Last Thuesday, Automotive News [AN, sub] was busy towing [sic] the GM party line, suggesting that the U.S. new car market had reached its nadir (not Nader) in August. TTAC immediately called bullshit. And now AN is doing the same, to themselves, backpedalling so furiously they just might achieve reverse traction. “Has the mix been fixed?” Amy Wilson (and pals) asks, redundantly. “Are the truck behemoths really back? And has the slim-profit small-car craze peaked? Bean counters, beware. It ain’t over till it’s over. Small-car sales were constrained last month by low inventory levels, and don’t forget that gasoline — while cheaper than it was — still costs more than $3.50 a gallon. And although full-sized pickups posted their highest sales and industry share month of the year in August, manufacturers had to shell out. The average full-sized pickup incentive was $5,723 per vehicle last month, Edmunds.com reported. That’s the highest monthly pickup incentive since Edmunds began tracking the data in January 2002.” And then it’s back to the same old spinmongery, from Ford and, of course, GM’s Marketing Maven. “At some point, gang, the market bottoms,” said Mark LaNeve. “Nobody knows when the hell it is — me especially. I’d like to think it was June and July, and we’re starting to crawl our way out of this thing.” I’m sure he’d like to think that. The question is, is it the truth? Hopefully, this article marks AN’s resumed pursuit of same.
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You’ll know the pick-up market has bottomed out when there’s a six month wait to get a competent contractor to fix up your kitchen.
Or when you see Travolta starring in “Urban Cowboy 2.”
Not before.
After reading about the auto executives trying to convince us that we have reached the bottom of car sales numbers I got to thinking, what is the bottom?
Is the bottom, when we only buy what we want, where the bottom can be raised by lifestyle advertising, and adding perceived value like heated seats, back up cameras and 10 more horsepower?
Is the bottom, when we only buy what we actually need, based on number of people we need to transport, distance we have to travel or what we need to pull, or carry?
Is the bottom based on what we can afford?
Most likely the bottom is a combination of all three of the above, and their influence factor will undoubtedly change with economic factors outside of our own control.
Just for fun I decided to figure out what would happen if cars had no glamour or halo effect. They were merely appliances designed to get one from point “A” to point “B”. No social status attached or personality traits represented. Just like that laundry pair you own. My apologies to the teal blue stainless upright washer crowd.
I looked up on the internet and found the a number of miles driven by Americans in total each year to be about 3000 Billion miles last year, and that number is coming down a bit.
Then I pulled a number out of the air that the average car should be reliable for about 150,000 miles. Most people don’t keep one until it dies or becomes that unreliable. If you could afford the new one once, you can probably afford a new one again. But someone gets your used car and uses it to the point that they can no longer tolerate and passes it along.
If you divide the number of miles driven, buy the number of miles a car travels in its lifetime you would need about 20 million cars to put on all the miles for America in a year. However we already determined that cars last for about 150,000 miles, and based on the idea that insurance companies and leasing companies calculate the average persons driving requirements for a year to be 12,000 miles that means that the average cars should last 12.5 years, no matter how many proud owners it had. When I make a trip to my local wrecking yard I would say that a lot of the cars there now seem to be from the late mid to late 90’s so I think that extensive survey makes my guess at least reasonable.
Now we take the 20 Million cars we need to cover the miles in a year and divide it by the 12.5 years a car can live, we find we need 1.6 Million cars a year to meet the basic need.
Now I know that some cars don’t meet their natural life expectancy. They get smashed up, some get abused, a lot go off cliffs and blow up in movies, so even if we figured we abused as many as we drive we get up to 3.2 million cars per year.
I believe forecasts for this year are for car sales to be down around 14 Million, so unless my reasoning is terribly off base the bottom from right now based on need rather than want is about 11 Million cars below what they think the bottom is now.
“And has the slim-profit small-car craze peaked?”
Since you put it in quotes, I presume it IS a direct quote.
AN is out of touch with reality. There’s no “craze” in buying as much car as you need and no more. It’s just good sense.
The bigger and more expensive it is, the greater the depreciation (doesn’t appear to be a longer useful life) and the higher the operating expense. No American family is better off spending $N/month on transportation when $(N-M)/month gets the same job done.
There’s families in my neighborhood with multiple half-ton vehicles. What made them think they needed more than one? And plenty of families in my neighborhood with half-ton vehicles and nothing to tow. What made them think they needed a half-ton vehicle?
There’s a few with half-ton vehicles who do tow – but it’s nothing more substantial than a 14′ aluminum fishing boat. Any minivan can pull that.
And the 4WD/AWD “craze” is costing people a fair chunk of change, too. Higher vehicle price plus higher operating cost. What for? 4WD was a rarity for our parents’ day and they didn’t have without traction control, either. I live in Minnesota and we are averaging less than one snow day per year for the last 10 years or so. In the rare event that the weather’s too bad to go out in your 2WD (traction-controlled!) vehicle… stay home.
If small cars are a slim-profit item, isn’t that a problem for Detroit to solve? Toyota and Honda skew small and they seem to be doing OK. They seem perfectly willing to sell cars with base prices in the very low teens and they’re both quite profitable.
I was watching Bloomberg last week and this very attractive economic type (Diane Garnick) was talking, so I paid attention. She was talking about the market but said some things about how people were ‘anchored’. By that she meant their expectations based on what they’d experienced. The recent crazy runup in housing prices, etc. was due in part to the fact that most of the current players had never seen a significant downturn, so really believed the market always went up. Assuming a similar mentality in the car market, i.e. “I should have whatever I want when I want it”, what people need has been irrelevant. The current sales falloff isn’t due to any change in attitude, but rather that they can’t get the money. I don’t doubt for a minute that they’d jump right back on the escalator if they could buy, on time of course, a ticket. It’ll take a lot of pain for an extended period to knock some prudence into people. Having the government eager to avoid the trauma isn’t the answer.
@KixStart – your points are right on the money. I was in Finland a couple of years ago and noted that in this land of ice and snow people manage quite well with RWD and FWD cars with snows mounted on all corners. There was a notable absence of 4WD vehicles, including Audis, which I found surprising.
Then again, maybe that’s why there are two Finns near the top of the F1 charts… They actually learn how to drive!
I’m not an economist, but I would be very surprised if sunny days were right around the corner. In the state where I live we are only beginning to see a wave of layoffs, whose impacts will then ripple through the rest of the economy. Sure, it is harder to get access to credit these days, but rational people will also reduce their spending — particularly on big-ticket items — when their employment looks shakier.
I’m certainly being more cautious with money.
I understand “The bottom” is when the sales volume per month starts to become more than the previous month.
But if they are loosing money on every sale, then why sell more?
Just curious. How will hyper-inflation impact car sales? Will people buy cars just because if they don’t buy something then their savings will become worthless?
The reason I ask is because I think we are primed for some runaway inflation in the US, like we had in the mid 70’s. We just bailed out Fannie May and Fannie Mac. This after Bear-Stearn. We are getting ready to bail out Detroit. We still have the FDIC and PBGC that will need serious cash infusions soon. Plus the billions disappearing in Iraq every day. I think they are going to have no choice but to fire up the printing presses and pay off these debts with freshly printed money.
Yank,
I am not foreseeing hyper inflation yet (call me after November for an update); however, I don’t think that many people will buy a new car to avoid the price increase until the fear of their present ride is greater than the fear of the price increase. Given how many folks have relatively new cars, it will take a few years for this to occur. The 2.8 could all go bankrupt in the meantime.
I love how the B&B from GM have all the information in front of them yet the best plan of action, the best strategy they can come up with, the best response to -25% in sales this year is:
“Gee, I hope it gets better.”
They pay you for that kind of stupidity? If my analyst came up with that as a response he’d be hunting for a job by lunchtime.
yankinwaoz :
September 8th, 2008 at 11:07 am
I understand “The bottom” is when the sales volume per month starts to become more than the previous month.
But if they are loosing money on every sale, then why sell more?
There are economies of scale. That is, it’s quite likely that if a car plant is running at 50% of capacity, the car manufacturer will lose a significant amount of money per car, but if that same plant is running at 100% of capacity, they will actually make a significant amount of money per car. If you can spread fixed costs (advertising, R&D, tooling, insurance, office overhead, rent or mortage payments, etc., etc.) over more cars sold, the break even point per car drops.
@ daro31:
Now we take the 20 Million cars we need to cover the miles in a year and divide it by the 12.5 years a car can live, we find we need 1.6 Million cars a year to meet the basic need.
This is where your argument falls apart. You’ve already used the cars assumed lifespan of 150,000 miles in calculating the need for 20 million cars to cover the 3 trillion miles we drive annually.
There is no dividing 20 million cars by 12.5 years since each car’s useful life has been squeezed into one year to achieve the previous calculation.
I would also posit that the average miles per year is more like 15K and the average lifespan of a car to be 200K+.
Dividing 3 trillion miles driven by 200,000 miles per car equals an annual need for 15 million cars — just about the true number. Of course, there is no accurate equation to sift between need and desire with regard to car purchases.