For all the drastic cuts and financial overhauls that are meant to secure a future for General Motors and Chrysler, their prospects in coming years will be determined more by the answer to a simple question: Can American drivers live without that new-car smell?
In recent years Americans appeared to be hooked on it and took advantage of home equity loans, easy credit and cheap short-term lease deals to send new-car sales to levels of more than 17 million a year.
Now the market has collapsed by 46 percent to below 10 million, as people are making do with the cars they have, leaving the industry to debate ”” and worry ”” about what the new normal will be once the recession ends.
I think the article was a bit short on one aspect. Carefully selected and maintained cars can run for thirty to fifty years. Many of the cars running in Cuba are mid-fifties Chevrolets. I once rode in a taxi in Ottawa that had driven 1,000,000 km (600,000 mi) and had not had the original engine rebuilt.
If sales volume goes down, car companies will have to charge more to survive. This makes it attractive to spend larger sums to keep old vehicles running. Looking at GM’s liabilities to assets ratio, it appears they have been selling cars at least $10,000 too cheap. An increase that large will drive sales down and prices even higher.
We have certainly seen this in aircraft. People today spend $50,000 and more to update a 1975 model to nearly new condition, even though the plane cost $35,000 new. The reason is that the 2009 model of the same plane is $350,000.
This is a price of low volume operations that cars will not likely reach. However, people may consider $10,000 to $20,000 in repairs and updating to keep their Accord on the road for another 10 years if the new price has moved up to $40,000.
Four years ago, my wife and I bought a 2004 Pontiac long wheelbase Montana minivan with 50,000 miles on it. It was very well maintained and in like-new condition inside and out (and still is), and we consider it the best car deal we ever made. The new car dealers in our area have taken a real beating, and are managing to survive, but the used car business is booming.
And if I want that “new car smell,” I can go to my nearest auto parts store and buy a can-full!
As with all trends keeping a car longer is likely to grow. The percentage of folks who buy used vs new is likely to grow and move up the income ladder. I think 15% of the new car loans in 2007 were the automotive equivalent of subprime – so take them out of the new car equation or lower the amount of car that they would qualify for. My guess is that the new “normal” will hit 14 million in the next upswing.
In addition, there is another problem for the automakers looming, courtesy of the Dems. There have been some rumblings about the potential for a Value Added Tax (VAT) at the federal level to fund single payer health care. If that comes to pass, you can bet that there will be a further decline in the sale of new cars (as well as the beginnings of a real black market).
My parents only owned one NEW car in the entire time I was growing up. Dad was a wiz with fixing anything that went wrong and could even do a mean job at body work! He kept those cars going for years.
My husband and I cannot afford a NEW car. It will even be a struggle right now to purchase a used second vehicle, but we have to bite the bullet as we will be needing one for me in the event that I can actually find employment. Then shortly thereafter we will have to replace his truck.
There is one way that the industry can make sure they’ll still be able to sell new cars, and that is to find ways to really lower the prices on those new cars while maintaining their quality. Lowering the MSRPs to the point where people really can afford new cars would be a start in the right direction. Offering some kind of sales incentives to dealers might also help.
LOL, #7. Sorry, but that isn’t happening any time soon with all of the new regulations being piled onto manufacturers by Obama and Congress. Even the most optimistic prediction is that they’re going to add $1300 to the price of a car, and I’d bet the number is likely going to be $4-5,000.
A tax by any other name….
The American car industry is hostage to the automakers unions. Unlike oriental automakers, they cannot afford the engineering and build quality of modern cars while still selling at a competitive price since the union contracts they have made over the decades are so onerous. Bankruptcy was the only hope of saving Chrysler and GM, but the socialist card tricks the government has played will leave the unions holding all the marbles. As the government now has a significant stake in the success of GM and Chrysler with their built in failure numbers, expect tariffs or creative legislation to tilt the field towards them. This will screw the market up even more, recovery or no.
I already have invested in my older car, with a new transmission, engine, and complete chassis overhaul. ( bushings, shocks, joints ) It drives like new, and even counting the expense of first class repair work, is an order of magnitude cheaper to operate than a new version at today’s prices. Much less compared to prices that will allow the unions to keep their perks.
That “New car Smell” is gone, by the way. It turned out that constant exposure was killing autoworkers, so materials used in recent cars release much fewer volatiles.
[blockquote]Bankruptcy was the only hope of saving Chrysler and GM, but the socialist card tricks the government has played will leave the unions holding all the marbles. [/blockquote]
Sorry, but that’s not happening either. Ron Gettlefinger, brilliant investment guru that he is, has already indicated that the UAW is going to dump every share of Chrysler that Obama’s task force plundered from secured creditors as fast as he can to get his greedy hands on all that sweet cash. Just in case you’re thinking about buying any Chrysler equity…
Meanwhile, the Ford Motor Company did not accept any TARP money. Anybody heard lately how they are doing?
Their stock is way up as of late, Denise. I think investors believe Americans interested in buying a domestic-brand car will flock to the only option not a part of Government Motors. In the short run, I think they’re right. In the long run, we’ll just have to see how the administration responds to the lack of demand for product from Government Motors, i.e. whether they’ll just keep pumping tax dollars into the zombie company to lard up complaint union voting blocs or if they will actively try to hobble Ford in some manner.
Thank you, Jeffersonian — You have made my point. Though there are undoubtedly still tough times ahead for them, I thought I detected a lilt in the step this week of a dear friend who is the V-P/GM of the local Lincoln Ford & Mercury dealership.