Ed Wallace at Business Week offers a counter-intuitive view: 2009 will see record low automobile sales…. and increased prices. My first inclination was to dismiss the man out of hand. But this past April he presciently said “There is No Gas Shortage” and followed up a few weeks later with a well-argued skewering of the ethanol myth. So, Ed Wallace is no Bob Lutz. But still, his latest proclamation is hard to swallow. “The time of heavy rebates is over as carmakers get ready to raise prices to increase profits. Get ready for sticker shock.” After that opening salvo, Ed goes tells the global tale of automaker woe. He rightfully points out that governments in German, England, France, Canada and China are stepping in to make sure their companies stay in the game, while the US government wrings its hands. But does anyone really think that the new US government is going to sit back and watch the indigenous auto industry implode?
The problem with all of this propping-up biz: it keeps the marketplace oversupplied with both unit volume and nameplates. Wallace justifies his prediction of falling sales and increasing prices by saying “What we witnessed in 1974, 1980-81, and 1992 was a fairly consistent series of price increases to create profits even as sales tanked.” But he neglects to mention that 1974’s Consumer Price Index inflation rate was over 11 percent, 1980 topped 13 percent and 1981 hit just over 10 percent.
Furthermore, the big news of 1981 was “Voluntary Export Restrictions,” under which Japan’s auto exports to the US were capped. 1992 was the only one of Wallace’s noted years with a relatively modest three percent inflation rate.
But it was also the first year of recovery after a recession, and in 1992 the then still big three enjoyed a 71 percent combined US market share. Today, GM’s share is under 20 percent and the former Bog Three don’t break 50 percent combined.
In short, today’s market is more fragmented and competitive than ever before in history. No company or cabal gets to set the price. Detroit’s managers have never lived inside the reality they must face today.
Today’s Korean and Japanese competitors have made it clear that they aren’t going to cede sales to Detroit on price; they’ll do whatever’s necessary to move the metal. Likewise, Volkswagen is steaming full speed ahead with plans to finally get a seat at the big boys table in the US market.
And then there’s China.
The China Price effect has already laid waste to much of the business-to-business market for manufactured goods– and just about everything sold in Wal-Mart. Automobiles are the last big frontier for China’s export manufacturing assault. Existing Korean, Japanese, French and German based competition means that no matter how many factories Detroit closes, they are unlikely to have the power to push through price increases during a time of slack demand. Prospective Chinese competition only ups the ante further.
Ed Wallace thinks today’s Cadillac CTS is a screaming bargain at $10k off its inflated sticker price. But what if it were built in Shanghai?
I did note that the Federal Government and also the Ontario Provincial Government did today Dec. 20 2008 give some money to the Detroit two.
I also note according to the UK Press that the PM there Mr. Brown told the Car companies to get “lost” so dont expect anything from the UK Government
“Detroit’s managers have never lived inside the reality they must face today.”
Nor have the United Auto Workers. They’ve lost pricing power, too.
For prices to go up, demand has to grow relative to supply. The easiest way for the federal government to do this (apart from the reaction from an enraged public) would be to enact very tough inspection laws, such as Japan has, along with emission and/or safety standards that would force scrapping of millions of cars now in use.
10k off for a CTS?
A coworker just put a 2009 CTS 4 with 1SB package on the road for well under $40k Canadian
I’ve been looking for a European car this winter (MB, BMW, Audi) and I have not seen too much in the way of out of the norm discounts for new metal. Perhaps some extra financing help, but that’s about it.
Obbop prediction time.
Invest in a good auto repair shop capable of performing the “heavy” tasks such as engine and transmission replacements and able to do the task properly.
If auto prices go up expect folks to repair what they already have.
Expect new auto/truck sales to continue lagging.
An economic pundit elsewhere warned of a possibility of a tariff placed upon non-Big 2.5 manufacturers and/or a tax rebate for those buying from the 2.5.
Why not just allow GM et al die and just hand over a bunch of money to those losing jobs.
Since we are apparently headed for a true socialist state let’s get the ball rolling.
No matter what happens I expect an upswing in the ongoing class war to the point that rebellion may be in our future.
Just stay away from my dumpsters. I staked a claim and live by squatter’s rights. Interfere with my food sources at your own peril.
John, I agree with you that there are some substantial holes in his rationale. The Japanese voluntary import quotas fostered big increase for everyone. In fact, if you look at transaction prices from the mid ’80’s to the early 90’s, some US vehicles are still in that same range, despite all the years of inflation.
In 1984, I paid $16k for a mid-level Jeep Cherokee; you could probably get a Patriot for the same. IN 1992, I paid $22k for a mid-level Caravan; again, probably available for the same today.
Gross industry overcapacity is the problem, in the US and globally. And everyone bailing out their industries is only going to delay the necessary reduction in capacity.
I’ve been looking for a European car this winter (MB, BMW, Audi) and I have not seen too much in the way of out of the norm discounts for new metal. Perhaps some extra financing help, but that’s about it.
In Canada at least, the “healthy” makes haven’t clued into things yet. They will, but only after the recession digs in a little and more people lose their jobs. As things stand, it’s mostly domestic buyers who have been laid off/let go/cut back.
Beemer drivers in Toronto haven’t felt the sting yet. They will. Soon.
The other issue is the dollar. They all suffered margin sting when the dollar parity exposed the predatory pricing they’ve enjoyed for the past decade. Now, with the USD:CAD ratio at 1:0.77, they’re hurting even more and in no mood to lower prices.
This actually makes sense. Well, sort of. For people who are screaming that the US is about to lose its entire manufacturing base, it would mean that it’ll be nearly impossible to get a new car for any price next year.
If this were true, people would be buying up new cars even to keep them on lots, because they’ll be as rare (and as valuable) as dodo birds.
So, clearly, people don’t believe that there will be massive shortages of automobile production in the next few years.
If new car prices keep getting pushed down, the entire business model is damaged. Part of the process of change-over from old to new is that there is a preservation of the “asset” value in cars.
Toyota/Honda haven’t played the incentive game as heavily as the other manufacturers in the high volume space and I think it’s contributed to keeping resale values up. If that model breaks down, you’ll be needing 50% deposit for finance on a new vehicle when you need it, if you choose to change it.
Re psarhjinian:
True that! The only people that I are ‘visibly’ suffering are the ones on LeaseBusters. Why take over a 2 yr or less lease, when you can get new for almost the same – thanks to factory supported residuals. But that won’t last too much longer.
Too bad I’m looking to buy, not rent. Just waiting until Audi Canada cracks……
Wait, so they’re going to sell fewer cars with higher margins?
So much for not being able to cut your way to profitability.
It really depends on the dollar, not on Detroit pricing power.
PeteMoran makes an important point. Heavy incentives to move new cars knock down the price of 3-6 year old trade-ins almost as much as they bring down the price of the new vehicle. Sensible people who run a car for ten or more years after buying it don’t feed the new car sales beast. They need the new every 3-6 crowd to keep the music going.
Incentive spending hurts trade-in values enough that it is almost counter-productive.
“Buy a car, get a check” has been a disaster for the industry.
All data indicates that 2009 will continue unwinding the last 5+ years of financial recklessness. More banks, more corporations, more people will be in BK in the coming year. Unemployment will hit levels that haven’t been seen in a long time.
New car purchases will (generally) become a last resort. The average American is not going to buy a new car unless they really, really have to.
There is currently a 100+ day supply of new vehicles gathering dust across the country. There’s a huge pile of repos, demos, and cars that people had to sell crossing auction blocks. Judging by the trends, it would appear that 100 day figure is optimistic. For all players.
All of those cars will be the first choice for the average person who must replace a vehicle.
It’ll take a minimum of 6 months just to clear the sales channel of what has already been assembled. Once that happens, IF, big honkin’ IF, the DET folks are on the right track, the discounting will slow – at least on desirable cars.
If you are in a new car showroom 6 months from now it’ll be because you have to replace your car. At that point, it will be a seller’s market. Competitive seller’s market of course.
Once the current excess inventories are depleted, pile ’em deep and sell ’em cheap is over. If you are on the new car lot, you will be there because they are either selling something you really, really want. Or something you really, really need.
Either way, the seller will be in a slightly better postion to hold the line on pricing.
It is time to clean house. Every mfg is going to have to streamline their car lines. R&D will be the only justification for niche market cars in the coming future. Market strategies will have to change to meet the demands of a changing global market.
Little refuge will be offered under the new administration from more stringent EPA requirements. Americans will have to learn to save money and tighten their belts like the rest of the world has been doing for decades. Trickle down economics only works if the money stays in country and, as we have learned, it only trickles to other countries now a days.
Manufacturing no longer provides jobs here in the states and the cost of protection of our state side workers has let less scrupulous countries get away with murder. Yes, the pendulum will swing the other way in the future, but until then, the car mfgs, the American public, and government is going to learn some very hard lessons in the coming decade. Spending your way into a strong economy is no longer a viable option and this change in spending will have a ripple effect in every direction across the globe.
Hang on to your hats, it is going to be a bumpy ride.
P.S. My prediction for the year is that interest rates will begin to climb. It is the only way for financial institutions to make a profit and, at the same time, reduce lending which is killing our country. And those of us who pay our bills wind up bailing out the rest of those who don’t!!!!!!
The natural flow of things in an oversupply is for the prices to fall. Carmakers cannot escape the law of supply and demand. To stay viable they will have to move metal, which means dropping price until it meets market demand.
Unless. Unless car companies are no longer dependent upon actual unit sales to survive. Indeed, they are not. They are dependent upon taxpayer funds. As I have said before in these pages, this completely skews the demand curve.
The entire result of taking money from taxpayers and giving it to the carmakers is helping keep the price of cars too high. The prices are obviously too high for working people to afford, either directly through purchase or through financing. But Detroit doesn’t care and Washington doesn’t care.
This is the exact same tack Treasury and the Fed are doing in an effort to artifically prop up house prices. Unstated is why it is in the interest of Americans to keep house prices too high and car prices too high. Unstated also is why it is in the interest of debtors to exactly keep those bubbles inflated as long as possible.
In the end all the taxpayer money is wasted, as they are powerless to stop the market; house prices will continue to collapse and car prices will start to collapse.
I previously thought the real new car discounts- not the phoney ones we’ve been seeing the last few years- would start in January. Now Detroit can smoke cigars and put off the inevitable.
Because when the lots are already jammed with 08s, and overflowing with the 09s, where are you going to put the 10s?
Years ago in South Africa there was an oversupply of cheese. The Cheese Marketing Board, a government body, reacted by putting up the price of cheese.
When we stopped laughing, they explained they needed the money to pay for the advertisements that would persuade us to buy more cheese.
So for some months we had expensive cheese and lots of fancy cheese advertisements.
When that didn’t work, they finally admitted defeat and cut the price of cheese and the surplus went away.
Sign of the times. Even reputable dealers are lower than whale shit. $25,000 cars advertised for $15,000. Gray mouse print, easily discernible with a 10x magnifying glass, says purchaser must finance for 72-months @ 8-percent.
The government is paying GM and Chrysler not to produce, so that might hit supply, but Ford, along with every other automaker, still needs to try to produce as much as possible.
Ed Wallace sometimes get to the right place, but gets there for the wrong reasons.
Applying a few historical percentages ain’t it. Not only is it simplistic, but it encourages the use of the wrong history. If one were to engage in that exercise (and I wouldn’t in this case), it would be more suitable to look at what happened during the early 1930’s, when unemployment rose, deflation set in and the country was loaded with an abundance of excess production capacity. The 70’s had too much inflation to provide a good comparison.
My guess is that you will see the typical annual inflation factor in sticker prices, as manufacturers are reluctant to lock in lower prices that they can’t recover later. But transaction prices will be a relative bargain for those who know how to negotiate. The transplants will keep prices from spiraling downward by cutting production to match demand. Now might be an ideal time to buy, but the 2009 increases won’t be so much that you’d be missing out if you waited, either.
It’s hard to predict exactly what the domestics will do, given current circumstances, but I wouldn’t expect any sudden epiphany in the art of inventory management or vehicle design to save them. My guess is that they’ll overshoot on production as usual based upon bogus projections given to the government, which will force them to blow them out the door later.
Eventually, the real price of cars, and almost everything else, will go up. We are now in the deflationary stage of this crisis. The Fed is “dealing” with this crisis by using a “money gun” — their own words. Bottom line, you can expect massive inflation to kick in 12-18 months from now. Salaries/wages will not keep pace with the rising prices of goods and services, as is historically the case. The days of 19 year old kids, driving new 3 Series BMWs, and Escalades with 22 inch rims, is rapidly drawing to a close.
Bottom line, you can expect massive inflation to kick in 12-18 months from now. Salaries/wages will not keep pace with the rising prices of goods and services, as is historically the case.
For this to be true, you’d have to believe that commodity prices are going to go through the roof.
Wages are typically the primary driver for causing inflation. If prices are rising rapidly but wages are not, then it’s because the cost of the other inputs is rising.
We just had a major commodity bubble pop in a dramatic way, as some of us predicted on this site. I don’t personally see there being much good reason for the price of oil and metals jumping in price soon, as the prices we just had were exceptionally high and won’t be experienced again anytime soon.
If you think that the spending will overstimulate the economy, then whatever inflation that comes from that should show up in peoples’ paychecks. It wouldn’t be great for your savings account, but it would be OK on the job and for the value of your house.
Meanwhile, with less credit available, car makers are going to have to deal with more competition. That should keep car prices from rising much more than they usually do.
Even if new car supply went down, prices would stay down because the car market is over-saturated. Many people have more than one car and if economy stays bad they are likely to sell one of their surplus cars. This keeps used car prices down, which makes new cars less attractive. In recent weeks I’ve seen so many older cars on the street with “for sale” signs.
Ironically often low-income people have multiple cars. Mostly junkers, but they have 4-5 POS cars for a family of 3 drivers.
The thing in the US is that you can keep old cars as long as you want. In Europe, Japan there are mandatory safety and emission inspections. Those make old cars expensive since they NEED to be fixed. Annual registration fee (tax) also often depends on emission. A new clean car costs $100 a year, and old junker costs $500 a year IF it passes emission test (with emission requirements of the year of production). Some cities now have no-go zones for older cars with bad emissions. Also new cars are more fuel efficient and at $9 a gallon this makes a new car more attractive. Therefore you don’t see 15 year old rusty beaters. And for the sake of safety and environment that is good. Not so in the US where everyone who has $500 can drive a car.
Also, more unemployment and the fear of such will keep the people from buying cars that just do it for fun, not because they need a new car. Ironically the low-income guy with the 15 year old beater who really needs a new car would not be able to afford it anyway.
Obviously if one or two of the D3 collapsed there would be a shortage for a short time with higher prices. Unless some investor takes production or so. Someone always will produce cars, and if the remaining companies can ramp up production and many enough are left for a healthy competition prices will stay competitive… will go up with inflation, but not as much as indicated in the article.
Most people don’t care if cars are expensive, the only thing people hate is to buy a car and see a huge discount ad on it the next day. Those discounts are the end of every brand name value. The more discount the manufacturer gives me, the less likely I’m to buy because discounts make them look desperate and like they have a bad product no one wants. BTW, we (2 drivers) have a Mazda 3 and Mazda 6 bought at around invoice. Happy with it, never regretted the price paid in 2005 and 2007, even when ads nowadays make better offers (until you read the fine-print, of course).
kaleun: “in the US where everyone who has $500 can drive a car”
One more reason to love this country!
@Pch101:
Apparently, you are unfamiliar with the economic realities of Wiemar Germany, or the more recent economic meltdowns in Argentina and the former Soviet Union. Why don’t you ask the average Argentinian or Russian worker how runaway inflation actually helped him.
As for the the recent collapse in oil prices, I’m not surprised either. As the American economy continues to suffer from China Syndrome, investors are desperately attempting to prop up shaky financial positions by liquidating what little they have left of value, including trailer loads of oil contracts. Enjoy your cheap gas now while you still can, because it won’t last for very much longer. Already oil producing nations are balking at taking any more dollars — which they increasingly view as green butt-wipes.
If I were you, I would think twice about that new Escalade, irrespective of how much cash the dealer is placing on the hood.
Apparently, you are unfamiliar with the economic realities of Wiemar Germany, or the more recent economic meltdowns in Argentina and the former Soviet Union.
Actually, I am. There’s virtually no similarity between those situations and what is occurring now in the United States. You may as well compare a broken leg to amputation.
A better analogy is to look at what happened to the US at the end of WWII. Pent-up demand created by the massive stimulus spending of the war, coupled with rationing that had curtailed actual consumption and wage and price controls that had placed an artificial temporary constraint on inflation, caused a brief period of inflation that briefly went above 10%. But by the early 1950’s, it went back below 2%.
What’s different now is that we have neither rationing nor wage and price controls to add to the problem, just the stimulus. The ingredients of the current situation have nothing in common with your examples.
I’v seen lots filled with brand new cars. I expect a Camry LE for 16K OTD in march.
@Pch101:
The bailout dollars being created by the Fed are hollow, empty, the walking dead, zombie dollars.
This new zombie dollar is backed by nothing. Not a corresponding level of production, nor any useful commodity, not even credible debt (debt that will actually be repaid sometime in the near future).
If you want an appropriate analogy, think of a tsunami. We are now in the deflationary stage of the financial tsunami. The water has drained from the shore, as far as the eye can see, exposing all the Wall Street and corporate ship wrecks lying on the stinking silt. The little monkey humans on the beach are all agog at the sight of it — little monkey/man brains trying to make sense of it. While the monkey/humans are mesmerized by the new sites, here comes the inflation in the form of a wall of water. This inflation wave will smash to bits what’s left on the beach as well as drown most of the little monkey/humans too dim to make a run for it.
Think of a tsunami as nature’s reset. The world’s financial reset button has now been pushed, and there’s no stopping it.
>>”…Most people don’t care if cars are expensive, the only thing people hate is to buy a car and see a huge discount ad on it the next day…”
That’s because people used to be able to ignore the price and just look at the payments. Detroit and the stores aggressively pushed this approach. Even today the majority of ads do not tell you the price, they tell you some generic monthly payment (or ridiculous lease rate with low miles and embarassing upfront cap reductions).
This ability to game the true cost was possible because of cheap credit. With the evaporation of cheap credit for a majority of buyers, it has become very clear that cars are too expensive.
Pay has not gone up. To the contrary, what pay remains is gobbled by higher taxes and tuition and insurance and health care. That is Detroit’s true competition, not Toyota. Worse- employment has gone down- jobs are disappearing.
Not only is there no ability today to buy all those cars sitting around as a result of overproduction, there will be even less ability to buy come the first quarter of 09. The carmakers were staring into the abyss: they would have to cut back production. They would have to truly lower the price of their product. THey may disappear.
Luckily the taxpayer stepped in with zombie dollars (thanks, Skor) to ensure that overproduction continues. Can’t have too many cars sitting around on dealer lots, slowly degrading to the raw materials from whence they came, the lonely sounds of seagulls in the distance. Sort of like the Omega Man or I Am Legend, except with dealer plates.
This new zombie dollar is backed by nothing.
Incorrect. It’s backed by the full faith and credit of the US treasury, which the world (at least for now) still considers to be top quality debt, as zero treasury yields now make abundantly clear. The US may have its flaws, but when the fit hits the shan, investors flock to the US and Japan for stability.
It’s fun to panic and to come up with clever labels, but that rhetoric gets in the way of factual analysis. Economic stimulus is the appropriate way out of the hole and the failure to act would result in a depression.
It has succeeded before and produced good results in the past. As I noted above, we already experienced an extreme version of this stimulus situation at the end of WWII, and things stabilized quite quickly. Similarly, the Reagan deficit busting stimulus of the 80’s was converted into a surplus within a decade thereafter. The problem is challenging, but not at all insurmountable.
“It’s fun to panic and to come up with clever labels, but that rhetoric gets in the way of factual analysis. Economic stimulus is the appropriate way out of the hole and the failure to act would result in a depression.
It has succeeded before and produced good results in the past. As I noted above, we already experienced an extreme version of this stimulus situation at the end of WWII, and things stabilized quite quickly. Similarly, the Reagan deficit busting stimulus of the 80’s was converted into a surplus within a decade thereafter. The problem is challenging, but not at all insurmountable.”
Quote from PCH101
It used to work when the US was a manufacturing power house and US cars were built in the US. This is no longer true. We buy parts from all over the world and they may get assembled here, they may not. Economic stimulus is no longer the solution in todays global manufacturing strategy.
Just look at the failed results of the stimulus checks disseminated this year. It was a total failure. Spending your way into financial success is only wishful thinking. All the Regan years did was put off the debt until now. And everyone is calling in their markers.
Go ahead. If you think spending your money will get us back on track, none of us are going to stop you.
Economic stimulus is no longer the solution in todays global manufacturing strategy.
Then you had better get all of the major world governments on the phone and educate them about this, because that’s exactly what they’re all doing.
Uhh, back to cars…
For a sustained price increase to work there has to be increased demand and increased capacity to buy. You can influence the former by reducing supply, but if any predictions of the coming cash-only economy are even partly correct, there will be too few bidders. It will be the opposite of “we lose on each one but we’ll make it up in volume” – “we make a fortune on each one but we can’t sell any.”
Of course, the supply reductions have lagged the demand reduction these last few months, so it wouldn’t be at all surprising if there were a corresponding upside price spike if incomes recover before supply ramps up. That usually happens in short-cycle recessions, though, and many think we are in for a long one this time.