Carmageddon: All 3 Major Auto Markets Contract YoY For The First Time Since January 2009

Tyler Durden's picture

For the first time since January 2009, sales of cars declined year-over-year in all three of the world's largest auto markets of Western Europe (-6.8%), China (-1.8%) and the United States (-3.7%).  Combined, these three markets account for roughly 70% of the world's auto sales (chart per Bloomberg).


And while auto OEMs spent the first part of 2017 ignoring the growing signs of trouble facing their industry, some are finally starting to admit that all is not well in autoland.  As we noted a couple of days ago (see "How Is This Not A Recession? Ford To Slash 10% Of Global Workforce"), Ford just announced plans to cut about 10% of its global workforce.  Meanwhile Nissan Motor is forecasting a surprise drop in profit this year and Toyota Motor expects an 18% decline as well. 

As we've been saying for months, this is likely just the beginning of what may be a very painful several quarters for the auto industry.  So what else could go wrong?  Here is a just a short summary from Morgan Stanley's auto team, led by Adam Jonas, of the things that could cause used car prices to crash by up to 50% over the next 4-5 years...which, of course, is probably not great news for new car prices either (Executive Summary:  flood of supply, poor lending standards and desperate OEMs who need to keep new car sales elevated at all costs):

  • Off-lease supply: This has already more than doubled since 2012 and is set to rise another 25% over the next 2 years.
  • Extended credit terms: Auto loans are at record lengths and lease assumptions (residuals, money factor) are at record levels of accommodation.
  • Rising rates: Starting from record low levels in auto loans.
  • Overdependency on auto ABS: The outstanding balance of auto securitizations has surpassed last cycle's peak.
  • Record high deep subprime participation: 32% of subprime auto ABS deals were deep subprime (weighted average FICO < 550) in 2016 vs. 5% in 2010.
  • Record high units of new car inventory: 2016YE unit inventory levels were near 10% higher than 2015YE, and are continuing to trend higher in 2017.
  • OEM price competition: Car manufacturers have capacitized to a 19mm or 20mm SAAR. At this point in the cycle we start seeing more money 'on the hood' to move the metal. As new car prices fall, used prices look relatively more expensive, which necessitates a decline in used prices to equilibrate the supply/demand imbalance.
  • Increased ADAS penetration: We expect auto firms to achieve nearly 100% active safety penetration by 2020, creating an unprecedented safety gap between new and used vehicles, accelerating obsolescence of the used stock. Rising insurance premiums on older cars could accelerate this shift.
  • Trouble in the car rental market: Due to a number of secular shifts, including how consumers access transportation options (e.g. ride sharing), car rental firms are facing stagnant growth, weak pricing and over-fleeted conditions. As these cars hit the auction, the impact on prices could be significant.

And here are the stats...

Off-lease volumes have already doubled since 2012 and are only expected to get worse...meanwhile, lending standards have gradually gotten worse and worse... further revealed by the growing share of 'deep subprime' loans in auto ABS deals.


But lenders are starting to get worried and are tightening lending standards for the first time since the great recession.  (Note: Shows net percentage of respondents reporting tightening standards on consumer loans for new and used autos. Negative numbers indicate loosening standards.)


Meanwhile, none of the warnings about a flood of used car volumes about to hit the market has impacted new car volumes being pumped out by the OEMs and pushed on to dealer lots.


All of which results in this fairly brutal outlook for used car prices and, by extension, the auto market generally.

Used Car Prices


Dear OEMs, the first step is admitting you have a problem.

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Hitlery_4_Dictator's picture

I like my 2003 King Ranch more and more everyday.......I would never sell it!  Also, newsflash, most people are retarded and never think about anything or the repercussions. Yes, that inlcudes car payments

man from glad's picture

I hear you! I have a 1997 GMC Sierra Sportside. I just love the thing. Still original paint, runs great, does everything I need it to do. It has some miles on it so I'll rebuild the engine in the next couple years. (I'm an auto tech). Anyway I plan on this being my last truck, hopefully in a few it becomes a real classic. I do get some compliments on it already.

Doppelganger71's picture

30k? Must be a used one. I saw a new F150 (not 250 or a 350, mind you), fairly done up - 49k and change..............

man from glad's picture

I meant a basic truck with just V-6, air and auto trans - thats it. When I looked last year for yucks as I recall I saw GMC Sierrra base price $27k (?). So figure on top tax, Loan amort. dealer fee etc. (ridiculous amount of money to spend)

Stormtrooper's picture

I'm thinking about issuing a personal 100 year no coupon bond at 3% interest so that I can buy a new Escalade.  If I do that every three years I can support the economy and always drive new wheels.  As for cashing in your bonds in 100 years,  well maybe it will make you feel good to come dance on my grave.

indygo55's picture

But it would be my grandchildren doin it. 

Benito_Camela's picture

Just passed up an opportunity to lease a nice new Alfa Romeo Giulia. Normally I wouldn't lease or buy anything new, ever, but this is a first year car from a company with past issues. The lease was a decent deal in how it was advertised, but these assholes would not give me those terms because my FICO credit score was 730 instead of 750, so I got a quote of $4000 down and $600/month and literally laughed in the guy's face and left. This was after the guy tried to get me interested in a 7 year note for the car, which I told him was a non-starter (again I will NEVER buy a new car, much less an Italian import). I just don't get it. Only reason my score is so "low" was an identity theft incident that took two years to clear up (in part because many companies intentionally don't do their due diligence on fraudulent account setups so they can add it to their balance sheet when it comes time to turn in that quarterly report, but I digress). 

Two weeks later I signed a 30 year mortgage note with no issues whatsoever.  The very next day my current next door neighbor who is renting his place drove up in his brand new Toyota Tacoma 4X4 tricked out with a lot of options. I'm sure that set him back $35K. Excellent truck, great resale value, will probably last him the rest of his life, but with things developing the way they are, you'd have to be an idiot (or rich) to buy a brand new Toyota truck.  I can't wait to walk back into that Alfa dealer in two years and off them 25% less than the sticker price on a lease return, in cash. The extent of this bubble (or glut of inventory and inflated pricing based on ridiculous note terms) is way beyond normal market forces putting things into check. I would bet good money shorting auto mfg.s is the way to go becasuse they are going to need serious intervention from the government in the next 5 years to stay in business. 

hongdo's picture

You should get the Alfa.  My first car was a 57 Alfa Spider.  A hand me down from my father's mid-life crisis.  My sister ruined the engine driving with no oil.  I rebuilt it and it actually ran.  It was never reliable and the top leaked but boy was it fun to drive.  In school I used to race a friend who had a Stingray through Boston late at night.  Good times, until it finally died.  I never again had a car as much fun. 

Shpedly's picture

Your story is a perfect example of the flawed dealership sales system as it stands today. Currently most dealers sales force are comprised of unabashed young men with the gumption to tell you complete bullshit with a straight face. Most dealerships hire these guys because they are willing to say anything with no remorse. The long standing system is to hook the customer and then do everything possible to extract as much money as possible. Between the trade in, the price of the car and the financing, it's no wonder people despise buying a new car. They key in on the payment because that's the easiest way to fool the buyer. After excruciating nonsense getting to final figures, the salesman says, "I'm sorry but my manager says we need to 30 dollars more a month on the payment to make this work. Say they were at 330 a month and now it has to be 360. Most people are so frigging tired, they think to themselves, "well if can afford 330, 360 is not a problem. " Well 30 more dollars on a 72 month loan is an extra $2160 dollars in the dealers pocket.

Benito_Camela's picture

No shit, the guy trying to sell me the car has been convicted and sent to prison in the past for securities fraud and running a ponzi scheme. Took 3 minutes on google to find out. 

scoutshonor's picture

State Farm realized 7 billion in increased claims 2016 vs. 2015.  A large part of which they attribute to people crashing into other cars while busy texting.

Part of this problem may be that rational people don't feel that owning and driving a car is worth death and destruction.  I sure don't.

FreeShitter's picture

40K gets u started into the nice shit. 60k for really nice and 80+ for luxury/badass.

Benito_Camela's picture

This is somewhat interesting.

Some PBS show spent a month or two at a Chrysler/Jeep dealership. 

Catahoula's picture

Had to happen sooner or later. Need to see some price contraction. 

CRM114's picture

Jan-March in Canada were overall up, but April is a 1.6% loss.

Truck sales are up 2.5% YOY, sedans down 8.7%, but we are Truck Nation so overall 1.6% drop.

Increasing number of people can't get financing.

Debugas's picture

borrowing money to buy a car is insanity, it simply means prices were propped up for too long and are way too high

cars should be bought from savings

Mimir's picture

"sales of cars declined year-over-year in all three of the world's largest auto markets of Western Europe (-6.8%), China (-1.8%) and the United States (-3.7%)."

What ????

"14.6 million new cars were registered in Europe in 2016, up 6.8% compared to 2015 and representing the third consecutive year of growth."