By on December 3, 2008

US auto sales in the month of November are down to a 26-year-low, with losses ranging between 30-47 percent for the top six manufacturers. I went to visit one of my favorite Mercedes dealers this weekend to see how my friends were faring (truth be told, I was bottom fishing) and I heard one tale of woe after another. One salesman, who I have known for more than ten years explained that he had sold one single car for the month of November. His wife had worked for one of the banks that cratered a few months earlier, so they were trying to get by on his meager commission, without much success. Since they cannot afford their mortgage payment anymore and they are underwater on the value of their home, my friend is staring down the barrel of the bankruptcy option. Even if you slept through much of Econ 101 in college, you cannot fail to recall that when supply greatly outstrips demand that lower pricing is the only solution and I am not talking temporary discounts and special financing deals. Everything you own is worth less today than yesterday- your home, your 401K and your only consolation is that the gas costs less, retailers are cutting their throats to get your business and soon even food will cost less.

Hello, auto producers? When was the last time you announced a permanent price reduction across your product line- sometime before Germany invaded Poland, if I am not mistaken. There is no cost based excuse for why the price of any automobile should remain the same in 2009 and consumers know this and are simply going to sit things out until GM and Toyota and Mercedes announce their $9,999 Cobalt, $14,999 Prius and $39,999 E Class. Want to sell cars like it is 1998, then you are going to have to price them like it is 1998.

When my home is again worth as much as I paid for it, then maybe I will be shopping for that Black Series SL65. Until that happens, I will patiently wait to become the second owner at 30% of the initial selling price, a figure much closer to true market value in this economy.

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25 Comments on “And Now The Really Bad News…...”


  • avatar
    dwford

    Good point! There is only so much of a discount the dealer can afford and bother to turn on the lights every day. At my dealer, we sell new cars well into holdback everyday to try and meet our quota, and for some customers, even that minus rebate is not enough to make them budge.

    The manufacturers have had numerous prices increases over the last 2 years as commodity prices have soared, but with the world wide recession, commodities have come way down, and so should sticker prices.

    All I can say to consumers is to make hay in the market while you can. During this recession and the coming Big 3 downsizings, thousands of dealers will close, and those that remain when the economy recovers will be stronger than ever and less willing to discount when that pent up demand returns…

  • avatar
    menno

    Well, seeing as everyone’s having a downer after reading this, I’ll “share” the little ‘ciphin’ that I did tonight. Looking ahead at how the Greater Depression might just play out…

    Let’s “assume” a collapse of new vehicle sales as bad (in percentage terms) as the great depression (mid-year 1929 sales peak through 1932 trough); that’s a 75% overall drop from the top (2007).

    From 16 million units per year down to 4 million vehicles new vehicles per year in the United States. I know; it’d be a total blood-bath.

    Let’s assume 80% of the auto brands go away. As in, forever.

    Which do I think will survive? You won’t believe my list. What are your best guesses, fellow B&B?

    By sales:
    Toyota. (No Scion, no Lexus).
    Ford. (No Volvo, Mercury, Lincoln, or Mazda).
    Honda. (No Acura).
    Hyundai. (No Kia; buys up Aptera, though).
    Nissan. (No Infiniti; known as Renault in Europe; no Nissans there).
    Suzuki (post-merger with Mitsubishi, strengthened by a very strong #1 position in India, good Chinese sales, good global sales – relatively speaking, that is…)(Plus 50% ownership of a big Japanese li-ion battery company and backing of Mitsubishi Heavy & Mitsubishi Bank wouldn’t hurt)
    BYD (yes, BYD – electric and hybrid cars at affordable prices backed by one of the wealthiest men in America – and the Chinese)
    Subaru (part of Toyota).

    That’s it.

    Gone – as in dead – would be:

    Acura (See Lexus).
    Audi (See Porsche).
    BMW (too small to survive the great collapse).
    Buick (GM kaput/gone/evaporated/dead).
    Cadillac (GM…)
    Chevrolet (GM…)
    Chrysler (you must be joking…)
    Dodge (figure it out for yourself)
    GMC (GM…)
    Hummer (um, you already know)
    Infiniti (Nissans are expensive enough…)
    Jaguar (Tata to Jag…)
    Jeep (died with Chrysler)
    Kia (morphed into Hyundai, as the stronger partner, owning 50% of Kia – not the other way around)
    Land Rover (roll over, Rover… Rover?! C’mon, boy… awwww… he’s dead….)
    Lexus (just as the Great Depression, nobody wants to be seen in a luxury car; a Camry is rich enough)
    Lincoln (see Lexus)
    Lotus (lots of trouble, usually serious – and history)
    Mazda (too small to survive the big shock)
    Mercedes-Benz (oldest remaining carmaker – no more – screwed themselves by yanking the rug from “partners” Mitsubishi, Chrysler and Hyundai…)
    Mercury (flew away)
    Mini (see BMW)
    Mitsubishi (morphed into and merged with Suzuki in order to survive, especially valuable; the MiEV, Lancer and Evo…)
    Pontiac (arrow through the heart)
    Porsche (Porsche financial shenanegans caught up to them…. VW, Audi, Porsche – gone – Porsche executives rotting in a German prison)
    Saab (sob sob sob, what will Ultra Liberal New England Profs drive now? Oh… Subarus, of course)
    Saturn (fell out of orbit and into the sun when GM did same)
    Scion (may as well just let that one go…)
    Volkswagen (see Audi and especially Porsche…)
    Volvo (long dead and forgotten, too small to make it)
    Mahindra (DOA)
    Other Chinese makes (Geely, Brilliance, ect) (DOA)

    US unemployment by year’s end 2011? 30%.
    Michigan unemployment by year’s end 2011? 60%.

    Wanna buy a new car, or anything, for that matter? Got cash? Or a FICA score of 750 plus and 25% down?

  • avatar
    tom

    Well, there’s more to it though…The problem is that car prices in the US are already way too low. Supply has for a long time been well above demand. That’s why they’re losing money.

    So the result of this crisis will actually be higher prices, once the former Big 3 are either gone or have massively downsized (well, actually everybody is downsizing right now).

    This credit crisis is the perfect storm…it’s like the asteroid that wiped out the dinosaurs. Those who’re not fit to survive will die and they’ll leave behind a new, competitive market.

    Prices might go down a little bit in the immediate future, but once the output has been reduced and the lots start to get empty, a car will cost you more than before the sh*t hit the fan.

  • avatar
    red5

    So why can’t I get a good deal on a Honda Fit? Oh, maybe because there were only 6 on the lot, and it’s the only car they are selling quickly.

  • avatar
    solo84

    @menno:

    As extensive as your extinction list is, I can’t help but to think that the list may be a bit far fetched. But hey, it seems that everyday brings more doom and gloom to the auto industry. Many brands on the list are capable of surviving the turmoil in my opinion.

    I can see your points on some dead brands, but one that I particularly disagree with? Your assumption regarding Mercedes-Benz and how they “screwed” themselves by letting go of Chrysler. The merger was a mistake from the start, and sure they could have dropped Chrysler sooner, but beneficial now nonetheless.

    my .02

  • avatar
    Adub

    I’d love to pick up a new-ish luxury automobile in this cratering market, although a 335i is the extent of my reach.

    An M5 would be awesome, though…

  • avatar
    Justin Berkowitz

    Jay makes an interesting point.

    Real wages haven’t risen in the U.S. in an eternity. Why should real car prices increase and expect sales to stay the same?

    But as someone else said, car prices in the U.S. are already bargain basement compares to what so many other comparable countries pay (even without value added taxes).

    At some point, we might have to face the fact that a “rich” upper-middle class family drives a Ford Focus, not a BMW 3-Series.

  • avatar
    ajla

    menno:

    I think that as long as there are vehicles for sale in the US, there will be a Jeep brand operated by someone.

    Also, I would laugh and laugh if BMW went bankrupt in my lifetime.

  • avatar
    chuckR

    Thanks to the bills coming due on a national scale, we’re poorer. Well, maybe not Jay. So we need to aspire to a lifestyle of earlier years when we knew we were less prosperous.

    What would the price be for a car that was defeatured to 1960s or 1970s? No DVD, no eleventeen speaker multi-kilowatt stereo, no ten way power seats with heat/AC/magic fingers, no nav, simple climate control, smaller engines(6 sec 0-60 becomes the standard again, most are 8-10 sec). You can keep the ABS and ESC in them, the development costs are sunk.

  • avatar
    rochskier

    It’s a great idea to wait to buy if you have a hoard of cash or other tradeable assets you can set aside.

    On the other hand, anyone thinking they’re going to finance that Ferrari they’ve always wanted at 75% off MSRP is in for a rude surprise.

    Going forward it is going to be extremely hard for Joe Sixpack to obtain the necessary financing for any vehicle purchase.

  • avatar
    SunnyvaleCA

    Since they cannot afford their mortgage payment anymore and they are underwater on the value of their home, my friend is staring down the barrel of the bankruptcy option.

    If they have a “no recourse” mortgage (like every one I’ve ever seen in California), then just being underwater on the value is sufficient (regardless of ability to pay). But there is good news! You don’t have to declare bankruptcy or even hand over your money or valuables. It’s called a “no recourse” mortgage because the bank has “no [further] recourse” after you hand back the keys to the house. That’s what is in the loan contract that the bank wrote; you’re just keeping up your end of the deal!

  • avatar
    gogogodzilla

    Re: menno

    Considering that the VW group is partially owned by the government of Lower Saxony, it would be very hard to foresee the German government allowing their investment to be flushed down the toilet.

    Which would mean that Audi and Porsche survive as well, being part of the same group.

  • avatar
    TomAnderson

    Menno: What about the Italians? What would become of Ferrari, Maserati and (possibly) Alfa (I’m guessing, under your scenario, Lambo would go under with VW/Audi/Porsche)?

  • avatar
    redrum

    Since when has spending less money on cars been a bad thing? Haven’t financial advisers been preaching for seemingly forever that it’s better to hang onto your car for as long as possible, that far too many people needlessly trade in their car every few years just because they want to, taking huge depreciation hits each time and putting themselves in increasing debt? And yet now this is somehow ruining our economy?

    If someone decides against buying a car now, that unspent money doesn’t suddenly evaporate. If this continues there will be some inevitable pain as the economy adjusts to this paradigm shift, but people are going to eventually find other things to spend their money on, and new jobs will follow. Or maybe they’ll just take that money and sock it away in their retirement account — surely this would be a good thing?

  • avatar
    Martin Schwoerer

    I am with redrum here. I say, there is no harm in people shifting their expenditures to things that are useful to society.

    Want to spend your money on windows for your home, in order to save heating? Good idea. Invest in a super-expensive education for your child? That sounds fantastic. Lend some money to a friend with a good business idea? Risky, but valiant. Renewing the lease for your gas-guzzling car every year? But why?

    We need to harden up a little. Consumption does not make people happy. And the idea that it is patriotic to spend, no matter on what, is Cheneyist propaganda.

    Let’s look at our own role here. When exactly did it become the standard that a car *must* have a 0-60 time of under 10 seconds? Discussion of economical cars at TTAC has been, in my opinion, poisoned by this factor.

  • avatar
    ronin

    >>…”The problem is that car prices in the US are already way too low. Supply has for a long time been well above demand. That’s why they’re losing money…”

    Unfortunately, this is contradictory even to econ 101, and I can prove it: There is way too much supply for the demand. This is because the price they are asking is too high. Otherwise, the rumored ‘pent up demand’ (is it really there?) would not be pent up.

    A company cannot force demand, and it cannot force people to buy at a price point. They don’t get to set the price; the market does.

    Likewise for consumers. Consumers don’t set the price, the market does.

    Market price is that which a willing buyer makes a deal with a willing seller.

    This isn’t about wishing or fairness. We may like it or not. It’s not about what the car company cost is, or what the product people think they should be able to sell a car at.

    The only monthly blips up in recent years have coincided with red tag (etc) sales. This is the clue the car companies cannot read.

    Donut shop owners know this. Landscapers know this. Why do the best of the best in Detroit not get it?

    Their bid to Congress is a request for taxpayers to fund the ability to preserve the high prices of cars. And Congress will go along.

  • avatar
    improvement_needed

    Brilliant!!!

    no need to buy a new car if you already have one or two or three that functions perfectly!

    we’re seeing the results of the massive sales growth over the past ~5 years or so.

    canibalizing future sales for short term profits!!!

  • avatar
    menno

    Hi solo84, well, Chrysler is a disaster, yes. But the fact that DaimlerChrysler screwed it up doesn’t mean it was an entirely awful idea at the outset; look at it this way.

    What’s more viable, Mercedes-Benz on its own, or a global automotive operation comprised of a successful premium Western European operation PLUS a successful (at one time) US operation PLUS a reasonably successful Japanese operation PLUS a minority ownership stake in a really fast growing South Korean company?

    gogogodzilla, the Italian premium marques might survive (especially Ferrari, backed by Fiat) but the rest I don’t see surviving.

    As for BMW and Volkswagen group – I wavered as to whether VW could survive, but with rumblings going on in Germany as undercurrents re: Porsche’s little game, and with VW’s inherent weakness in the US, at the very least I can’t see them surviving in the US at all. I have to wonder if they’ll survive in their current form at all, but would give them a better chance of an un-merged Suzuki, since VW at least has a good market in China (which is much more precarious than the Indian market given that the Chinese could simply nationalize foreign ownership of the joint venture auto companies at any time – or does anyone think the Volkswagen Group, or General Motors or Toyota could amass an army to liberate their money from the Chinese?) Certainly the governments (Germany, US, Japan) aren’t going to fight a war over VW, GM or Toyota lost monies.

  • avatar
    menno

    Ajla, I’m pretty certain that car fanatics in the 1920′s didn’t think that Pierce-Arrow, Duesenberg, Cord, Auburn, Peerless, Stutz, Bugatti, etc. etc. would go out of business, either.

  • avatar
    Mark MacInnis

    Menno:

    Besides an (apparently) simplistic analysis of just flexing volume numbers from 1929 and applying them to recent volumes, how do you extrapolate 30% unemployment nationally or 60% in Michigan? Not saying your wrong, but it should be imcumbent on people swinging wild numbers around to provide some support for those assertions.

    I tend to be a pragmatic optimist (I know that sounds a bit oxymoronic (my wife sez emphasis on the ‘moronic’ part)). But, as a financial analyst, I can recognize cold hard factual numbers for a case when they are made.

    What I am saying is that it is EASY to spit out dire predictions, as you did, sitting at home calculating stuff. When you spit out the results of your cipherin’, without showing your work, reasonable people can’t look over your shoulder to verify if the assumptions upon you based your SWA guesses have merit. That is why serious academic work goes through a peer review process.

    I think what I am trying to say here, is that we have quite enough people yelling fire in a crowded theater, thank you. It should be a reasonable expectation that when you yell fire in a crowded theater, you at least have the sense to show people smoke, and maybe some of the actual flames. I think that ought to be a reasonable expectation for all the Best and Brightest who post here.

    The internet is a wonderful, dangerous thing. It allows free, real time communication. People who use the internet have a responsibility to make sure that what they are saying has a basis in fact.

    Again, not saying you are wrong. But, where are your supporting numbers, friend? Otherwise, perhaps you can keep your SWA opinions to yourself.

    To paraphrase Franklin D.: (who was pretty good at the leadership thing, even if he was a bit of a socialist.) “We have nothing to fear, but fear-mongering itself.”

  • avatar
    guyincognito

    “At some point, we might have to face the fact that a “rich” upper-middle class family drives a Ford Focus, not a BMW 3-Series.”

    “Let’s look at our own role here. When exactly did it become the standard that a car *must* have a 0-60 time of under 10 seconds?”

    Wow, this is some seriously depressing stuff.

  • avatar
    allen5h

    All the dealerships in America may be hurting, except one. My local Honda dealer. Yup, it’s different there. They tell everybody business is good, they have no problem selling cars.

    Maybe it’s because rich retirees from other areas are buying their new Hondas from this dealership? Why would rich retirees in Florida buy from a Florida Honda dealer when they can buy their new Honda in Kentucky?

    Or maybe it’s because they can qualify anybody who walks through the door into a loan? I think they have direct access to the U.S. Treasury’s bailout money. They may have a direct line to the treasury, you know, a red phone? A red phone is a great advantage to have, if you are the only dealership in America who has one.

    So don’t believe everything you read or hear in the MSM and blogs about dealerships hurting for sales. This may be true for tens of thousands of dealerships in America, of every make, but there is one exception!

  • avatar
    200k-min

    “Let’s look at our own role here. When exactly did it become the standard that a car *must* have a 0-60 time of under 10 seconds?”

    It didn’t become “standard” that cars have powerful engines. This is a phase fueled by cheap oil and easy money. Similar to the muscle car phase grinding to a halt with the 1970′s oil shocks/recession so too will this phase grind to a halt.

  • avatar
    menno

    Hi, Mark. Well, you asked for some numbers. How are these? (They’re not mine; I’m not that smart). Funny how my “guestimate” of 30% unemployment goes right in the middle of his figures, though, isn’t it? As for Michigan, well I live here and we’ve been in a recession/depression for, oh, about 8-10 years now – so I’m just doing a WAG (wild ass guess) as to the 60% just by looking around at what’ll happen when/if the GM and Chrysler companies fold up and blow away. We’ve lost our LAST car parts plant in the town where I work, for example, and I volunteer at a food pantry – so I have some clue.

    Here’s that link – it’s kind of long but absolutely terrifying, if even 10% is true. Which I unfortunately think, it is. It’s very interesting to note the commentary about B.O. too

    http://www.theinternationalforecaster.com/printerfriendly/International_Forecaster_Weekly/Financial_Crisis_Only_Squandering_Our_Future

    By the way, what’s wrong with 0-60 in 10 seconds as “fast enough”? Perhaps it’s a matter of perception; if you’ve sat behind the farty ass of a horse in a carriage, then 0-60 in 10 seconds is plenty fast, isn’t it? OK I’m joking, but what’s wrong with using good stewardship? Just exactly when is “enough” – “enough”? Not forgetting that once again, perception is a big thing. When I was a kid in the 1960′s, it was a pretty quick V8 powered car which would do 0-60 in 10 seconds. My wife’s four cylinder Sonata will do 0-60 in under 9 seconds; gets 32 mpg on the highway (5000 mile trip to/from Canadian rockies last summer at 70 mph proved it), tops out in excess of 125mph (way faster than most V8 cars even from the 1980′s), is safe, reliable, smooth, quiet – a great cruiser. Yet it’s looked down upon as a prole car. The rest of the world sees it as a luxury car! We’ll be joining them soon, I suspect.

  • avatar
    charly

    Ronin,

    most cars sold are statues goods. You don’t buy them for the service the provide but as a sign you can spend x amount of money. See for a good example every SUV sold. If you lower the price the only thing that will happen is that people would move to the new x dollar amount car.


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