Autoline on Autoblog with John McElroy
by John McElroy on Jul 28th 2008 at 12:33PM 
THE AMAZING SHRINKING CAR MARKET
As car sales continue to spiral downward, some product planners in the industry are beginning to ask the unthinkable: is the American car market going to shrink permanently?
They are starting to consider the possibility that the days of selling 17 million new vehicles every year are over, and that going forward the American auto market is going to be smaller.
There are a number of reasons why product planners are beginning to contemplate this possibility, but the two biggest causes are the high cost of oil and the skyrocketing costs of regulations. Amazingly, even though raw material costs are soaring at rates never seen in a century, the car companies say that pales in comparison to cost pressures they're grappling with due to CAFE, the California CO2 standard, and upcoming safety standards.
Whatever the cause, if, and I emphasize if, the U.S. car market is indeed going to be smaller in the future, that would have a drastic and painful impact on the manufacturing base in the country.
John McElroy is host of the TV program "Autoline Detroit". Every week he brings his unique insights as an auto industry insider to Autoblog readers. Follow the jump to continue reading this week's editorial.
The impact on the manufacturing base will show up in not-so-obvious ways, too. For example, as the industry switches from V6 and V8 production to 4-cylinder engines, it will not need as much casting or forging capacity. After all, one V8 block equals two 4-cylinder ones. The same goes for the heads, the cranks, pistons and con rods. And that means it'll need a lot less machining capacity.
There's no question that car prices are going up, and will continue to go up for the foreseeable future. For nearly two decades now, the massive profits that car companies made on full-size pick-up trucks and SUVs literally subsidized the cost of selling passenger cars. With sales of pick-ups and utilities in the tank, automakers can no longer afford to use passenger cars as loss leaders. They're going to raise prices. They'll do it slowly to be sure, so that most people don't notice it at first. They'll raise them 1% here or 2% there, whenever and wherever the opportunity presents itself, even pushing through several price increases a year.
And as those prices go up, they'll start to push customers on the fringes to seek out other alternatives, like keeping their old car longer, or turning to public transportation, car pooling, bicycling, or even telecommuting. And if the market shrinks, that means the industry will have lower economies of scale-fewer vehicles to spread their costs over. That too will cause prices to go up, and force more people out of the market.
Actually, as I've written here before, there is already a long-term trend in place of fewer people buying new cars. In the 1970s typically 7% of the population marched into a show room and bought a new car every year. In the 1980s and 90s that fell to about 6%. Last year it dropped to 5.4%. It varies from year to year, but the trend is unmistakable.
What has saved the industry up to now is that the population of the United States continues to grow ever year, by more than 3 million people. That means every 10 years we're adding over 30 million people, and a lot of them have to buy cars.
That's why I have a hard time believing the U.S. market will permanently shrink. But I'm not the one doing product planning for the car companies. And the ones who do tell me they are starting to plan for that possibility.
Autoline Detroit
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Last week's show: "That's a Wrap"
As car sales continue to spiral downward, some product planners in the industry are beginning to ask the unthinkable: is the American car market going to shrink permanently?They are starting to consider the possibility that the days of selling 17 million new vehicles every year are over, and that going forward the American auto market is going to be smaller.
There are a number of reasons why product planners are beginning to contemplate this possibility, but the two biggest causes are the high cost of oil and the skyrocketing costs of regulations. Amazingly, even though raw material costs are soaring at rates never seen in a century, the car companies say that pales in comparison to cost pressures they're grappling with due to CAFE, the California CO2 standard, and upcoming safety standards.
Whatever the cause, if, and I emphasize if, the U.S. car market is indeed going to be smaller in the future, that would have a drastic and painful impact on the manufacturing base in the country.
John McElroy is host of the TV program "Autoline Detroit". Every week he brings his unique insights as an auto industry insider to Autoblog readers. Follow the jump to continue reading this week's editorial.
The impact on the manufacturing base will show up in not-so-obvious ways, too. For example, as the industry switches from V6 and V8 production to 4-cylinder engines, it will not need as much casting or forging capacity. After all, one V8 block equals two 4-cylinder ones. The same goes for the heads, the cranks, pistons and con rods. And that means it'll need a lot less machining capacity.
There's no question that car prices are going up, and will continue to go up for the foreseeable future. For nearly two decades now, the massive profits that car companies made on full-size pick-up trucks and SUVs literally subsidized the cost of selling passenger cars. With sales of pick-ups and utilities in the tank, automakers can no longer afford to use passenger cars as loss leaders. They're going to raise prices. They'll do it slowly to be sure, so that most people don't notice it at first. They'll raise them 1% here or 2% there, whenever and wherever the opportunity presents itself, even pushing through several price increases a year.
And as those prices go up, they'll start to push customers on the fringes to seek out other alternatives, like keeping their old car longer, or turning to public transportation, car pooling, bicycling, or even telecommuting. And if the market shrinks, that means the industry will have lower economies of scale-fewer vehicles to spread their costs over. That too will cause prices to go up, and force more people out of the market.
Actually, as I've written here before, there is already a long-term trend in place of fewer people buying new cars. In the 1970s typically 7% of the population marched into a show room and bought a new car every year. In the 1980s and 90s that fell to about 6%. Last year it dropped to 5.4%. It varies from year to year, but the trend is unmistakable.
What has saved the industry up to now is that the population of the United States continues to grow ever year, by more than 3 million people. That means every 10 years we're adding over 30 million people, and a lot of them have to buy cars.
That's why I have a hard time believing the U.S. market will permanently shrink. But I'm not the one doing product planning for the car companies. And the ones who do tell me they are starting to plan for that possibility.
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Autoline Detroit
Airs every Sunday at 10:30AM on Detroit Public Television.
Autoline Detroit Podcast
Click here to subscribe in iTunes
Last week's show: "That's a Wrap"
Reader Comments (Page 1 of 2)
Boom, bust, and echo 12:52PM (7/28/2008)
With the exception of healthcare, aren't all markets in North America bound to shrink as the boomers age, die, and their wealth gets wrapped up in healthcare? We're not exactly at replacement rates in the birth rate, are we?
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Scott 1:00PM (7/28/2008)
Let's not forget that a sizeable portion of the new car market was brought about by cheap and easy credit. It was all to easy to go trade in your 2-3 year old car on a new one, even when upside-down on the original load, and walk-away with a brand new car you probably couldn't afford with a nice 60-72 month loan at a low rate. The entire economy was based on this cheap-and-easy credit (see the housing market) and now that the credit crisis is in full swing I seriously doubt we'll ever get back to the 17million/year mark. I don't think that after the amount of pain these finance companies are going through that they'll want a repeat performance any time soon.
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Rene Curry 5:53PM (7/28/2008)
I agree with Scott. Now to further his comments on the housing market...
Everyone was using their home equity as an ATM to either buy vehicles beyond their reach or to shore up other credit that allowed more to be spent on vehicles. Having a tax deduction justified everything!
What I think the car companies do not see coming is that they have another problem other than gas prices, that is affordability.
The housing market was taken down for two reasons. Employment in the midwest followed by affordability on the coasts. This same effect will happen to autos.
The auto companies are all focused on 30K priced vehicles to mine profits whether it's a small or large vehicle. The problem is that over the next few years they may have 30K + vehicles sitting next to all those SUV's that aren't selling. They could get blind-sided just like $4.00 gas did to them.
Sure, premium vehicles will still sell for what they are, premium! However the mentality that an everyday vehicle should be in the 30K range may be in for some rough water in the next few years.
This is a real problem because every automaker is targeting this price range without an alternative plan.
Nightcrawler 8:56PM (7/28/2008)
"...I seriously doubt we'll ever get back to the 17million/year mark."
Remember, never is a very long time indeed.
mikeyt 1:03PM (7/28/2008)
Perhaps one day the auto industry will shift from making reactionary decisions to being more proactive and better able to predict future market conditions.
"Small" and "budget" (read: low quality) are NOT mutually exclusive!
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Kumar 1:01PM (7/28/2008)
That stat about the percentage of people buying a new car YEARLY going down is pretty lame.
I'm more interested in the average number of years people have been holding onto their cars. It had been coming down in the last few years with more people leasing or selling their vehicles when they're upside down because they had been going on payment, not total paid (including interest).
I can't find it quickly, but I thought it had gone from an average of 10 years 15-years ago, to an average of 3-5 years of ownership 2-3 years ago. I know I'm already planning on sitting on my car an extra year to save ca$h.
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kballs 1:37PM (7/28/2008)
The percentage of people buying new cars every year can be misleading, since our total population goes up every year (helped by immigration). The total number of new cars sold every year doesn't directly follow the percentage of people buying them.
That said, the credit crisis has played a role in lots of people buying new cars in the last 5-10 years, and a sudden drop recently as the economy is weak and credit is tighter. How long people keep their cars on average seems to depend more on how easy it is to get credit and how good the job market is than long-term durability of the vehicles.
Brad Purvis 1:04PM (7/28/2008)
I think if we take a look at what happened to the British auto industry in the 70s and 80s, we see almost the exact same thing happening to the US auto industry today. The "Big Three" have held onto their legacy way of doing things for too long and now they are in a downturn from which they may never recover.
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mike 1:04PM (7/28/2008)
So what's the downside of having fewer cars on the road?
Boom, birth rate does not matter, simply because millions of immigrants come to USA every year........we also buy cars.
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Russell 1:09PM (7/28/2008)
A few thoughts on the declining USDM
1. It may not be a bad thing. Sure there will be painful losses, but the yearly dumping of cars/suv's into rental fleets was an artificial representation of the marketplace.
2. We should have a national standard of CO2/emissions. One that is fair to the states, but is not so onerous as to hold our industry hostage to the whims of election year politics or the unrealistic regulation of carbon as a pollutant. I do believe in the need to regulate carbon emissions, but it is better done at the macro level (i.e. coal fired power plants).
3. Take the healthcare costs out of the business. The big 2.5 is going to falter and quite possibly fail. I dont have any easy answer (other than transferring the responsibility and 20B to the feds...wildly unpopular)
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xspeedy 9:27AM (7/30/2008)
The solution to reducing the cost of auto development and regulations is to have world standards with perhaps a tiered format for the "third world". Europe, Asia, Canada, and the US all have differing standards for everything from crash testing to emissions to glass to bumpers to headlights. Let's create a world governance body that develops a tier 1 standard for all the wealthy nations and a tier 2 standard for emerging markets or thrid-world countries like India (Tata Nano for example).
The fact that California has their own standards for emissions within the US is absurd. Is every state to have their own standard for things like safety and emissions? How about every city or county?
Having a single standard would make manufacturing so much more cost effective for the manufacturers and much of that savings could be passed down to the consumer. Given the pressure of materials costs, hundreds of slightly differing standards is something we don't need to pay for.
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ML 1:28PM (7/28/2008)
Excellent point xspeedy ("The fact that California has their own standards for emissions within the US is absurd.") and I totally agree. But then, California thinks it knows what's best for the country more than anyone else and they've thought that way since deciding to do something about smog in the L.A. basin decades ago. They just flexed their muscle to the point that the auto industry had to comply, which escallated the cost of manufacturing vehicles specifically for California emissions regulations. The federal government SHOULD mandate nation-wide regs in all areas of transportation so that GM, Ford, & Chrysler can funnel resources to meet them on a broader, national scale.
snakesausage 1:35PM (7/28/2008)
XS, this is something that I think would be a great benefit to all of us. One more thing is to pick side of the road to drive on and measurement for speed we should use. It is absurd that in the modern times of the 20th century we did not work this out.
Mike Lee 1:14PM (7/28/2008)
I like your provocative first question . . . "is the American car market going to shrink permanently?" The answer? Yes(!), unless GM, Ford, & Chrysler start LEADING in automotive technology instead of playing catch-up. They've collectively watched imports take market share away from them since the 1970s and done virtually nothing substantive about it! And if things continue the way they are the GM, Ford, & Chrysler might consider merging into one company to combat manufacturers who want this market as their own. And don't think that China isn't already planning on just that(!).
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Julius 3:45PM (7/28/2008)
Mike - I think you misunderstand. He's talking about the OVERALL sales decline - not just the domestics. It's already happening in Japan, where fewer people are interested in the hassles of owning a car.
The question is, will that also happen in the US... (the idea of the imports taking a lion's share of a shrinking market is another thing entirely.)
Artie43 1:16PM (7/28/2008)
We have been building too many cars in this country. The good times are gone and people don't have the money to spend on vehicles. People are up to their neck in debt and just don't have the money to spend. Easy day are here and gone.
So it is good that the industry shrink. Most new cars are good for many years service any more. And IMO consumers want good mileage, safety and reliability. Once they have the car they need, why would they want to buy another one anytime soon. We have been living in a time of conspicuous overconsumption. Good that this seems to be coming to an end. We will all save money and the environment too.
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Vintage 1:39PM (7/28/2008)
Nice post, and exactly why I keep posting my video that hybrids are not good for the environment. We overproduce cars to the point where used cars with simple problems are scrapped, instead of repaired. It is wasteful, unsustainable, and it pisses me off since I like a lot of older vehicles.
Hugh G 1:22PM (7/28/2008)
Boomers are buying overpriced choppers from OCC. Take a look at their new HQ in New York. Its as big as GM's!
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Vintage 1:24PM (7/28/2008)
Cars are reliable now. My 3 vehicles have 135k, 193k, and 227k. All run and drive fine. As long as I maintain them, I won't be buying another vehicle. And when I do, I won't be buying new. It's a waste of money.
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Rob 1:35PM (7/28/2008)
"There's no question that car prices are going up, and will continue to go up for the foreseeable future. "
Thanks to more unfunded mandates from Fedzilla for another hidden tax...
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