Rising Inventories: A Race To The Bottom?

While our own Ronnie Schreiber may have taken Zero Hedge to task for its inaccurate story on unsold cars, Australia is facing a situation where rising inventories have created a buyers market, just as local production of automobiles is winding down.

Australia is a notoriously competitive auto market, with more than 60 brands competing for just 1 million units annually. Local outlet Carsguide is reporting that there are currently 150,000 unsold cars sitting in the country, with more arriving from global factories in each, leading to a massive oversupply of new vehicles.

Holden chairman Gerry Dorizas spoke to Carsguide, and provided an interesting quote in light of the fact that Holden will be ending local production by 2017

How can companies sell cars cheaper in Australia than in Europe…It’s not sustainable. I believe they (prices) will go up at some point in time. At some time this competition for prices will create a problem in the network…But that point has not arrived and car companies are rolling out new incentives with every passing week.

When production of the Commodore and Ute end, H olden will be reliant on imports from South Korea, Thailand and possibly Europe, as it seeks to offer a full line of Holden vehicles sourced from GM’s international operations. The brutal competition in Australia, along with changing market tastes, led to the demise of the Commodore and Australian manufacturing – undoubtedly a loss for enthusiasts and Australian industry. But these same forces have also allowed Australian consumers to get better deals on cars, particularly in the compact segment that is now replacing the large sedan segment as the passenger car of choice.

To the outsider, the stories from Carsguide, Zero Hedge, and elsewhere may be perceived as evidence of poor discipline by the auto manufacturing sector, and in many cases, they’d be correct. Inventories are rising back to pre-recession levels and easier credit are undoubtedly helping spur auto sales in the United States. Industry sources tell us that 2014 has seen record transaction prices, meaning that consumer spending, and by extension, auto financing debt, should be at record levels.

On the other hand, the current economics of the auto industry dictate that under-utilized capacity is a bad thing, and factories must be kept humming above a certain level (typically 75 percent of capacity) to remain profitable. Labor laws in many jurisdictions make it cheaper to keep cranking out cars than to lay off workers, even temporarily. Once they leave the factory gate, they become the dealer’s problem.