Lets Face It, We Were Buying Too Many Autos

In a recent New York Time article, Industry Fears Americans May Quit New Car Habit, the subject is the concern in the auto industry that once the economy starts to improve total vehicle sales will not return to the pre-recession levels.  The article talks about changing habits and that people are starting to realize that they just cannot afford to own a car, or at least keep buying new cars. 

At the sales high point, Americans were buying over 17 million new vehicles a year.  This is in stark contrast to this past April when the rate was about 9.3 million a year.  Some analysts estimate that the current level is about four million vehicles below an appropriate demand, about 14.5 million vehicles a year. 

In the U.S. today there are over 250 million vehicles registered.  At the current rate of sale, it would take almost 27 years to replace the current vehicles on the road.  Using the higher demand estimate, it would take a little less than 19 years to replace the vehicles. 

I am not sure if I agree with the 19 year replacement cycle, but I definitely think the 27 year cycle is too long.  With everything going on in the economy, the 19 year replacement cycle seems too short.

The problem is that people have lost the perception of wealth that they once had.  Even people with relatively secure jobs are cutting back and saving.  One of the ways they are doing that is by holding onto vehicles longer.  Add to this the fact that most Americans are driving less and you have a longer replacement cycle.  Some people are giving up owning cars altogether.  The push by the government to improve public transportation can potentially remove the need for a car by many more people.  At a minimum, improved public transportation options will lead to a reduction in automobile usage and increasing their lifespan.

There are signs of life in the auto industry.  May sales inched up to a yearly rate of about 9.9 million vehicles from a 9.3 rate in April.  Although Ford sales are down 24% from May 2008, it is less of a decline then the other big six manufacturers leading to an increase of market share to a three year high.  In addition, Ford has outsold Toyota for the past two months.  This has led Ford to plan to raise production 6% over the next several months. Other positive signs for U.S. automobile manufacturing are the recent agreement, by GM, to sell the Hummer brand and the large number of bidders for Saturn.   If both units do get sold it will mean, for the short term, less U.S. job loses in the manufacturing sector.  Both the Ford production increase and the saving of one or two domestic nameplates help the general economy.

For the auto industry specific issues, the pessimists say that the industry needs a substantial recovery of demand to become profitable again.  The optimists argue that sales will rebound strongly and there is a great deal of pent up demand.  Even though the sales might not match their recent highs, the shedding of costs that are occurring, as we have seen at GM, may allow the automakers to be profitable at a much lower overall sales level. 

If some auto companies, or nameplates, do not survive, the auto demand will be satisfied from somewhere. I just hope that when the new “normal” sales level gets established, a majority of the domestic market is satisfied by quality vehicles manufactured in America.  Just remember that you cannot always tell where a vehicle is manufactured by the company name.