In the United States, car market has been evolving at an incredible rate. According to Steven Szakaly, an often quoted economist of NADA (National Automobile Dealers Association), who also has Hungarian origins – this year American car manufacturers will sell 17 million new cars. The interviewee thinks that their productivity is a world leader and their renewal was essential for the growth rate of American GDP to exceed Japanese and European, and to improve its position against China as well. Steven Szakaly does not believe in the inflationary risk or that Fed is suddenly going to dynamically increase interest rates, however, he affirms that the dollar will remain strong for another one and a half to two years, and the price of crude oil will not increase on the world market.
All of these enabled that well-known great investors have started to fight over car dealerships in the United States.
Péter Zentai: From György Soros to Warren Buffett to Bill Gates, every significant great investor has bought or is planning to buy a car dealership. Does it surprise you?
Steven Szakaly: Not really. In the United States, this sector shows the signs of steady and predictable growth. Today – especially in car sales and the services linked to them, such as maintenance – it is impossible to make losses. Our researches prove that the American automotive industry, especially sales and maintenance are going to provide a higher than the average income for a long time. New car sales have become enormous and it will keep growing, and if recess comes back the following year, that gigantic car fleet will need repairs, maintenance and other newly established services.
This is the main explanation to the spread of this new ‘trend’, that investor-geniuses are getting involved in car dealerships.
The other explanation is that, in the United States’ 16 thousand car dealerships have 8 thousand owners only, which means most of them are small family businesses with older owners and some of them are ready to retire – for a good sum of money. Not to mention that in the last couple of years, they earned more money than the national average – thanks to the automotive industry and sales boom in 2010.
How much average net income can a car salesman expect in the United States?
The net profit is only 2.2 percent, but it is technically guaranteed; however, there are great reserves in improving the standards of technology of a dealership’s services, broadening its services, and in system rationalisation. The new great investors are sure about that they can increase their profit rate to 4 -5 percent.
It is not impossible that some of them will leave this business after a couple of years, but until then they assure the increase in profit.
Do you also think that it is guaranteed?
Yes. To start with; here, car manufacturing has gone through a complete renewal within a couple of years. It has become one of the leading sectors of the economy of the United States. This renewal was an essential contribution to rationalisation, boosting the United States’ economy as a whole, and to outperform Japanese or European economies. We are talking about a more than three percent of sustainable GDP growth, whole China is slowing down.
Along with the sustainable economic growth rate, the housing market was stabilised and prices were increased. Credit market is growing spectacularly as well…
Aren’t Americans afraid of becoming indebted again, since 2008 has not been so long?
Every macroeconomic and financial circumstance, mainly Fed’s attitude suggests greater calculability and a general feeling of safety than it used to. Americans are not afraid of new loans, and they enjoy the unusually low interest rates. However, from both their and the banks’ part there is a great caution. There is no dissonance between the loan volume and the state of economy, credit expansion favours the economy.
But interest rates can rise anytime…
Theoretically they can. However, in practice, we do not forecast any significant interest rate rise – definitely not in the next one or two years. Risks would only appear if Fed intervened suddenly and unexpectedly. However, Fed has been predictable, it does not want to cause any surprises.
If everything starts to go well in America, it would result in inflation and lead to a steady interest rate rise cycle?
Yes, but we are sure, that this is going to be a slow and modest process which is predictable. I do not see any inflationary risks in the United States. Its main reason is the strong dollar, and the slowing down of Japanese, European and Chinese competitions. So we cannot import inflation from them. All these circumstances are strengthening the dollar…
For how long?
The dollar-euro parity (one-to-one exchange rate) is going to happen this year, and will stay for another one and a half or two years.
Expensive dollar is not good for the American industry since it produces for export.
It cannot hurt the American automotive industry. This year, 17 million new cars will be sold in the country. Last year 16.4 million was sold. It has become a great internal market, which boosts every economic renewal process that is characteristic to the American economy.
Its ‘genesis’ was that the state, precisely, the Washington government in 2008-2009, rescued the dying car manufacturers with a historically unprecedented capital injection to the sector, which was – partially – nationalised. Car manufacturers, such as Chrysler, Ford, Toyota, General Motors were grateful and paid back the subsidies and preferential loans. They changed quickly, and they were rationalised and modernised.
By closing down factories and firing thousands of people…
That is right, indeed. But it only took a couple of years for regeneration, and now production rates are the same they were before the crisis, sales are higher than before, and the majority of those who were fired six and seven years ago have returned to the industry.
Sales reflect this the best way: four thousand dealers had to close down their business temporarily or permanently – six and seven years ago. However, today every dealer is in a more stable position than they have ever been before.
Do car sales reflect the best the state of the American economy again?
Besides real estate sales, these numbers are the most reflective indeed. In the meantime, a slow but stable wage rise is going on in the automotive industry, what is followed by other sectors. In comparison with the economy, wage rates have just started improving. This phase delay significantly decreased/decreases inflationary risks.
The technological renewal of car manufacturing: electronic cars are becoming more and more widespread in America, China, hydrogen cell fuel cars in Japan and Germany – how much does it affect car market?
Only a small portion of those 17 million new cars are manufactured with such technologies. No change can be expected as long as an electronic car costs as much as a luxury model and their performance do not exceed significantly the classic fuel ones’. American automotive industry and sales have to serve masses that want to see diversity and wide range of assortment, and that if they want and can afford, they can buy a car with any technology.
Fuel prices are very low in America…
According to our forecast it is going to stay there. We think, for geopolitical and other, domestic reasons, furthermore, because of the oil oversupply, we are going to enjoy the cheap fuel and diesel for another two years at least. This, of course, increases car sales.
And this is what intrigues Buffet and the others?
Their starting point is what our numbers support. In the United States, automotive industry and sales provide a very stable income and an expansible market – for a long time, as it seems.