so. But, you know, I would say, thinking about the economy, employment seems to be fairly tight right now. If inflation is to get anywhere, it’s in labor, which is good. from a consumer standpoint, the consumer is, is earning more, we could certainly buy into corporate profits a little bit. But I think, you know, we’re looking at an economy where consumers are not necessarily worried about losing their job, because you know, the ones right around the corner. I think affordability is definitely something that is factor in whether it’s housing, autos, anything from a durable goods, category concern. But broadly speaking, we’re in a relatively healthy environment here.
James Connor 3:07
So let’s examine the auto industry. From a top down approach, I want to determine just how important this industry is to the US economy, maybe you can just take us through how important it is to GDP and how many people it employs?
Brian Sponheimer 3:19
That’s great, so the US economy, the auto industry, about about a $1 trillion industry, it’s about about 5% of the economy. And if you think about all of the components of that ecosystem, throughout our vehicles lifecycle is everything from not only the automakers themselves, in the US the Fords, the GMs, this the mantises, but also the foreign automakers that are here, whether it’s BMW, Honda, etc. And then there are there are hundreds of what are known as tier one suppliers, those are the suppliers that are directly to the auto industry or the automakers rather. And then there are 10s of 1000s of tier two suppliers. So that so thinking about, you know, all the systems and subsystems that go into making what is outside of an aeroplane the most complex piece of machinery that you arrive, we’ll get in it it is an industry that just from a manufacturing standpoint, has 10s of 1000s of participants from a company perspective, and then just thinking about the ecosystem of how those vehicles are sold through dealer networks. About 16 million cars are gonna get sold this year in the US and it’s a fairly typical year. About 40 million US vehicles will get sold to there’s about 18,000 or some 17,000 or so dealers in the US that sell new vehicles as a franchise. auto dealers is about 35,000 us vehicle dealers in the US and you know really thinking about how how many Grow, those auto dealers are to local, local economies and how integral those, those auto suppliers are to local economies. It’s a, it’s a massive industry in the US, it’s an important one. And it’s one that really drove economic growth and prosperity for the better part of the last 50 years for the US.
James Connor 5:20
And just to summarize, you said 16 million cars will be sold in 2024.
Brian Sponheimer 5:25
That’s right, that’s a somewhere in the range of 15.5 to 16 million that’s roughly flat to up from from 2023.
James Connor 5:35
And I know the last few years have been somewhat distorted because of the pandemic. But how would those numbers compared to before the pandemic?
Brian Sponheimer 5:43
So for the better part of the decade, prior to 2020, the US ran somewhere in the range of 16 to 17 million vehicles. I think a few factors drove that that range, a little bit higher than where it’s going to be this year, we could talk about that vehicle affordability being a major component of that with really a decade of, of 0% interest rates playing a major role there, I think to one of the things that we could talk about is is inventory on dealer lots. So prior to 2020, there are roughly 3.7 million units of inventory available on dealer lots. What happened during the pandemic was that April and May of 2020, zero cars in North America got produced, really just a few 1000. And inventory went from 3.7 million units, eventually down to about 900,000 units. So about a 75% decline in, in in the US. And really that was that was true across all of North America. And what happened during that time period is that dealers and automakers were able to charge significantly more for the vehicles that they actually had on hand. And they learned that the per unit profitability rising as much as it did, they actually generated more returns from a profit standpoint than they had been when they were selling more vehicles. So as we have started to really get industry production back up to a level where supply chains are not really the mess that they’ve been. Really everyone in the ecosystem is realizing they don’t need to produce as much as they did before. And they can generate greater profitability on a per unit basis, just by having a little less inventory than they had before. And we’re in about 2.4 million units back on deal a lot. And again, that’s down from 3.7 million units prior to the pandemic. So it’s a long winded answer to a very short question. We were we used to sell a few, a few 100,000 to another million or so more vehicles, prior to 2020. Obviously, we’ve recovered back almost to where we were before.
James Connor 8:00
So it sounds like the American consumer really got screwed during the pandemic, by the automakers?
Brian Sponheimer 8:07
Well, if you It depends on on, you know, that definition. I think, you know, it was simply a supply demand equation where, you know, consumers that wanted that desperately wanted a new vehicle had to pay more. And if you didn’t necessarily need to buy new, you could have at least initially chosen to use vehicle marketing, I use vehicle prices also went through the roof during the pandemic. So, you know, from a supply demand perspective, it was it was a difficult time if you were really in need of buying a new vehicle, or used vehicle for that matter.
James Connor 8:47
And when you were talking about those inventory numbers, those are new cars. Is that correct?
Brian Sponheimer 8:51
That’s right, yeah.
James Connor 8:52
Right, and so why don’t we just touch on the used car market? I think you said there’s 40 million sales?
Brian Sponheimer 8:58
Yeah, we’re up here. Yeah, about 35 to 40 million US units get sold every year. Clearly, that’s a function of, in part how many new vehicles gets sold. So one thing we’re seeing right now is that the supply of available zero to 44 year old used vehicles is is very low. That’s based on the amount of vehicles that were produced in 2020 2021 and 2022. So you think about an industry that gets a lot of its vehicles from the office market leasing really dried up during the pandemic. And because of that, that supply demand imbalance. Dealers are really hesitant to to sell used cars for anything less than the maximum amount that they could get for them because they didn’t really have to sell those those units. So you know, you’ve got an industry that is, is healing a little bit but the US vehicle market is generally a little bit more stable than the new market because think about it in times of in times, where they brought our economy AMI isn’t quite as robust as it as it candy used vehicles are a good substitute for buying new. So you start, you tend to see a little bit of a lower amplitude, as it relates to the cyclicality of the US market and makes it makes for a very good market from from an investment standpoint from for, for what we do.
James Connor 10:26
And I just want to expand on that a little a little bit from okay. If you’re an automaker, where are the margins better? Are they better with new cars or with use cars. And if you’re a consumer, where do you get a better deal buying a new car or buying a used car?
Brian Sponheimer 10:43
So once from from an automakers perspective, once that vehicle gets sold to a dealer, they, they don’t have any, they have no more claim on the on that vehicle. So it’s really, the profit on the newer the used cars is really at the dealer level, the per unit profitability from $1 amount is greater on a new car than it is on a used car, just think about a, a brand new car is going to be significantly more expensive than the use car. So the per dollar amount will be will be better. The profit margins on a used vehicle are typically better than they are on a new car. And we’re talking about a typical period, not necessarily the one that we’ve been in the last the last couple of years. But what had all what had traditionally been a market where a used car dealer would have greater greater information as to the quality of the the used vehicle that they were selling, and be able to generate a greater margin on that vehicle selling a used car to a consumer. It’s one of the reasons why the used car market got such a bad reputation for the better part of the last 50 years. So consumers always felt like they were getting ripped off buying a used car. There’s a lot that’s changed about that, which I think is really positive. And we could talk about that a little bit about pricing transparency and consumers knowing exactly what they’re getting. Certainly more than than they would have in the past. There are some leaders in the industry right now that are really doing a good job from a best practices standpoint, they’re and they’re gaining share the Carmax of of the world. So, you know, the US market is has certainly evolved quite a bit over the last 20 years but really accelerated within the last the last decade.
James Connor 12:42
No, I do agree I always feel I get ripped off when I buy doesn’t matter if it’s a new car or a used car. I feel like I’m getting ripped off. But before we go down that road, I want to just clarify one thing what you said about merchants so when I go into a dealership and I buy a new car, what are the typical margins for that dealer?
Brian Sponheimer 13:00
Yeah, so I you know, on a on a more margin on a new car. Without you know a new the real exogenous factors that we’ve seen over the better part of the last few years, usually in the five to 6% range, it could be as low as four and a half percent depending on the, the the automaker, in the the brand. And use margins are usually in the six to 7% range can be as high as eight or 9%. Dealers are terrific businesses, not necessarily because they make so much money selling new and used cars, but it’s it’s the Attach factor from the parks and service business that really drive what a dealer’s profitability. You know, dealers want to they are there in the selling business not not the whole in business. So, typically speaking, when they when they get a piece of inventory, and they want to get that, that vehicle back out the door.
James Connor 13:59
And when you look at a high end car, let’s just say a Mercedes or BMW, I’m assuming the merchants are far better on that than they would be on say, a Ford or GM product. Yeah, the safe assumption.
Brian Sponheimer 14:12
That’s That’s right. You know, you hit you have a not only is this the profit dollar amount going to be bigger. At that level, you’ve got a consumer that is less likely to really battle from a price perspective. And so they’re more willing to pay a little bit more
James Connor 14:31
And in terms of the longevity of cars. Now, cars can last a long time. But what’s the average age or the average number of years that consumers keep cars for?
Brian Sponheimer 14:41
So there’s about 200, and just under 290 million cars on the road in the US. There’s about 1.3 trillion on the road around the world. And in the US the actual average age of those 287 million cars 2.7 years. So that’s the oldest on record. And that’s for a variety of factors. or not the least of which is that cars are just simply getting built better than they ever have. before. You’ve also and we’ve seen step changes in the past from from an aging perspective, but a, the materials used in the car now are significantly more durable than they were, say 3040 years ago, you have non corrosive metals, and certainly a lot less rusting that goes on in vehicles. So, you know, consumers are holding on to their cars longer. And then the the technology in the vehicle is, is is iterative, to a degree and it’s that’s allowing consumers to, to be able to hold on to the vehicle for the longer as well
James Connor 15:41
Man, I can’t get over that 12 years, that is a long time. I typically keep mine for five or six years, or I tried to anyway, I guess it all depends on mileage, right?
Brian Sponheimer 15:50
Well, I typical car, you know, last 1718 years, and we’ll have three to four owners you have that first owner that owns it for the first, the first five years until it comes off a warranty, someone thereafter will buy it at 55,000 miles or so and drive it for another, another six or seven years and then someone else will take it and drive it. So to speak until the wheels fall off. It actually creates a very healthy automotive aftermarket, you know, we have followed the industry for the better part of the last. Really, since our inception, 4047 years ago, 48 years ago, this will be the 48th year that we’ve we’ve had a an automotive aftermarket conference in Las Vegas, in November, where we bring in a lot of industry leaders of companies such as AutoZone, and O’Reilly and some of the larger auto dealers and, you know, thinking about servicing those 285 million or 290 million vehicles and and how steady that industry is relative to say a new vehicle dealer selling into a 17 million unit market. It’s that has been a an area where we’ve had a lot of success in finding really good ideas from an investment standpoint.
James Connor 17:14
So let’s talk about some of the changes happening within the auto industry. It’s being disrupted on many fronts you have EVs, autonomous driving ride sharing. So I want to discuss these topics and why don’t we just start with EVs. That seems to be the biggest change in the industry. But they’ve exploded in recent years. In 2020, global sales for EVs was around 3 million and then by 2023, I believe the number was around 15 million globally. But maybe you can just touch on that because it does seem like the number or the growth or the rate of change within the Eevee industry is starting to slow but maybe you can just give us your views on that and what it means to the traditional car market.
Brian Sponheimer 17:56
So I think it’s important to think about the Eevee growth in terms of the geographies where that that growth is really taking place. So clearly, China has been a leader in electric vehicle adoption. It’s clearly been funded through subsidies by the Chinese government and it’s led to really a massive expansion not only by by Tesla entering the market, but also BYD is the largest electric vehicle manufacturer in the world, Chinese to Chinese automaker, we’ve seen massive changes to emissions regulations in in Europe causing greater adoption there and the use cases for electric vehicles are probably a little bit better. In Europe, where consumers aren’t driving quite as much. In the US electric vehicles were about 8% of new vehicle sales this past year. Clearly Tesla has been at the the forefront of Evie adoption for the better part of the last decade, you’re now seeing newer models come out from from your traditional automakers really up and down the price spectrum everything from $35,000 models from GM and Ford to upwards of $150,000 models from the Mercedes of the world. And what we’ve seen is that a lot of the demand from early adopters has already taken place. And we’re entering this period now where in order for greater Evie adoption in the US to take place. The product needs to not just be an electric vehicle by name. The vehicle is going to have to look and feel like the SUV and truck market that you The US market really is. And I think we’re in this this time period where those models are just now getting rolled out. And right now, electric vehicles are still more expensive on a, on a comparative basis relative to internal combustion engines, that’s come down quite a bit, and we’re getting near parity, but on an apples to apples basis, and Evie is going to be more expensive. We have to have a rollout of electric vehicle charging infrastructure that takes away some of the range anxiety that consumers have about electric vehicle adoption. And just thinking about how vehicles are going to get charged. Roughly speaking, about 50% of US households don’t have garages, so the ability to charge your vehicle overnight. Is is something that that is slowing that adoption right now. So we’re in an interesting time as relates to evey. I think you’re going to see hybrids come back into the Vanguard a little bit more, you will clearly see a greater electric future. It’s just a question of when I think though this has really been the way that we’ve approached it. You know, we’re measuring progress on this in in five year increments as opposed to the whole world going, or the whole us getting to EVs by by 2030.
James Connor 21:33
Yeah, it almost sounds like an impossibility. But you make an interesting point, too, about the cost to maintain these hertz recently announced that it was discontinuing evey rentals. And it’s going to be selling 20,000 cars. And then replacing those with your traditional cars. A lot of that had to do with the cost to maintain them. Can you speak to that? Yep.
Brian Sponheimer 21:55
So you know, as I mentioned before, there’s error about 17,000 dealers in the US that helped to maintain the zero to five year old car population. Tesla rolled out a, a, really an ownership model that didn’t use dealerships, it was its direct sales, they have fewer service locations. And I think one thing that we have found is that when electric vehicles have service and maintenance issues, that the interval time period, to fix those vehicles is quite a bit longer, and has to do with parts availability has to do with with a lack of supply of properly trained transit technicians, and in the repairs are more costly. So as it relates to hertz, and I think it’s worth mentioning, hertz bought upwards of a 10th of their, their US fleet and electric vehicles. So we’re talking about 50,000 cars. And in that time period, Tesla decided to cut prices, by about by about a third on new vehicles. And so a vehicle that used to cost $60,000 was now going to cost $40,000 or so think about what that did to the residual value of Hertz’s fleet. And so, you know, they’ve had massive issues as its, as it has related to depreciation of their, their fleet, and what they had originally expected to sell those vehicles for, versus what they they’re actually going to be able to sell them for. So, you know, it’s really a two pronged problem, the, the units that they had, and if you think about a rental car company, they’re really an asset manager, right, they buy physical assets, and then they, they have to get them out. Those Those, those assets aren’t generating any revenue for them. While they are, they’re waiting on service. So they had an issue with those vehicles from a dependability perspective, given that the repairs cost more and they took longer to do and at the same time, those vehicles were depreciating at a rate that was faster than originally anticipated, because prices kept coming down. Tesla kept cutting price on their on the new vehicles that they were selling.
James Connor 24:40
Yeah, very interesting points. And I never really looked at it like that before. But I guess that also, Tesla’s aggressiveness also had a big impact on other OEMs like Ford and GM that were trying to push out these EVs to.
Brian Sponheimer 24:54
That’s right. Yeah. So we had we had seen some sets some fairly promising models come out from Ford in particular was the f150 lightning that really stood alone in the industry until recently, as far as being the only electric pickup truck that was available, but also the Mustang Maki. And so, you know, that is really kind of a direct competitor to the Tesla Model three, model Y. And so when Tesla started cutting, cutting price, clearly a direct impact there that that I think a lot of the industry is still coping with.
James Connor 25:30
And Tesla recently released their numbers, maybe you can just give us your thoughts on what they’ve said.
Brian Sponheimer 25:36
Yeah, really interesting quarter. Tesla right now is sort of between growth periods, according to the company, they have, really four models that they sell the Model S, the Model X, the model three in the model Y, and they’ve been out for a few years, they they think that they’re going to have a smaller, more affordable vehicle available for consumption or for sale at the end of 2025. Test was track record as it relates to hitting time period targets hasn’t been necessarily the best. So they produced and sold about 1.8 million 1.8 million units this past year. I think the broader Street is looking for roughly 2.1 million units. So you know, you’re talking about a growth rate for the company that that’s less than 10%. And the question really is for investors is they think about Tesla stock. What are they willing to pay for that growth, how much of Tesla’s market capitalization should be attributable to some of the other potential industries that Tesla could enter some of the the AI or autonomous solutions that they could potentially be a major part of. And I think that that’s something that that growth investors are really, really struggling with with right now. So stocks down roughly 30% over the first 35 days of the year. So you know, I it’s going to be a really interesting year as relates to Tesla. We’re value investors. So Tesla, while being a company that we we have a real close eye on is not necessarily one that you know, are where we look to for investment opportunities. As I mentioned before, we spend a lot more time with the dealers and with the automotive aftermarket, where cash flows can be a little bit more predictable, and where some m&a opportunities may be really fitting into our our own methodology as investors here.
James Connor 27:56
And so that’s a good overview of what’s happening with EVs. But what about autonomous driving? how is this impacting the industry and also ride sharing?
Brian Sponheimer 28:05
Yeah, so from an autonomous standpoint, I think a lot of the exuberance and enthusiasm that maybe was there five or six years ago, has really taken a backseat to some of the broader obstacles that is really one of the most amazing engineering challenges that anyone has ever seen. What we have now across most automakers, is what’s known as level two autonomy or Level Two plus autonomy, where you can get onto a highway and then go hands free. This is the Tesla FSD, which was previously called full self driving supercruise out of GM. And there there are various other names across the Mercedes, BMW, and other automakers that are that are able to have level two plus autonomy, when we’re thinking about the pure, purely autonomous solutions that are being explored by Waymo. And by crews. What they have found is that the first 90% of autonomy was, I guess, the relatively easy part. It has a someone who’s not a scientist or not an engineer, I think, simple simplifying for me to say. But when you talk about urban environments and Robo taxis and the ability to navigate areas like San Francisco, where there’s really an infinite number of variables that are needed to take into account to create a safer driving experience, and one would have if it was a human driving, it’s proven to be a massive, massive challenge. And I think we’ve seen that from some of the some of the steps that GM has had to take recently with crews as a relates to almost shutting down the program and, and taking a step back from a growth perspective, relative to original ambitions. And 20. Before the pandemic, Elon Musk was talking about a million Robo taxis available for Tesla owners, if you would own a Tesla was going to become a robo taxi. Within a year and a half or so obviously, that didn’t take place at all. In fact, those cars are now five years older than they were before. So we were talking about those kinds of those cars potentially being sold and new new vehicles being bought that that don’t necessarily have that promise that that was offered five years earlier. So autonomy really taking a step back. However, the implementation of active safety measures such as automatic emergency braking, and and, and radar, basically, your bumpers now a for a new car is a it’s a very expensive sensor. You know, that adoption, I think, is making the vehicles significantly more safe. It’s also impacting areas like the collision market where vehicles are being labeled as totaled considerably earlier than they ever would have been in their lifecycle because the cost of repair a bumper is now in the 1000s. Because of all this technology for active safety that is that is in in that part of the vehicle both front and back.
James Connor 31:32
Another big trend within the industry is consolidation by large corporations. You mentioned earlier that there’s approximately 70,000 dealerships in the US. And a lot of these large companies like auto nation, Lithia and Penske have been consolidating them. But what does this mean for the auto industry overall? And I guess, what does it mean for the consumer, we’re getting better deals because of this consolidation?
Brian Sponheimer 31:55
Well, when large what larger corporations have done like auto nation and Penske, in particular, on the volume side, so not necessarily in the world of premium vehicles, but certainly within the Toyota Honda’s the GMs and Ford a cetera, is they’ve gone to a no haggle pricing model in a lot of cases. And so consumers are going into dealerships now. And the prices, the price, and I think that that has created a better buying experience for consumers than the experiences that you are I spoke to earlier on this, on this recording, where you go in and you feel like you’re dealing with a seller that knows more than you do, and you come out feeling that that the experience was gross. What what the consolidation of that dealer? Industry and you know, if you go back 10 years that that dealer number was in the 20,000 range, or I guess, now 15 years ago, in that 20,000 range, that consolidation, I think is creating a better user experience than than then consumers would have otherwise had in the past, you’re getting more locations to service your vehicle. And you are, you are having a a really more professionally run organization, get better standard operating procedures. So I think it’s been, generally speaking a positive for, for the consumer experience, the same time, and a lot of cases, dealerships are really entrepreneur, I really entrepreneurial or entrepreneurial industry. Sorry about that. But you’ve got it you’ve got owners that are that are very smart owners. And a lot of cases when this consolidation takes place. Lithia will say you’ve been a great owner for a long time, we’re just going to help you from an operating perspective of go out and run your business the way you see fit.
James Connor 34:02
You raised some interesting points there. But I have to admit, I have a real love hate relationship with these dealerships. I love going in and checking out the new models, but I hate the whole negotiating process, because that still goes on with a lot of dealerships. And I always feel like I’m getting screwed over and there’s always like 510 or 20 Different additional fees that the add on additional taxes. And so you never know what the real cost is. And then they’re always pitch pitching you on other features like tire insurance, for example. But as a consumer, how do I know I’m getting a good deal?
Brian Sponheimer 34:34
Yeah, it’s a good question. I think what’s happening now is that so much of the process of buying a new car or used car is able to be done online beforehand. And so you’re getting a lot of that transparency that you never had before. When you are going Shopping as a as a consumer, and that is really up and down the spectrum of whether it’s a, whether it’s brand new car, or whether it is a 10 year old vehicle that’s being sold at a car Max, where you’re getting 30 different high resolution pictures about a vehicle, you’re getting a CARFAX incident report from any major accidents that the vehicle has had over the course of its lifecycle, you’re getting better information about, you know, you mentioned, tire and wheel insurance, which, depending on where you live, can be a very valuable investment in your car. And in other places where, you know, it isn’t a concern is a waste of money. So, you know, to your point, every five years or so a consumer goes in to buy a new car. And what I think has happened is that if someone had gone in five years ago, their experience would be maybe a little bit a little bit less cozy than than it is now. But there’s there’s a lot more transparency now. And I think that that’s positive for the consumer. And I think it’s generally speaking positive for the dealerships, in that, you know, while they while they may be losing a couple of dollars in the margin that that they might have squeezed out of out of consumer 1520 30 years ago, having that better experience is leading to greater customer retention. And that’s really what a dealer wants, particularly as it relates to parts and service, you know, they want a customer walking out thinking that they had a great experience at the dealership. So that was time for everything from major repairs to a car to oil changes to anything from a repair and maintenance perspective that they want to go back to that dealership and because they were treated fairly.
James Connor 36:58
So you’re suggesting before I go in and buy a new car or a used car, I spent a few hours online, just trying to determine what the correct price is,
Brian Sponheimer 37:07
you can actually get almost all of your transaction done online now. And really, depending on where you live in the US, and this is on a state by state basis, you can get the entire transaction completed with you knowing exactly what everything means. But knowing what, what exactly what you’re buying. Some states though, require actually ink on paper as it relates to signatures. But I think you know, you’re able to spend as much or as little time examining what, what you are, what you’re buying, more than you ever could before.
James Connor 37:42
So the other aspect to this whole processes, Parts and Service. Yeah, no, you just get those notifications on your car saying, Okay, you’re at 500 miles, or whatever the number is, you gotta bring it in for maintenance. And then you go in there and next thing, you know, it’s like 500 bucks or 1000 bucks, you know, basic maintenance. Right? Well, I’m curious, what are the gross margins of shit associated with that aspect of the business?
Brian Sponheimer 38:07
Yeah so that’s, that’s about half of dealers profit that they’re making through roughly 13% of the sales of the dealership, and margins can be up in the in the 50% range. So, you know, there’s, there’s an attach rate that comes with that zero to five year old car, where a lot of the the engine work that’s gonna get done is is protected by warranty. And then, you know, there’s there are, there’s an entire ecosystem of good, better best from a parts perspective. And from a, from a cost perspective. So, you know, that’s, that’s partially why, you know, once a, once a vehicle is out of that zero to 5%. Age range here, you’re going to the independent aftermarket, you’re going to find the the up and down the street garages to get your vehicle fixed, because the prices at a dealership are are what they are. They’re they’re considerably more expensive. And, you know, there’s a massive industry out there that exists to to help consumers who don’t want to pay that.
James Connor 39:21
So it’s, you know, the economy, the US economy is very strong growing at 5% annualized, the jobless rate is very low. CPI is coming down. And when we look at all these different aspects of the auto industry, including new sales, you sales and all the different trends that we just spoke about, where is the auto industry going in 2024? And what does it mean for the overall economy?
Brian Sponheimer 39:46
Yeah, I think it’ll be a relatively healthier for the industry. And if we think about the various parts of that ecosystem that we talked about, the automakers will have a relatively good year they still want to put a Little more inventory on dealer lots, there will probably be some to negative pricing because that inventory will, will come with with a gross margin impact that will be lower than this past year. But still, it’s still a very good year. For for the broader industry, the US market is going to be in a year of transition still as that zero to zero to five year old as your three year old car population repopulates. And we just simply need to sell more new cars to populate that that industry three or four years later, the automotive aftermarket should have a relatively decent year, obviously, you know that that aftermarket supports the 290 million unit car population that comes with consumers, every cohort of the income bracket. So you know what, what would concern me at the margin is affordability of parts for for that aftermarket. We’re about halfway through a winter here, where, you know, harsh winters have a really big impact on on vehicle maintenance. And so we’ll see what happens over the course of the next six weeks or so. From a personal standpoint, I hope it’s a very mild winter. But from an investor standpoint, cold and icy winters are excellent for some of the stocks that we invest in. So we’ll, we’ll see what happens there. So I would say 2024 shaping up to be a relatively decent year for the industry. Vehicle affordability remains the top of my list of concerns as does from a broader perspective. GLS geopolitical impacts on on Asia and Europe from the from the perspective of some of these global suppliers that we cover. But it should be relevant in the US should be relatively decent year.
James Connor 42:07
So just to summarize all that as it stands right now, there’s no concern for you with the auto industry. And there’s no, you don’t see any slowdown in the US economy. From from all the data you look at.
Brian Sponheimer 42:20
There’s always concern I never ever ever sleep well on anything anything. I’m always looking for what you know, war value investors, right, we look, we looked down before we look up. But right now I think we’re in a we’re in decent shape with, you know, some cracks on a vehicle affordability, rising rates starting to have a bit of an impact. But you know, I will say things things could certainly be worse.
James Connor 42:50
And one of the other questions I’m always faced with when I’m looking at a new car, is it better to buy or lease?
Brian Sponheimer 42:57
Well, leasing, leasing availability is actually coming back a little bit, you saw the automakers and their their captive finance companies pull back on leasing. When used vehicle prices went through the roof in 2021 and 2020 2020 22. I would say if you’re a consumer that’s going to put 12,000 miles on your on your vehicle or 18,000 kilometers, you are in a good place from a leasing perspective. If you’re someone that does a lot of driving, like I do. And I think like you do, then, you know ultimately leasing probably isn’t for you. But there are people that love the leasing experience every three years they get a new car. And it’s one of the reasons why it’s it’s over 50% typically of what Mercedes and BMW do every year.
James Connor 43:52
And given everything you said, Ray Now for the consumer, from a consumer point of view, is it a good time to buy a car?
Brian Sponheimer 44:00
Well, if you’re if you’re on the opinion that that rates are going to be dropping in the next six months and you’re able to wait, then, you know, waiting might not be a bad idea. I’d expect though that commensurate with that the price of the car that you have right now is also going to go into depreciate as well. So I think it’s a decent time to buy a new car, certainly, maybe not as good as it was five years ago, when rates were much lower, but a decent time. And there’s some really exciting technology that’s going to be a lot different than than what you had seven or eight years ago and last car you bought.
James Connor 44:44
Brian, as we wrap up if an investor we’d like to hear more about your thoughts on the auto industry or learn more about Gabelli funds, where can they go?
Brian Sponheimer 44:53
They can go to gabelli.com where they can see a list of our open and closed end funds. Additionally, we do have a large, separately managed account business. So they can contact us there. But we are our website is goodbelly.com. And certainly any any auto related questions that can can be, can be put through his the general website as well. So I appreciate your, you’re giving me the opportunity to speak, to speak our own church here.
James Connor 45:29
Now that was a great overview. And I learned a lot of border because like I said, I have my concerns with this whole industry when I go into buy a car. But anyhow, I want to thank you very much for spending time with us today. And I look forward to our next discussion.
Brian Sponheimer 45:41
Oh, thank you very much for having me and it really appreciate the opportunity to to talk about what what gets me excited.
James Connor 45:48
Well, I hope you enjoyed that discussion with Brian Sponheimer and you have a better understanding of the auto industry and how it impacts the overall economy. If you have any suggestions on who you would like to see interviewed on Wealthion? Let us know in the comment section below. One of the reasons we do these interviews is to help you determine what’s happening in the economy and how the economy might have an impact on your financial future. And if you need understanding and how to prepare for your future, consider having a discussion with a Wealthion endorsed financial advisor and Wealthion.com There’s no obligation to work with any of these advisors is a free service that wealthy on offers to all of its viewers. Once again, thank you for being with us today and I look forward to seeing you again soon.