January sales figures are starting to trickle in. Apparently that’s all they did last month — trickle.
Here’s the [harsh] reality:
• We may be in for a SAAR below 10 million units for the first time since 1982.
• We’re on track for our fourth straight month of a 30%-or-more decline.
• Of the vehicles sold last month, 27% were from the 2008 model year, compared with 12% in January 2008, according to Edmunds.com.
But is the glass half-full or half-empty? Check out this tidbit from an article in today’s Wall Street Journal:
“Automakers posted sharply lower U.S. sales for January, putting more pressure on struggling Detroit companies. GM’s light-vehicle sales dropped 49%, while Ford was down 40%. Toyota fared slightly better, with light-vehicle sales down 32%.”
Toyota posted a 32% decline in vehicle sales, and the Wall Street Journal calls it “slightly better.” Sure, quantitatively, a 32% drop is better than a 49% drop. But if sales volume has dropped by a third, should we try to put a positive spin on it?
A major component of the dismal sales report is that there were virtually no fleet sales. S. Detroit typically avoids large volume fleet business and the Detroit 3 have been shut down for weeks. In addition, the slow economy and difficult financing have caused fleet and rental operators to hang on to their vehicles longer. At some point, the normal retail market will start to come back AND fleets will need to replenish so we will get some serious “bounce” once recovery begins. The big question is will the “recovery” be sustained, or fizzle out and have to be restarted?
Here’s a little calculation, the sort of back-of-the-envelope exercise in which economists indulge. I don’t have 2008 data, but I don’t think that would affect my bottom line (lines?).
1. During the previous 4 years of the bubble (2004-2007) sales averaged 16.7 mil, scrappage 11.1 mil, and thus net additions to the vehicle fleet averaged 5.6 mil.
2. In the 4 years before that (2000-2003) sales averaged 17.1 mil, scrappage 12.9 mil, and net additions 4.3 mil.
3. So if we compare the two we added 5 mil excess vehicles during the bubble, mostly light trucks.
4. From another angle, if scrappage is about 12 mil (the 10-year average) and new drivers are 2 mil a year then we get underlying demand of 14 mil, add say 1 million more for business use and “normal” sales should be at most 15 mil a year. Certainly not 16+ mil.
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If that’s the case, then we could have a long and painful adjustment to bring us back to “normal” — several years of sales of 13 million or less until the number of vehicles per driver falls a bit, and then sales rising to equilibrium. All of course premised on car quality not having improved over the past decade (median car age was 8.3 in 1998, 9.2 today).
Plenty of ways this calculation could go wrong. And I hope I am wrong. Lots of cars sitting in garages while people use their SUVs (or maybe the other way around) with no pressure to get rid of the “extra” vehicle, hence not so much excess. A big cash for clunkers program designed to reduce the number of used cars and pull up prices overall. New technology (regulations) that lead to faster scrappage (including not-so-old cars in great mechanical shape that “only” have fried electronics).
I dislike the idea of added new-car incentives: with longer intrinsic vehicle quality, shouldn’t depreciation be lower / residuals much higher than what our incentive-laden sales fever has given us? For other reasons (“monopolistic competition” — if you don’t know, don’t ask) I’m not sure we can in fact get rid of incentives, but they sure have come back to bite the industry.
Most of us are driven by emotion, whether we admit it or not. Marketing methods do an effective job of driving people to spend money they shouldn’t. Of course, who is to say who should or shouldn’t buy a new vehicle. I’ve been in the auto business all my adult life but my personal creedo is “Everyone drives a used car.”
I suspect the “excess” vehicle sales Mike mentioned that occurred during “boom times” came about because of compelling advertising messages AND the feeling of security many of us had when we thought we had a substantial financial cushion in home equity. That perceived home equity created a false sense of security. People spent money more frivolously as a result. As that sense of security no longer exists I suspect we are in for years of 15 million new car sales.
Having said that, it’s not all about volume. For some reason, we have all been conditioned to think in terms of unit sales. There are good reasons for this. The more vehicles in operation the more parts will be sold. Gross profit per unit of sales is a better way to look at auto sales in my view. Lexus, BMW, MB, and others have developed brand value to the point they can charge extra just for their brand. How much more does it cost to build a 3 series BMW vs a Chevy Malibu?
In the early eighties we had the MITI restraints that kept a lid on Japanese imports. The importers changed their sales mix from small low margin vehicles to vehicles that made at least 3 times more gross profit per transaction. It evolved into Acura, Lexus, and Infiniti. They sold approximately the same number of vehicles but increased their gross profits dramatically.
Thanks for doing this, JJ