The auto industry has always been cyclical and anybody in the business for over a decade knows this. In fact, 2016 ended the longest year-over-year growth in history. Of course that streak started in 2008 when the financial crash happened. What you do not want are cyclical mistakes and that seems to be the direction we are headed.
Automakers Have Short Memories
It was only 8 years ago that the CEOs of Chrysler, General Motors, and Ford took three private jets to Washington to beg for a government bailout. Ultimately, Chrysler and General Motors filed for a “controlled bankruptcy” and Ford was able to avoid it through some very intelligent moves by then-CEO Alan Mulally.
There is essentially nobody left who remembers what got them in trouble.
One problem in the auto industry is although everything crashed not all that long ago, all the executives who were in the position of making decisions are gone. So are many of their underlings, so there is essentially nobody left who remembers what got them in trouble.
What Lead To The Issues?
There were a lot of mistakes made by automakers, not just the Detroit Three. One of the big ones was trying to outrun a declining market, meaning the automakers just kept building vehicles, shoving them down the dealers’ throats, and pouring on huge incentives. This caused a massive cash burn that was insurmountable.
Not only were the car companies out of money, so were the captive finance arms, like Chrysler Credit, GMAC, and Ford Motor Credit. This caused all sorts of problems getting people financed, especially during the Cash for Clunkers program initiated by the government.
Another crippling factor for the auto industry was the overwhelming cost of health insurance, retirement plans, and for the Detroit Three, United Auto Worker wages. In 2006, the total compensation of a UAW worker at Ford, GM, and Chrysler ranged from $70 per hour to $75 per hour. At Honda and Toyota, it was $48.
So Where Do Things Stand In 2017
I am seeing some of the same mistakes this year that I saw back in the late 2000s. Inventories at dealerships are ballooning, and here we go with massive incentives again. Incentive spending just last month was $3550 per vehicle sold in the United States. Remember, a good number of vehicles have no incentives, so some were double that amount. Even Subaru, which doesn’t rely on incentives is spending 60% more to sell vehicles through the first six months of 2017.
I am seeing some of the same mistakes this year that I saw back in the late 2000s.
Last month, Hyundai and Kia both spent 25% more on incentives than they did in June 2016. GM spent over $4300 per vehicle last month, Ford and Nissan both spent $4100, Fiat Chrysler spent almost $4400 per vehicle, even Mercedes spent $4450 per car. Only BMW has cut back to $4150 per car versus $5400 per car last June.
Longer Term Loans
For me, the biggest looming disaster for the auto industry is long-term loans. While the price of vehicles continues to rise, people are stretching out loans to keep the payments affordable. The average price of a car in June 2017 was almost $33,000, and the average loan amount was over $31,000.
Most alarming, the average loan term was a whopping 69.3 months. So, people buying cars today are signing contracts that are not paid off until April 2023. They are also signing up for payments that are $517 per month, an all-time high average. That is great unless something causes gas to shoot to $4 per gallon.
For me, the biggest looming disaster for the auto industry is long-term loans.
What do the longer-term loans mean for the auto industry? It means it is going to take a lot longer for people to be in position to trade vehicles. Some automakers are even offering cut-rate interest rates on 84-month loans, which to me is suicidal. A few of the car companies, like Toyota, continue to put the bulk of incentive spending on short-term leases, which puts customers in a position to trade much sooner.
2016 was the best year ever for the auto industry, but all streaks end sometime, and it looks like 2017 will be the year to break it. I think there will still be over 17 million vehicles sold, which is a solid year. However, the incentive spending is making this year look better than it really is.
If I were running a car company today, I would study everything that happened in 2008 and 2009 to see what mistakes were made and make sure those are not repeated.