I love optimism as much as the next guy. The last thing we need in our business are perpetually negative people.
I am neither an optimist nor a pessimist. I’m an opportunist, in the best sense of the word. I try to stay rooted in reality and react appropriately for whatever the world serves up. As an avowed opportunist, I’m also a realist.
I just read another extremely optimistic article predicting 18 months of increased U.S. sales that will approach 18 million new units before leveling off near the end of 2017.
In similar articles I’ve seen, every analyst, economist, and statistician weighed in along with analysts from TrueCar, Edmunds and Kelley Blue Book, as well as other industry insiders and auto executives.
Within a few decimal points every one of these experts and analysts were in agreement: We’re gonna sell a boatload of cars and trucks in North America in the next two years. Party on, Garth.
Now, I’m not saying that won’t happen. I am equally cautiously optimistic that they will be right and we’ll eat cake. But the realist side of my nature kicks in and the opportunist starts analyzing possibilities and contingencies.
First of all, the majority of the analysts’ predictions are based on pent-up demand. The average age of a car on the road is 11.5 years. Every day somebody drives a car is one day closer to the day he or she absolutely need to get a new one, or a newer one.
So, what could possibly go wrong? Is it just me or is anyone else concerned that China just crashed hard? Feeling it are Ford, General Motors, Chrysler and Volkswagen. The list goes on.
Every manufacturer has major investments in plants and resources in China and in July the Chinese stock market crashed and continues to tank.
Meanwhile, the Russian economy is in the toilet. Greece had to get bailed out. Puerto Rico just defaulted on its national debt. It is an American territory with a population less than Connecticut’s and a debt greater than the state of New York’s. Who’s going to end up bailing them out?
The point is that it appears economies are tanking around the world. An exception is Mexico which is seeing a lot of manufacturers relocating jobs and resources there, including major multi-billion-dollar auto plants.
Something else could derail car sales in a big way. Uber is the most valuable business startup in history. It is valued at $53 billion. Millennials love Uber.
What if Millennials stopped buying cars because it’s just too easy and cheap to hop into an Uber vehicle whenever they want to go anywhere? How many monthly Uber rides equal a car payment?
Interest rates are going up. So are car prices. My last Cadillac Escalade was a ’10 model, completely loaded and tricked out. The MSRP was just over $60,000. That same Escalade today with identical features has an MSRP of more than $100,000.
Now, someone might say, “Look Ziegler, there are a lot more features and technology in the ’15 model.” And I would say “Yes, but it’s the same chassis and frame and motor and I really don’t need a lot of that technology.”
That’s what a lot of consumers probably are saying. Geez, Louise, some mainstream cars are priced at 60 grand. We’ve priced ourselves beyond what many consumers are willing to pay. That’s why there are so many old cars on the roads.
The Fed just bumped interest rates for the first time since 2008. Okay, not significantly, but still rates are moving up. We know that’s not going to end with the first bump. Sort of like the movie Jaws. When the unseen shark was coming you heard the first couple of notes of tension-building music and you said, “Oh no, it’s the shark again.”
We’re resorting to 84-month financing to keep the payments affordable, but that can bury consumers in a car for more than five years minimum after they trade-in their upside-down car and roll the outstanding debt into the new loan. Extended term financing could kill our momentum.
Wait a second Ziegler, leasing is having a strong revival. We are currently leasing cars at 29% of all retail transactions on new cars. Okay that’s a good thing, especially because most of these leases are going at 39 months.
Of course, that’s going to create a whole lot of certified pre-owned units. Throw that into the mix with all of the rental fleet returns that are currently tallied as sales.
Several manufacturers have loaded up the rental companies and the reckoning is coming. Remember if we do sell 17.8 million new units again, there also will be approximately 45 million used units sold, if history is a correct indicator of future events. Suddenly, we’re cramming 62 million car sales at 200 million licensed drivers. That might work, but not one year after another.
The final thing that could hurt the sales boom is the government regulating retail finance. Forgive them because they know not what they do. If the Consumer Financial Protection Bureau’s regulations aimed at controlling the auto finance industry are too tough for subprime, then it will disappear.
Senator Elizabeth Warren (D-MA) and other architects of the plan will effectively kill subprime consumers’ ability to secure financing and buy a car. Subprime is a big segment of auto financing. The more the government restricts dealer-arranged financing, the more it will hurt the very class of customer it wants to protect.
There are a lot of people who would never have the ability to own a car if the dealer didn’t leverage the lenders to get their deal approved. Nobody is going to loan money to proven high-risk customers without a rate-to-risk margin.
Debbie and I are grabbing the dog and heading to Florida tomorrow. This is the first vacation we’ve had that wasn’t a business trip in more than 10 years. She thinks I will probably work the entire time. The auto business won’t crash before I return. But I’m keeping an eye on it just the same.
Jim Ziegler president of Ziegler Supersystems based in metro Atlanta, is a trainer, commentator and public speaker on dealership issues. He can be email@example.com. WardsAuto readers also may comment on this article by logging in or registering below.