The Auto Industry Is About To Drive Off A Cliff, Again

Tyler Durden's picture

Submitted by Gordon T. Long of MATASII

SELF INFLICTED ABUSE

In the fall of 2015 we released a video study entitled: "The Coming Global Auto Abyss - Too Much Supply, Too Many Brands; Combine with Too Much Credit!".  We concluded that low interest rate monetary policy for the auto industry was like handing crack cocaine to a drug addict. The auto industry would rapidly and irresponsibly abuse it, to such an extent that it would once again 'spin out' and careen back to what can only be termed the Washington 'substance abuse center'. Whether mis-management or clever strategy we are unfortunately being proven right and are now witnessing the reality.

The Washington Keynesian planners mistakenly believe that cheap money still stimulates demand. It historically did this before it became a legally addicting substance, but even its original tenet was essentially based on bringing demand forward. By design this creates a demand hole in the future, but as Keynes himself famously rationalized: "in the long term we are all dead" ... so not to worry when the economic need is urgent! Setting aside for a moment this critical structural reality, we need to remember that cheap credit additionally fosters structural ramifications seldom elucidated:

  • EXCESS SUPPLY: Cheap and readily available credit creates excess supply as manufacturer have their capital costs reduced allowing them to competitively pursue market share in the wanton beliefs they can gain competitive advantage due to increased volumes, buyer financing, supply chain leverage, aggressive advertising etc.,
  • INDUSTRY CULTURE: Sustained periods of cheap credit unintentionally changes buying behavior patterns, expectations and financing structures of industries.

FORD INADVERTENTLY SIGNALS THE REALITY

During Ford Motor company's latest earnings call, while defensively attempting to justify a massive 50% shortfall in earnings (falling to $0.30-0.35 from $0.68 in Q1 2016 and versus expectations of $0.48), they disclosed that sales volumes are now expected to fall off this year and next with used car prices dropping for several years!

How could this be with US industry sales at historic levels approaching 18M units per year and no one anywhere with any credibility, even remotely suggesting  that a US recession was imminent?  The answer is that 'hole' we referred to above has arrived but it is a much worse chasm because of the industry financing options that have been foisted on the unsuspecting, tapped out US buyers since the "cash-for-clunkers" slight of hand.

The industry has created a minimally two year hole in the market that will flood used and new auto supply inventories while buyers are effectively locked out!

This is not how a well managed industry strategically and responsibly plans, unless of course the game is actually government regulatory arbitrage (think: "Cash-for-Safety" to justify new expensive regulatory features)?

HOW IT WAS ORCHESTRATED - GIVE BUYERS ONLY TWO CHOICES

Auto Leasing has exploded since 2015 and now approaches 35% of all sales. The Lease terms are normally 2-3 years with questionable residuals being used to achieve low lease rates on highly priced units. We have now entered the period where those initially leased units are being returned - in massive. Meanwhile, those Buying versus Leasing have been financing over much longer terms. Ford detailed this with the following charts for their units sold.

THE FORD MOTOR EARNINGS PRESENTATION

Vehicles prices since 2008 are dramatically higher. A $28,000 vehicle in 2008 is now $50-$55,000 and loaded down with new standard equipment features such as backup cameras, WIFI, Seat Warmers etc to justify the higher prices. Prices that can only be sold via cheap credit financing terms.  It was to be an expected marketing strategy to drive profits higher while money was cheap.

As a result:

  1. Vehicle Purchases were financed out over periods that bordered on the useful life of the vehicle (based on non- warranted maintenance costs),
  2. Vehicles were increasingly leased on 2-3 year leases with high residual values and mileage limitations.

The government wanted it, the central bankers wanted it and the industry wanted it. To achieve this it meant a sustained period of cheap money and creative financing. But it comes with a price tag that must soon be paid!   All of this is now hitting as Ford inadvertently warned!

THE COMING CHASM IN AUTO DEMAND IS 'BAKED-IN'

CONSIDER THE FOLLOWING 7 INDUSTRY FACTS

1. HISTORIC SALES LEVELS: Motor vehicle sales have boomed in the years since the Great Recession.

  • 2016: U.S. sales of new cars and trucks hit a record annual high of 17.55 million units.
  • 2017: J.D.POWER / LMC AUTOMOTIVE: Industry consultants J.D. Power and LMC Automotive reiterated their forecast for a 0.2 percent increase in sales in 2017 to 17.6 million vehicles.
  • 2017: MOODYS: Moody's on the other hand says it expects U.S. new vehicle sales to decline slightly to 17.4 million units in 2017.
  • 2017: EDMUNDS: For the full year, Edmund says sales appear to be falling short of last year’s record of 17.55 million vehicles. Edmunds is looking for a 2017 total of 17.2 million vehicles amid softer consumer demand for both cars and utilities as the year progresses.

2. PEAK AUTO SALES: Moody's Investors Service said in a report  that U.S. auto sales have peaked, competition to finance car loans is set to intensify and drive increased credit risk for auto lenders.

3. TRADE-IN TREADMILL:  Typically, car dealers tack on an amount equal to the negative equity to a loan for the consumers' next vehicle. To keep the monthly payments stable, the new credit is for a greater length of time. Over the course of multiple trade-ins, negative equity accumulates.

  • LENDERS = >TERMS: Lenders have supported automotive credit growth with "accommodative financing," including longer loan terms, Lenders could further lower annual percentage rates and keep extending loan terms, though the latter would increase their credit risk.
  • MANUFACTURERS=>INCENTIVES: To ease consumers' monthly payments, auto manufacturers are subsidizing lenders or increasing incentives to reduce purchase prices, though either action would reduce their profits.

4. LENDING CREDIT RISK: "The combination of plateauing auto sales, growing negative equity from consumers and lenders' willingness to offer flexible loan terms is a significant credit risk for lenders," Jason Grohotolski, a senior credit officer at Moody's recently told Reuters.  In the first nine months of 2016, around 32 percent of U.S. vehicle trade-ins carried outstanding loans larger than the worth of the cars, a record high, according to the specialized auto website Edmunds, as cited by Moody's.

5. INCENTIVES
• Incentives currently average 10.4% of a new-vehicle’s MSRP, which is the highest percentage since March 2009 when rebates averaged 11.3% during the Great Recession.
• SUVs and pickup trucks—with a combined market share of 61.5%—still dominate the sales mix in a market that is bolstered by rich incentives averaging $3,768 per vehicle, according to a March sales update from J.D. Power and auto forecasting partner LMC Automotive.

6. USED CAR PRICES

  • A decline in used-car prices is a bad sign for dealerships, which typically see better returns on used vehicles versus new ones.
  • Limited supplies have driven up prices in recent years, but analysts have warned that used vehicles would increase in number as leased vehicles are returned to dealer lots.
  • Since 2015, consumers looking for lower monthly payments have leased new vehicles at a record pace. Many of those cars, trucks and SUVs that were leased at the start of the recent U.S. sales boom are now reaching the end of their terms.
  • Ally, the former finance arm of General Motors (GM), noted in a recent presentation that full-year earnings growth would fall short of expectations, citing the anticipated price drop for used cars.  “We’ve seen a pretty dramatic move in 2016,” said Ally CFO Chris Halmy, adding that the downward trend is expected to continue.
  • The used-vehicle price index from the National Automobile Dealers Association posted a 3.8% decline in February compared to the prior month. NADA also said wholesale prices fell 1.6%.
  • In the first quarter of 2017, Ally saw used-car values retreat 7%, a steeper move compared to the company’s projection for a 5% drop in 2017.
  • Falling used-car prices are a troubling trend for manufacturers, dealers and financial services firms, including Ally and in-house lenders such as Ford (F) Credit. Some bargain hunters will be swayed by affordable used cars, thus reducing demand for new models. When sales begin to slow, automakers often ramp up discounts to attract buyers, a strategy that cuts into profits.
  • Incentive spending in March rose 13.5% month-to-month, hitting $3,443 per vehicle, based on data from ALG, TrueCar’s (TRUE) research division. Those gains were slightly offset by an increase in transaction prices.

7. INVENTORIES

Car Inventories Swelled to 13-Year High - highest level since 2004, a potentially troubling sign for automakers.

In February, new vehicles waited in dealer inventory for an average of 74 days before a sale, the most “days to turn” since the government’s Cash for Clunkers program in 2009.

Passenger cars accounted for roughly 38% of all new vehicles sold during the first two months of the year, reflecting a sharp decline.  Sedans have fallen out of favor with many consumers enticed by roomy and fuel-efficient crossovers. Although manufacturers have cut production of some small cars, supplies remain at elevated levels.

Caldwell noted Banks are stretching out loans to make payments more affordable for buyers, extending loan terms as high as 84 months.

The average loan term in February marked an all-time high at 69.1 months, beating the previous record set in September 2016, based on Edmunds data.

For the full year, sales appear to be falling short of last year’s record of 17.55 million vehicles. Edmunds is looking for a 2017 total of 17.2 million vehicles amid softer consumer demand for both cars and utilities as the year progresses.

WHAT WILL WE DO WITH THIS INVENTORY?

There are now approximately 265 million light vehicles registered in the US today compared to 255 million driving age people, or just over 1 car eligible driver. How many cars can we absorb, especially since useful age of vehicles has been increasing by one year every 6.7 years over the last 20 years.

We have a massive problem looming and the auto industry knows it. We are fully expecting broad based problems to emerge over the next 18 months in multiple areas of the auto industry:

  1. The US Dealership Network,
  2. Auto Manufacturers,
  3. Lenders & Financiers,
  4. Securitization (ABS, CLO, Synthetics etc) Investors

This is all as predictable as a drunken sailor on shore leave.  We knew cheap money would be too much for auto executives to refuse and oversupply was a sure bet! So will be the industry's return to the Washington "substance abuse center".  Expect the industry to be back at the government feeding trough asking for help.

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Blue Balls's picture

One of the many bubbles blown by the Fed.  

Get the rope ready. 

NugginFuts's picture

I'm waiting for that biggest of bubbles - the stock market. That is where all the inflation went! Only way to get it back out is jack up rates and watching the corresponding collapse. 

FireBrander's picture

I have a "Clunker" I want to trade in...wait'en to get sum dat Uncle Sammy money!

C'mon Trump...slip some cash my way.

FireBrander's picture

Someone posted a while back about CarMax.

My experience:

First Time: Walked away shocked at what a rotten "no haggle" deal I was offered.

Second, and last, time: Same as the first time...

My Trade: 20% BELOW dealer trade in book value..which is already a "steal it" price.

Car I wanted: "No Haggle" price was 18% above dealer retail book value.

literally, across the street at a "Luxury" dealer, the SAME used car was at $500 below dealer retail book value.

MalteseFalcon's picture

The coming economic  reset should include new car companies and no car dealers.

Beam Me Up Scotty's picture

Don't worry about anything!! You can get 3 large pancakes at Burger King for just .89cents!!! Think of how much money you can put towards your car now??!!??

dot.dot's picture

That might have been me.  Both times I have taken cars in to be appraised I was given very strong offers -thousands above traditional dealers.

Sold them this car last week for 20k:   

 

https://www.carmax.com/car/14218247

They now have it offered at a no-haggle pice of 23,998 which is 2200 more than I paid new for it 11 months ago.  Go figure...

johngaltfla's picture

One has to wonder that now that the wunderkid is out of office along with his Socialist henchmen if the .gov is going to waste money making huge fleet purchases and parking the vehicles to support the automakers and keep their numbers inflated. For some reason I don't see a Trump administration directive being issued to waste money to support GM and Fiat-Chrysler.

j0nx's picture

Only an idiot buys from carmax. I am mostly hit and one miss with them buying MY cars though. 2 cars they offered KBB mid range and one was way below. The one below I took up the street to the dealer I was buying a new one from and they paid KBB mid range for it anyway. It's been about 5 years since I've had a car apparaised by them so maybe they are offering lowballs now all the time. My guess is it has a lot to do with make, model and demand in the area that you are in.

aliens is here's picture

NO haggle is a scam. I don't believe it.

svs9000's picture

Demi-God Elon Musk will save us all....

venturen's picture

Elon didn't get to being a billionaire saving others.....he is a charltan 

Oldwood's picture

How is Tesla going to handle it if Trump ends his free lunch and gas prices stay low?

foodstampbarry's picture

Yep, no Fed money and Niggas be broke for realz.

oldguyonBMXbike's picture

Invest in rope companies and sell right before the mass hangings.

SilverRoofer's picture

I don't really give a shit

Let it collapse most jobs are in Canada Mexico ECT

 

 

Still Losing Money's picture

you mean elon and his eletric toy car company won't save us?

Seasmoke's picture

People sure are obsessed with the Automobile Ponzi all of a sudden.

divingengineer's picture

It's just such an obvious Trainwreck. Every shit bag in town is driving around in a new muscle car or luxury coupe now.
The poor folks are a bunch of snotty motherfuckers these last few years.
I never seen so many BMWs on the road. To their credit, Mercedes-Benz seems to have participated in this shit show much less than the other makers. Some, but less. I think in the end it they'll be glad they didn't jump in and Lose their arses.

greenskeeper carl's picture

It's luxury diesel pickups wherr I live. But oh well, I just want to see this cycle play out to its logical conclusion. Sometime in the next year or two, I'm going to be looking to pick up a 3-4 year old loaded 4WD Yukon XL or suburban. Looks like it will be a buyers market, which is nice cuz I am sure as hell not paying what the asking price is now.

Yukon Cornholius's picture

Faux-luxury (Acura, BMW, Infinity, Land Rover etc.) SUVs will soon be flooding the used car market. Hope you like silver or shit-gold color.

Joe Sichs Pach's picture

Re: Mercedes
Go check out the new ads they're pumping on YouTube.
100% catering to the ghetto-warrior rap-star wannabes.
My wife showed me a couple weeks ago and I could only shake my head.
This is precisely how formerly "exclusive" brands lose their luster.
Mercedes is turning into Cadillac of the 1980's.

29.5's picture

i saw a guy test driving an alfa the other day. IN THE SOUTH. and even more funny, it looked like a honda accord or some shit. Like, literally, nothing special at all.

New_Meat's picture

Why, I heard that u kan bild ur own Kaddy, one bit at a time!!! 'struxtions were on the majik box 'n' shit.

Refuse-Resist's picture

Kangs don't need no cracker built car. Dey build dey own cars, just like the Nigerian space program and their Kangz-Class starships.

 

aloha_snakbar's picture
The Auto Industry Is About To Drive Off A Cliff, Again

Its been driving off of a cliff for several weeks on ZH... that must be one TALL ASS cliff...

Peak Finance's picture

Just a warm-up

the shit begins in Aug - Sep 2017 when the new cars show up on the lots.  

Chauncey Gardener's picture

Yep. That's when the channel stuffing will collide with the unsold, hideously overpriced inventory. And, with all the lease returns, used car and truck pricing taking a beating will leave the dealers in a very, very bad place. Should be a buyers market for three year old lease returns.

post turtle saver's picture

my prediction... whether new or used, shop for your new vehicle at end of year 2017 into the first two weeks of Jan 2018...

there are going to be dealers out there hurting... a lot...

Fisherman Blue's picture

I want a new car at at 55% discount to sticker. I will pay cash.

FreeShitter's picture

How about a 2012 malibu for 12 grand 90k miles? lol

superdave's picture

Hang on a little while longer, Fisherman Blue. You'll get it.  I want a 3 yr old loaded, leased SUV that will be cheeper than a 10 year old beater! Patience, Pilgrim.

 

j0nx's picture

Uh huh. Like patience for a house will be cheaper and here we are 5 years later and home prices are record highs. Don't hold your breath on a repeat of 2008 for home or car price collapse barring war or something else catastrophic and it won't matter then anyway.

daveO's picture

Cycles always recur. The FED can extend them, but not repeal them. The longer the FED extends, the harder the retrenchments. Fiat/Chrysler will probably go out of business in this cycle unless it gets a gov. bailout. Ford and GM will get sliced in half.

MrYukonC's picture

GM should already be gone -- they should have gone bye bye last time, but instead they were bailed out.

Hopefully we can rid ourselves of that disease this time.

Refuse-Resist's picture

I want a car with 3 pedals. Fuck automatics and especially fuck CVTs.

Do they evey produce cars with M/T any more outisde sports cars and the lowest end POS? All the built in driver-nannies are a real pain in the ass. As are nav systems and integrated touch screens.

Give me a jap car, V6, M/T, and as little automation as possible and I'll be happy. Say a 3000 lb sedan powered by a 280 hp VQ35. Oh shit, I had one of those and sold it like an idiot.

Now I'm trying to find another one...

 

Pumpkin's picture

70k for new trucks.  It's insane.  Burn it down.

Refuse-Resist's picture

Yes, A new 'truck' with a 4 ft bed that can't even hold a mountain bike. Wow what an impressive truck. Those leather seats and power windows sure are nice though -- just don't get em dirty.

spastic_colon's picture

it doesnt take a crisis they're always at the trough.

BigFatUglyBubble's picture

but as Keynes himself famously rationalized: "in the long term we are all dead"

If you point me towards his grave I'll drop trou and unload some plant stimulus

 

#nomoarbailouts

oldguyonBMXbike's picture

Just as soon as you point me to Rockefeller's grave.

Dovda Wimar's picture

JD Rockefeller, Lake View Cemetery, Cleveland Heights, OH.

Dovda Wimar's picture

Bad luck old chap. He was cremated and his ashes scattered on the Downs at Tilton, in Sussex.

mydogisprettierthanyou's picture

I stopped reading here:

"Vehicle prices since 2008 are dramatically higher. A $28,000 vehicle in 2008 is now $50-$55,000 and loaded down with new standard equipment features such as backup cameras, WIFI, Seat Warmers etc to justify the higher prices."

 

Yeah right. Show me one.

Let's pull up every midsize sedan or small suv with similar features. They maybe have gone into the low 30s.

 

 

 

 

ToSoft4Truth's picture

4-banger Camrys are 23.8K while 6-banger Camrys are 31.7K.  Zero percent interest for up to 72 months. 

Benito_Camela's picture

That doesn't sound right, on a feature-for-feature comparison basis. There's no way that the same car with a V6 costs almost $10K more with the same trim level. 

ToSoft4Truth's picture

You're right!  I picked a 4-banger SE Vs an XSE w/6-banger. I didn't go too granular.  Looks like the XSE has Navi, etc. 

 

Build your own:

http://www.toyota.com/configurator/#!/build/step/model:grade/year/2017/series/camry/model/2546

 

 

LetThemEatRand's picture

I had the same thought.  A new Honda Accord (the ultimate vanilla average car) will set you back around $22K if you go for the basic model, pretty much the same as in 2008.  I think the author now shops at the Mercedes, Lexus or Audi dealership, whereas he was buying Hondas in 2008.  What has happened to car prices?!