An underlying cause of the U.S. automaker crisis.
For openers, there are far too many cars.
As we watch the slow-motion train wreck that is the dying global automotive business, it’s easy to blame the economic situation for the debacle. And it’s certainly a very big contributing factor. Or more precisely, an accelerating factor. It has absolutely made matters worse — and faster.
However, so far, there has been little discussion of the overcapacity issue that underlies it all — and which is far more serious and which has been quietly bleeding the industry white for years now.
Simply put, too many vehicles chasing not enough market.
The industry (that’s all the carmakers put together) tries to sell on the order of 11-12 million new cars every year because that’s how many cars they build. The problem is it’s hard to sell that many cars, even in the best of times — and it’s even harder to sell them at any kind of decent profit.
For years now, the margins on cars have been extremely slim — and getting slimmer. Often as little as a few hundred bucks, net, per car.
Think how lousy a business that is. A car is a hugely complex thing made up of thousands of individual components that must be manufactured at various locations and then assembled into a single unit. Literally thousands of people and several weeks (if not months) of assembly process are involved in the creation of just one finished car.
Also, modern cars, once built, have an extremely long shelf life compared with the cars of the past. With decent care, they can last 15-plus years and more than 200,000 miles. But the auto industry continues to churn out new cars on the 1960s-era assumption that the entire fleet gets recycled every 5-7 years or so.
Result? The inventory (new and used) stacks up.
And yet, each year, it seems another automaker jumps into the already overcrowded waters with yet another model to compete against the existing multitude — making it ever harder to earn a buck off the already-there stuff.
There was an exception to this — SUVs - during the period that ran roughly from the early 1990s through last year. Profit margins on SUVs were huge — as much as $10,000 or more per vehicle on a high-end model such as a Lincoln Navigator or Cadillac Escalade. Why? Because at first, there were only a few SUVs on the market — far fewer (both model-wise and total numbers-wise) than the emerging market for them. So the automakers could charge more for them.
SUVs were also easier and cheaper to build than passenger cars — which helped. But the real reason they were such money-makers — at first — was that supply lagged behind demand.
Now, of course, the market for SUVs is glutted, too.
Which gets us back to the overcapacity issue.
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H/T to National Review Online