As US sales continue to tumble of a giant cliff, it becomes tempting to spin a short-term trend into a long-term projection. Just as peak oil theorists were everywhere last summer, warning that gas would never again cost less than $4 per gallon, many analysts now think that the US car market will never again reach 17m per year. Automotive News [sub] takes on the debate, fielding arguments from both sides. On the pessemistic front, players like Pricewaterhouse Cooper see the 17 million years as “an aberration,” artificially pumped up by a false sense of personal wealth, lax lending standards and irresponsible automaker incentives. Daimler’s Dieter Zetsche, Mazda’s Jim O’Sullivan, and private equity baron Wilbur Ross fall in the sub-17m camp as well. They collectively estimate an eventual recovery of 15-16m units by around 2012-2014. The other side of the argument is concisely summarized by Robert Schnorbus of JD Power: “Of course we will return to 16 or 17 million. Every recession we hear this argument that Americans have fundamentally changed, but Americans love their features and comfortable cars.”
Ford senior economist Emily Kolinski Morris concurs, pointing out that “pent-up demand grows as the average age of passenger cars exceeds 9 years and the sales rate falls below the U.S. average annual scrapping rate of 12.5 million. The U.S. driving-age population increases 2 million a year, headed toward 264 million potential drivers out of a total population of 331 million by 2018.” But on the other hand, Morris notes that unemployment is high and consumer confidence is at an all-time low. Deutsche Bank’s Rod Lache points out that debt levels also work against a strong recovery, as “short-term debt is 14 percent of income.”
But whether American sales return to 17m, or never again peack past 14m, the uncertainty is hell in the short term. Few expect 2009 sales to exceed 12m, but planning for a recovery is confounding medium- and long-term planning for the automakers. Volatility in energy prices and nearly every other economic indicator are forcing production plans to become as flexible as possible. With each of the next four years (at least) being planned with several million separating the high- and low-sales scenarios, the risks of misprojection are high and the consequences would be profound. Especially for firms that are on federal life support.
Daimler’s Dieter Zetsche? Pardon the language, but what the fuck does that guy know about anything? He should be standing on a corner with a cup in his hand. Prick.
Anytime soon? No.
Never? Also, no. Every recession breeds an even stronger economy afterwards (as a general rule), and population keeps increasing.
For the past 5 years what would have been the “real number” without “irrational incentives”.
By how much did “irrational incentives” drive up sales, and “churn customers” from one deal to the next, from one manufacturer to the other with a better deal and more “slush money” to salvage under water trades.
Is it 0% or 1% or 5% or 7% or 10% or even more?
At this stage is it the sales? Or who can make money with the number they will sell?
The manufacturers that have adjusted their plans and planning to less volume, and making money to stay in business are the one that will have a level of success as the dust settles.
Interesting use of Ricardo Montalban to illustrate this thread. He, of course, starred in what are arguably the best car commercials ever. People remember them to this day. Back then the cars may have been lousy but they sure knew how to market them.
What about the median sales price?
Given gas prices and consumers actual and perceived contraction of income it has got to be trending down.
The margins on cars are generally lower. So even if Ford has the same sales numbers as before it will be more Foci and less $10k gross margin light trucks.
16,999,999 yes. 17M no. No one will ever buy that last car. The market is forever capped.
What nonsense.
Well, there are those stating we’ll see USD10/barrel oil this year – of course, they are also stating that could come with 20%+ unemployment, which would be a bad thing.
It really depends upon the kind of car being built, doesn’t it? We won’t see a 17 million/year market with the kind of cars that they used to build until recently.
15M or so at the current population level seems ’bout right. To purchase cars at a rate substantially higher than the scrap rate has to be classified as a luxury (and a pricey one at that); given the non-existent real income growth in the US in the past eight years, it’s safe to assume that this is a luxury that’s going to get back-burner’ed for a few years.
Simply mentioning the increase in the “driving-age population” reveals weakness in the fact set of the 17M+ crowd. 2M new drivers each year is less than 1% growth. Big deal.
The real question, though, isn’t “what is the sales rate in X years?”. It’s “what will it take for manufacturers to develop a flexible system that would allow for +/- 20% swing in sales over a period of a couple of years without financial Armageddon?”. That, of course, requires fixing the industry’s chronic oversupply situation, which is exactly the opposite of what we’re currently doing.
My guess is about 13.5 million as the sustainable base sales rate. This assumes a vehicle fleet of about 240 million right now, with 12 million vehicles to be either removed from the fleet by recession or be largely undriven.
A 228 million vehicle fleet replaced every 17 years, yields a 13.5 million sales rate.
By 2013, writers at TTAC will be hounding Detroit’s automotive executives for failing to anticipate the strong rebound in automotive demand, poised to surpass 18mm new vehicle sales in the US by 2016. There will be all sorts of caterwauling about how Michigan’s corporate knuckleheads pulled their horns in too far and allowed a market share opening for Chinese manufacturers to exploit.
Pick any five-year period and consider how quickly circumstances change. In 1991 when US auto sales sagged toward 10mm, the world-enders and bemoaners in the intelligentsia couldn’t imagine the market we had by 1996. It’s not just cars. The tech economy was going to shrivel after March 2000 when the market whitered overnight. The bleakness of September 11, 2001 was going to darken the next decade. In 1979 through 1982, the US was finished and Japan was going to run the world and own most of our assets.
Of course we’ll be at 17mm again. Yes, credit is going to come back. High unemployment (which may well peak *below* 1980/81/82 levels) will yield to renewed growth. Vehicles will wear out and as well, new technologies will make a new car compelling to many who don’t yet need one. The US will have a larger population next year, next decade, next century. We won’t see 17mm new car sales “anytime soon?” What defines anytime soon? People saying that must be 11 years old because anyone near 30 starts to realize how quickly time rockets by.
This weekend, restaurants in my corner of Los Angeles were jammed. SRO; waiting lines; crowded at the bar. The local luxury mall was busy, and so was Target and Home Depot. It may have been just a flush of optimism in anticipation of a new President and regime change, that will yield to more caution. But we have been living under an economically ham-handed administration that is dramatically inept at managing the psychology of a serious downturn, I suspect many “experts” are blind to gains that can be won by leadership over management, and steady evidence of pro-actively applied competence, along with a more openly communicative administration.
More to the point, we hear “experts” warning that this recession will be “long and deep,” followed by estimates that there may not be evidence of recovery until the latter half of 2009. Too many people will incur pain. None of us is assured to be insulated.
However, while we may not have been in quite as long a recession in 1982, we did endure a series of recessions interrupted by anemic, barely-observable “stagflated” recoveries with persistent high unemployment from 1971 through 1982. We’re going to find our way out of this more quickly than that, by a considerable margin.
This is the United States. We grow our way out of our problems. Vehicle sales to a growing population will follow.
Phil
Predictions are hard to make, especially about the future.
Who predicted a year ago that December 2008 would have an annually adjusted rate of about 10 million cars a year? No one that I know of.
Should we expect that anyone can do any better predicting this next year? I don’t think so.
Still, we all have to plan, carmakers included. But as Eric Bryant says, carmakers have to plan for about a +/- 20% swing in sales figures without that leading to financial Armegeddon.
Toyota and Honda can probably handle whatever comes. GM and Chrysler cannot. I have my doubts about Ford also. It will be interesting to see what 2009 brings.
Here’s Toyota’s 2008 world total, incl Daihatsu and Hino which grew during the year, while Toyota (7,996′) fell back 5%:
8,972 (-4%)
They’ll manage OK.
Talking about the number 17M as having some meaning or significance is nonsense.
The market is either growing or shrinking. What the sales volume is, on any given day or year, is meaningless.
While the market is shrinking, we will see a lot of marginal producers fall off and die (Chrysler, anyone? – Fiat or no Fiat). When the market starts to grow again, we will see the entry of new players to replace the players who were lost.
Where will the new players come from? China and India.
This is inherently unpredictable, and the only thing we know for sure is that we are likely to see bigger swings in sales numbers. Given the possible life span of modern cars, a new car purchase is more of a luxury than ever before, and clever marketing and economic booms can create very high sales figures, but changing fashions and economic depression can also generate extremely low sales figures. Anyone claiming to be able to predict this is lying.
My prediction: the winner here is the car maker that can easily adapt to big swings in demand.