The butterfly effect is the idea that what seems like a small change in a system can lead to larger or even totally unexpected results. Today, the auto industry is experiencing an imbalance in inventory as a result of OEMs pulling back production on sedans to build more trucks and SUVs.
How might the butterfly effect play out when it comes to the dramatic recent decline in sedan manufacturing and sales? Certain aspects of this rapid reduction in the percentage of sedans on the road could lead to outcomes that may be unpredictable and surprising.
Used-Vehicle Prices: If (or, really, when) fuel prices rise, it’s conceivable that fuel-efficient compact and midsize sedans will become more coveted. And if the economy experiences a downturn, there could be more consumers who simply can’t afford new or even used larger vehicles — heightening demand for used sedans and driving up prices. Or, is it the opposite? One analyst commented recently that sedans are already depreciating heavily, which will likely trigger lower resale prices a few years down the road. As sedans fall further out of favor, will consumers abandon them completely?
Automaker Profits: What happens if some unknown factor — skyrocketing oil prices, a new political administration committed to stringent fuel mileage standards, or even something as random as a consumer fad or celebrity boost — makes small cars attractive to the market again? If U.S. automakers have dismantled their production apparatus, will they lose the marketshare they’ve gained with trucks and SUVs? Or will current trends continue to prove their decision to forgo sedans a wise prognostication?
Safety: While pickups and SUVs are safer in multiple-vehicle crashes, they are proportionally more likely than cars to be in fatal single-vehicle crashes. Additionally, as the proportion of SUVs to cars on the road has increased, so have pedestrian deaths. Might SUV buyers clamor loud enough for collision-warning systems and other safety features that could make the switch to larger vehicles have the opposite effect and increase overall safety?
Analysts, advisors, and actuaries do their best to predict the unpredictable, but life often has its own ideas and moves in a different direction. What will be the eventual “butterfly effect” result of today’s decisions about sedans? We’ll have to wait and see what’s in store.
Lynn Hess is a content specialist at State National Companies, a division of Markel Corp., and writes on a variety of financial topics relating to banking,
credit unions, and insurance. State National is the Customer Experience Partner of Auto Finance Excellence (AutoFinanceExcellence.org), a sister service of Auto Finance News.
