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Car Guy
Too Many Cars, Not Enough Market
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.
What's "overcapacity"?
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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Robert Rosencrans| 2.11.09 @ 7:58AM
Only the U.S. government would have the audacity to bail out an industry where the public has rejected that industry's products.
The financial circle jerk in Washington is not fooling anyone and has become the third and final act of financial Hell.
Based on Washington's decisions, it appears all you need do is create an industry, staff it with union employees, create products nobody wants with those union employees, and the government will allow you to stay in business to create more products the public has rejected.
In the meantime, that same government continues to grow, sucking off more resources from the private sector.
frost| 2.11.09 @ 10:03AM
Still another exceptional Eric Peters column! What a terrific addition he's been to TAS; sure beats the broken-record re-recitation of those old "social" conservatism/thought police issues, whistling in the dark and preaching to the choir stuff...
He nailed it. The next question appears to be "what happens next?" A probable effort in futility, 'ay?
daboss| 2.11.09 @ 10:38AM
Jharp – why don’t you just give extra money to the IRS and be done with it. I am sure every April 15th you send the IRS extra funds you have in your account.
The gov’t spends OUR money (yours included). They do not produce anything of value.
Do you go to your neighbor’s house and confiscate their lawnmower or squat in their house free of charge? I doubt it – but that’s exactly what the gov’t does with taxes. They take property from one to give to another.
This is a serious time and we need serious answers to these problems. Like a consumption tax – those who have more will pay more and the evil politicians cannot use the tax code for their special interests. Plus the IRS would not collect your personal data – since I would imagine you are against the warrant-less wiretaps for terrorist you would agree that the IRS should not collect personal data either. Or the new health care IT controller – who will have access to your personal records. I am sure you are against that, as well.
jrharp| 2.11.09 @ 11:13AM
daboss| 2.11.09 @ 10:38AM
"The gov’t spends OUR money (yours included). They do not produce anything of value."
"This is a serious time"
Thne why don't you get serious and quit posting ridiculous claims.
So now our roads, tanks, military, police, fire, national guard, ports, air traffic control, and so forth have no value?
You, sir, are an ignorant fool.
daboss| 2.11.09 @ 11:32AM
Jrharp –
Good comeback. Sidestep the issues at hand.
“So now our roads, tanks, military, police, fire, national guard, ports, air traffic control, and so forth have no value?”
Only the military and MAYBE air traffic controllers are in the purview of the Fed. Everything else is better handled by the states or the private sector. Why should the gov’t build roads when Ohio can do it or private individuals? We do have our own department of transportation. Seems like one of them is redundant. Plus I don’t believe the people of Kansas should be paying for a road in Ohio. Let the Ohioans pay for it – via their own department of transportation.
So back to my first point – do you squat in your neighbor’s house? Do you take their property? Do you pay extra in taxes? Do you support giving the IRS personal data or maybe the health IT controller? Were you against the terrorist wire tapping but for these programs?
Dan D| 2.11.09 @ 11:38AM
Um, Eric? Your numbers are a little bit off.
The US market has exceeded 15 million units for most of the past decade, with a year or two over the 17 million unit mark. Current sales are running at an annual rate either a bit above or below the 10 million unit mark, depending on whose figures you believe.
The essential problem is that full capacity for North America easily exceeds 20 million units (with multiple shift operation), and for everybody to be profitable unit sales need to exceed 17 million by a healthy amount.
That is the classic definition of surplus industrial capacity. At current sales levels even the healthiest companies will be unprofitable (Toyota included). Removing surplus capacity entirely means several large manufacturers closing all North American manufacturing entirely.
Paul| 2.11.09 @ 11:53AM
Plus, in the short term, what fool would use their own money to buy a new car now; just keep waiting (and waiting) a few more months--maybe six--until the multi-billion $ Federal New Auto Consumer Bailout Discount Purchase Plan is implemented.
Citizens will be able to purchase--from the government inventory--a new union-made, eco-friendly vehicle for $15,000 off the private sector (Toyota, Honda, Nissan, Mazda, etc.) price, AND they can borrow the money from the Federal Government Union Bank.
daboss| 2.11.09 @ 12:03PM
Jharp –
The IT heath care controller is in the stimulus bill. They are charged with monitoring heath care provided to individuals. Seems a little Orwellian to me.
If you do not take money from your neighbors then why is it ok for the gov’t to do it?
All I am saying is let the STATES and the citizens of the states provide the care that they want. If a state wants to go all liberal … let them (like Vermont or CA) - if Alaska wants a bridge to know-where – let them build it and pay for it themselves.
We need to avoid running to the central gov’t to take from one to give to another. It’s not efficient, wise or even constitutional.
Bill, St. Louis| 2.11.09 @ 1:16PM
Good column and even if the numbers are off a little, the concept is accurate. Supply and demand still sets up the winners and losers in business.
With that in mind, someone once told me (auto manufacturer manager) that U.S. car makers have over 100 models to choose from and then add the multitude of personal options for new buyers ordering new vehicles (as opposed to buying one off the lot) and you end up with huge production issues. If you add the number of dealer orders for cars trying to guess the local demand, you have a lot of choices. TOO MANY CHOICES. But that is the American way or is it.
Toyota, like the foreign made in America companies, makes few models, with few options (most have standard items that are optional in US autos) and works toward having a slightly higher priced vehicle with an improved quality/resale value. Fewer models = fewer production lines = lower cost per unit = more profit = success. Yes, it limits choice, but apparently there is enough choice or like the Delorean, they go out of business.
Marc Jeric| 2.11.09 @ 2:10PM
It is encouraging to see how many "liberals" and "progressives" read the American Spectator" and print their idiotic comments here. Perhaps after many years of reading these articles some light might pierce the intelectual murk inflicted on them by their teacher union goons and their university "professors" of social studies and psychology.
jerryofva| 2.11.09 @ 2:47PM
Bill, St Louis:
Like many bashers of American Auto manufacturers you seem to have an outdated impression of both foreign and domestic manufactures. Toyota only has a few models? Really? Here is a list:
Yaris
Corolla
Prius
Camry
Solara
Scion A, B, C and D
Fourrunner
Highlander
Land Cruiser
Lexus, IS, LS, ES, GS
Lexus SC
Lexus ISF
Lexus GX, RX and LX
And lets not forget the Hybrid variants.
That's at least 21 models not including trucks.
Japanese manufacturers are no different then American companies when it comes to a plethora of models.
Take some time to learn something about the industry.
Mike| 2.11.09 @ 5:01PM
Eric. You never explained why there has been such a persistant overcapacity problem with the big 3. If you can't identity the cause, you certainly can't come up with a solution.
jr| 2.11.09 @ 5:59PM
Over producing autos is nothing new. It has been going on nearly forever. When the 2009 cars show up, the lots are full of 2008s, some of which had been there for nearly a year. Rust anyone? Ya think that if the gooberment made them destroy new autos that were unsold after 15 months -- would we all be better off? I don't think the dumb big 3 superdogs could handle that simple task, much less reducing the number of models they produce. Is that a money saver or what?
Thom| 2.11.09 @ 6:00PM
I’m trying to get my head around all this undo complexity worship about why the auto industry is in the tank and especially the American auto industry. When I bought the 20 year old car I’m driving today (205,000 miles) gas was $1.00 a gallon. It cost me about $500-600 a year to fuel this car. Last summer it cost me 4.5 times as much as it did in 1989 to fill up. Has my disposable income gone up 4.5 times in 20 years? No. I paid 8-9 percent interest on my first three car loans and paid them off in 22-30 months. The norm 30 years ago was three year loans that became 5 year loans long ago. Today, Vendors will give you what they say is 0% interest over several years. If you believe you aren’t paying interest on the loan you get from them then you probably believe the same when furniture stores do the same tactic. My direct vehicle replacement (having been in series production since the early eighties) would cost me $10-11,000 more than my 1989 vehicle or about 71% more than my 1989. It can’t approach the mpg my current car delivers today. Has my disposable income gone up that much? No. My gross has almost double though. When you consider the 25% increase in SS taxes put in place the year after I bought this car and the increased percentage of funds I have to invest for retirement that I couldn’t do as easily back in 1989, my net income as a ratio of gross has declined over the years. Add a home purchase in 1990 to this. Most older adults will relate to this situation. The population on average has aged out of its trend to buy a new vehicle every 5-7 years too.
Now look at what is offered today for vehicles and their prices. Most “import” design manufactures have as their bread and butter passenger cars not pickup trucks and SUVs. That’s a function of the cost of operation where they are home based for the most part. American manufactures long ago abandoned anything small or fuel efficient compared to what the “import” designs produce. American designs proudly put V6/V8/V10 on the side of their vehicles and still cling to the concept that the more V the higher the value to consumers. Doesn’t work as well as it used to, particularly when you realize our cost of fuel situation gets worse with our own and world population growth alone. Even with the current slump in demand and price nothing is being done to improve the supply situation and there are active efforts to make it worse in short order.
Combine the uncertainty (certainty in my book) of future fuel cost increases with a glut of large fuel inefficient pickups and SUVs from American manufacturers and the need for American manufacturers to make large numbers of and huge profits on these vehicles because no one will pay the high price they would have to ask for their passenger cars compared to the “import” designs and econ 101 takes over. Even if I had the money to replace my current vehicle I wouldn’t today, this year and maybe not even next year which is when I plan to. Most Americans are caught in this trap. Taking on more debt with the possibility of having to pay twice, three times the cost of fuel as now doesn’t spell good times for any manufacturer whose business model depends on making enough profit on the high end trendy vehicles to stay in business by taking a loss or breaking even on its passenger car fleet. Hence, not only is there excess capacity for the reasons listed in the article but Detroit based American manufacturers have been robbing Peter to pay Paul for 4 decades now and the bill has come due. A fool assumes $4-5.00 a gallon gas isn’t coming back if our economy recovers. My fuel cost increase the last few years alone would be equal to or more than my annual loan payment on any vehicle. Most people have figured out they can’t continue to make large loan payments on vehicles and put fuel in them too. That’s where we are now. People will make larger down payments, put off buying until they have to in order to make smaller monthly payments in order to afford the fuel cost they can’t do much about. Catch 22 kind of. Detroit lived off cheap credit and low fuel prices for decades. They just can’t keep this much production with $73.00 average W&B;cost and their cash cow profit centers not selling. The party is over for them.
Thom| 2.11.09 @ 6:09PM
Mike said, "You never explained why there has been such a persistant overcapacity problem with the big 3."
Because Detroit is owned by the Union which won't agree to permanent labor/plant reductions thus it is carrying a very high fix cost basis ($73.00 W&B;cost) to cover all the baggage it carried over the decades (three pensioners for every worker via buyouts and early retirements for example). They need volume to make up the difference with variable cost savings vs. fixed cost. Same problem for any Capital intensive business. If our airline producers did the same as Detroit did years ago they would already be out of business. Solutions? There are lots of solutions but no good one left that won’t gore someone’s ox in the worst kind of way.
David Govett| 2.12.09 @ 4:36AM
Did we Americans not agree that politicians know better how to spend our money than we do? Did not the recent election make that evident? Foolish me, I thought a republic of experienced managers superior to a democracy of easily deceived scatterbrains. I could not have been more wrong. Henceforth, I shall keep my head down and mouth shut at my job, and willingly turn over my paycheck to the government to do with as it sees fit, in this best of all possible hells.
mpgomatic| 2.12.09 @ 8:41AM
Call me an idiot (go ahead, plenty of people do), but I firmly believe the key to our nation's turnaround is in ending our dependence on foreign oil. To achieve that goal, our automotive fleet must change rapidly to use less petroleum. There are three primary ways to do this: through the use of highly fuel-efficient clean diesel engines, through electrification, and through natural gas conversion. All of these technologies exist today and are being implemented by the automakers (and aftermarket) in various forms.
There is excess capacity, no doubt about that ... but if we use that capacity to our favor, we can accomplish a goal for the common good. The factories need to build the vehicles that will allow US to achieve energy independence. Americans must have the will and the way to purchase and maintain those vehicles.
Brazil did it. America can too.
Jason Lewis| 2.12.09 @ 10:53AM
You do raise some very valid points!
RT
www.anon-tools.us.tc
Auto Parts Dude| 2.12.09 @ 12:55PM
I think the government is missing the fact that though a bail out might be good at present to keep these companies going, it is but a short term solution. Even if the big 3 makes it in the next few months, the decline in demand will eventually catch up with them, causing more losses. I for one am saddened by the loss of jobs that might result once the big 3 fails to hold their ground, still, I think the government is just delaying the inevitable. The industry is currently in downward spiral, and unless the administration thinks of a better way, down the drain will go the public's hard earned money.
the-gunslinger| 2.12.09 @ 2:07PM
This is exact result of Soviet Central Planning: surpluses of stuff people don't want, and shortages of the stuff people do.
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Commander| 2.19.09 @ 9:26AM
How do we sustain our economy...one that has become so effecient in producing and consuming that we have an overabundance of just about any thing we desire? Do we need full employment to produce all the material goods that we can possibly consume?
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Mark sells cars| 2.22.09 @ 10:37AM
Although it may not seem fair I believe in selective failure. Let brands and manufacturers with a slumping or declining sales record lets say over the last five years go. No matter what the cost to jobs.
It's like thinning a struggling Forest. You go threw and remove all the dead wood before the whole forest burns down to the ground.
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