US reaches ‘peak car’ moment as incentives, inventories rise, whilst fewer Americans carry driving licenses

Consumer demand

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US autos Sept14

The blog’s suggestion back in March that now would be a good time for US readers to buy a new car is looking more and more prescient.  As the head of American Honda explained to investors last month:

In addition to a heavy reliance on fleet sales to boost volumes, we are seeing some of our competitors adopt short-term tactics to stoke sales, like big jumps in subprime lending and 72-month terms.

No, that wasn’t a typing error.  The Wall Street Journal confirms that “both GM and Ford offered 0% financing on six-year loans in August“.  And it goes on to note:

  • Vehicle inventories are growing – they are now at 72 days versus 60 days this time last year
  • Average incentives continue to rise and are now $2700, up 10%
  • Used-car prices are falling, again as forecast by the blog
  • And sales owe much to subprime auto loans eg the “liar-loans” concept of the subprime housing market

Clearly, manufacturers have become despearate to sell.

THE ‘TOP 4’ MANUFACTURERS CONTINUE TO LOSE MARKET SHARE
The ‘Top 4’ companies, as the chart shows, are also losing market share despite their incentives:

  • The “Top 4” now account for 60% of the market versus 70% pre-2008 (black line)
  • GM is now around 18% versus 25% (blue)
  • Ford sales are around 15% versus 18% (green)
  • Toyota sales are also around 15% versus 18% (purple)
  • Chrysler sales are around 12% versus 14% (red)

The pattern of incentives highlights the growing segmentation of the market:

  •  GM and Ford are offering 6 years’ interest-free loans
  • Toyota is offering average discounts of 19.4% and Chrysler 12.9%, according to TrueCar

This makes it clear that none of the ‘top 4′ have real pricing power, as one would expect to see in a strong market.

And, of course, GM is not only offering 6 years’ credit – but is also offering employee levels of discounts to anyone trading in a new car.  Plus, it is under Justice Department investigation for its alleged subprime loans.

The real problem for the US auto industry and the ‘Top 4′ is the massive change taking place in US driving habits.  As Jerry Jasinowski, former long-time president of the National Association of Manufacturers told ICIS’ Joe Kamalick in an important recent interview:

Americans are changing their transportation habits, and a growing number of them consider personal vehicles undesirable.    The share of the US population carrying driver’s licenses declined from 89% in 2000 to 83% in 2012, and young people living in urban areas use mass transit and rely on rental vehicles when they need one.

“Also, the auto industry’s laudable focus on quality means that cars, SUVs and trucks last a lot longer today than they used to, meaning that fewer people trade in their vehicles for new ones every few years as was once the national custom.

“Industry officials believe that US auto sales will continue to climb for a while before topping out at nearly 17m in 2016, then falling to 15.4m by 2019 – and this despite what could be a 9% population growth to nearly 335m by then.”

Today’s optimism therefore looks to be highly short-term in nature.  Rising inventories and increasing incentives are a clear sign that we are close to a market top.  Whether it is delayed till 2016, as the industry hopes, is a matter for debate.  The blog suspects that they are too optimistic.

The key issue is that we have reached ‘peak car’ moment in the US.  People who haven’t got a driving licence aren’t going to be buying a new car either.

In turn, this means auto suppliers are sitting on their hands when it comes to investing in new capacity.   As the Wall Street Journal notes,

They have still not replaced capacity and jobs cut during the slump to meet revived demand.”

This is further evidence of the futility of trying to use monetary policy to create an economic recovery based on the Boomer-led SuperCycle model.  It confirms that the ageing of the Boomers inevitably means we are transitioning to a New Normal.

Instead, companies and investors need to develop new business models, based around the developing need for “cheap, convenient mobility“.

Already one major company CEO, Axel Heitmann at Lanxess, has lost his job through failing to recognise the need for new thinking.  US Dept of Transport data highlights the key issue, namely that “As we age, we drive fewer miles“.

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