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Main reasons why the U.S. car sales have peaked

18 May 2017
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Main reasons why the U.S. car sales have peaked

We’ve been a bit worried about the car market after Ford Motor announced that it plans to cut 10 percent of its salaried workers. General Motors didn’t show better results, it reported a 4.7 percent sales drop on April, just like Fiat Chrysler who might get sued for using illegal software which violate the U.S. clean-air rules. We’ve been trying to understand the reasons for the slump, and here’s what we got:

 

 


 

Demand has peaked. Last year, there was a record vehicle sales volume of 17.55 million. But the National Automobile Dealers Association forecasts that will slide to 17.1 million in 2017, which still is on the high side historically. And that will come despite a barrage of discounts -- about about $3,900 per vehicle, or around 10 percent of the suggested retail price. That's the biggest discount level since the recession.

Why the demand falloff? It may simply be that, for now, everyone who wanted a car bought one. Low inflation and interest rates, along with cheap gas, may have pushed more buyers into the market than would typically want new wheels. 

During the recession and its aftermath, many owners held onto their vehicles. So then they traded in the old ones, creating a glut, which further plumped up the over-supply. Morgan Stanley analysts predict that used car prices will fall by up to 50 percent by 2021.

 

Credit reversal. Low interest rates led to more available credit for auto buyers. One aspect was an explosion in long-term loans, to six years or so. That's a long time to be committed to a vehicle, and consumers end up paying more over time in interest. 

Further, reminiscent of the housing boom and bust, lenders loosened standards, and auto loan generation ballooned 56 percent since 2009, with a third of it subprime. 

As a result, car loan delinquencies (90 days or more past due) have climbed to their highest levels since 2008. The upshot is that many lenders are reexamining their lending policies, which could bring a credit contraction. Hence, the easy-money spigot likely won't be open wide for autos for too much longer.

 

 

Problems overseas. Although most U.S. multinationals did better offshore in 2017's first quarter, Detroit automakers made very little money outside of North America. General Motors was the best of a bad lot. Beyond North America, GM had difficulty breaking even, with decent performance in China offset by South American and European losses. It has put its European brands, Vauxhall and Opel, up for sale.

Ford garnered all its net income in North America. Italian-controlled Fiat Chrysler, despite its London base, made 80 percent of its earnings in North America. 


 

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