Posted on 06/11/2017 10:11:26 AM PDT by Lorianne
Almost every negative thing happening in the car business – in particular, ludicrous technical complexity for the sake of electronic gimmickry and also to cope with diminishing returns federal “safety” and emissions mandates – could be gotten under control by the simple expedient of cutting off the monopoly money/debt-financing that makes it all possible.
The seven year loan.
“Free” money (zero or very low interest).
Give-away leases.
The car industry is riding a bubble that’s proportionately as large as the housing bubble of a decade ago. And it is going to pop. For the same reason that a wave has to crest and wash ashore, once set in motion.
Signs of trouble abound. They build them – but no one comes. Not without inducements that amount to give-aways.
For several years now the car manufacturers have been resorting to truly desperate measures to prop up new car “sales” – in air quotes because it’s a dubious proposition to describe as a “sale” a transaction that involves exchanging the item for a sum insufficient to cover the cost of its manufacture, plus a profit sufficient to make the exercise worthwhile.
Yet that is exactly what is going on.
As new car prices rise, the cash back offers, dodgy leases and other “incentives” necessary to move them off the lot also rise in frequency and inanity. Examples include the leasing of electric cars for less than the cost of a monthly cell phone contract (Fiat made just such an offer; see here) and “below invoice” transactions that rely on the manufacturer (e.g., Ford) paying a dealer to “sell” a car (e.g., manufacturer to dealer incentives) for the sake of getting rid of it, getting it off the books.
Or rather, onto someone else’s books.
Give-away leases.
The car industry is riding a bubble that’s proportionately as large as the housing bubble of a decade ago. And it is going to pop. For the same reason that a wave has to crest and wash ashore, once set in motion.
Signs of trouble abound. They build them – but no one comes. Not without inducements that amount to give-aways.
For several years now the car manufacturers have been resorting to truly desperate measures to prop up new car “sales” – in air quotes because it’s a dubious proposition to describe as a “sale” a transaction that involves exchanging the item for a sum insufficient to cover the cost of its manufacture, plus a profit sufficient to make the exercise worthwhile.
Yet that is exactly what is going on.
As new car prices rise, the cash back offers, dodgy leases and other “incentives” necessary to move them off the lot also rise in frequency and inanity. Examples include the leasing of electric cars for less than the cost of a monthly cell phone contract (Fiat made just such an offer; see here) and “below invoice” transactions that rely on the manufacturer (e.g., Ford) paying a dealer to “sell” a car (e.g., manufacturer to dealer incentives) for the sake of getting rid of it, getting it off the books.
Or rather, onto someone else’s books.
Once the papers are signed and the car is driven away, it is no longer the dealer’s problem. He no longer has to worry about it. If the “buyer” fails to make the payments, it is now the lender’s problem.
And that problem is written off, in its turn, when it becomes necessary to do so. The bank makes up the loss via interest and fees on other debt. Or by re-selling the repo’d vehicle at exorbitant interest to another debtor.
Rinse, repeat.
The dealer, meanwhile, has made a “sale” – and it is so recorded and reported, adding another log to the swaying Jenga tower.
Sound familiar?
But wait – there’s more!
As the ever-more-desperate measures to prop up new car sales become ever-more-desperate and more and more people who really can’t afford new cars “buy” them anyway, it depresses the used car market. Why “buy” a used car, after all, when you can “buy” a brand-new one for about the same monthly payment?
The used car market is cratering – and that is a sure sign the fat lady is clearing her throat.
Remember: Interest rates on new cars are lower (even nonexistent) and the loan/debt can be extended over a preposterously long period – seven years is now routine – while the loan/debt on the used car must be of shorter duration because of the greater and faster depreciation on the used car. The typical three-year-old car is worth about 75 percent of what it was worth when new – and will only be worth about 50 percent after another three years. Writing a loan/debt on an asset that will almost certainly be worth less than the balance due on the loan before the loan can be paid off is what you call a bad deal.
The loan/debt limit has probably already been reached. Seven years is a kind of Event Horizon for car loans because after seven years, almost every car – regardless of make or model or what it sold for when it was new – will be worth less than 50 percent of what it sold for when it was new. They can’t keep pushing off the paid-for date in order to keep “sales” from wilting, permanently.
This is why the bum’s rush to ride-sharing; to the rent-by-the-hour (via an app) business model that GM (Maven) and Ford (the firing of Mark Fields) and pretty much the entire car industry have embraced as their only possible savior. The people running major companies are many things but idiots they are not – some superficial evidence to the contrary notwithstanding.
Poltroons and greedheads, certainly. But not dummies.
They know that they can’t keep pushing out loans indefinitely to sell cars. It is not tenable, both because of the debt load (unsupportable) and depreciation, which imposes a physical limit on loan duration. Hence the new rent-by-the-app (and hour) business model. It is the only way the business can continue without going out of business.
Either that or economic sanity returns.
The government stops mandating diminishing returns emissions rigmarole, for instance. And here’s a real whopper of an idea: We get scientists, not politicians and regulators – to prove that harm (real harm, not some ugsome bureaucrat’s hypothetical) would result from dialing back the current rigmarole to, say, model year 2000 standards.
Consider: Were new cars “dirty” in 2000? Were the skies suffused with smog? People choking and coughing, falling comatose into gutters? No, to all of the above. The fact is the cars and the air have been clean for decades – but the EPA continues to pretend otherwise, to maintain the fiction of the need for its continued existence.
Same for the presence or absence of back-up cameras and anti-whiplash head rests and whether the car can do an egg-beater roll without its roof crushing. The fact that some people want to be parented doesn’t mean the government has the right to parent the rest of us. Let those who want and need adult diapers go ahead and wear them, if they like.
So, the good news out of all this bad news is that it must soon come to an end. The cost-no-objecting and mandating; the noxious, suffocating parenting.
It is going to end – because it cannot continue.
I’d like to buy a cargo van. Too expensive. It’s nothing but a shell + a motor.
I could use a new pickup, but I’m not seeing the incentives the author is describing. Even at 7 years, the payments on a vehicle going for upwards of $50k are pretty sobering.
Even the used truck market is ridiculous.
Part of this is I need 4wd. It seems the automakers require you to buy a luxury truck to get this option.
Tell me again, exactly why a new pickup truck should cost between $45K - $55K dollars. RIP OFF!!!!
A pickup costs 40 to 60 K. To much for something that I’m going to haul who knows what across fields and through the woods and work with.
I can remember when you could get a fairly nice house for $40k to $60k.
“Tell me again, exactly why a new pickup truck should cost between $45K - $55K dollars. RIP OFF!!!!”
Simple. The car companies are required to fold-in the cost of developing and then selling their ‘green models’, else they get hit with huge fines.
You’re paying for them.
It's not going to happen, ever, for foolish people getting seven year loans, in fact anything over five years. Why? After four years or so (depending on use) repairs and maintenance get more expensive. That on top of a loan? It's a recipe for disaster.
Fake News. From the industry that pumps up it’s numbers on cost of cars.
Same deal in the Movie industry. They drain the profits away from the main company by leasing cameras for 30X what they should go for, and sets, and every other service. That’s why it takes 100M$ to make a crappy film.
IF they make over 100M$, then they have to pay residuals to actors, profit to investors, etc. AND TAXES.
Meanwhile, their “subs” are making obscene money, and they have a hand-in-glove relationship.
For years, car companies did the same thing.
Time to put a few people in jail until they stop with the dishonest profit reporting.
CAFE kills!
Do not rollback CAFE, repeal it!
Bring freedom back to the car market and get the government out.
And yes, the options(very profitable) are mostly nonsense.
Give me a basic truck. Four wheels and a steering wheel. Stuff the rest of it.
Be glad too. Government regulations that requires more and more electronics on your vehicle. More expensive engines to comply with ridiculous emissions requirements. Labor union costs, contracts and ever expanding pension costs. Research for future vehicles. Monies set aside for litigation in case ANYBODY has an accident that could in any way, no matter how small, relate back to the manufacturer. Government mandated recalls. And last but not least (well maybe it is) profits for the shareholders.
F-150 posted price $21,557.
Well you now get the benefit of having a touch screen radio and instead of 2 headlights you now have 6 or 8 which you can't turn off in the freakin' daytime and will each cost $300+ to replace.
Ain't those worth an extra $10-20K?
There isn’t any new car on any lot, American, Japanese, German, Korean, British, French, or Italian, that is worth more than $10,000.00, tops.
Beyond the present price of any of those makers listed, there comes the second nightmare ... maintenance. That is anoother landscape of inflated prices, tools the average knowledgeable American cannot acquire due to proprietary licensing, and, of course, the availability of parts.
And lastly, ‘the nanny state’, thanks to Ralph Nader.
If you own your own business there are tax incentives to pay for much of certain trucks and vans.
LOL. Cases routinely go 7+ years without repairs.
In 1977 I bought a brand new GMC 3/4 ton 4X4 on a one ton frame for just over 6500 on the road. After Jimmah was done with his term, that same truck was nearly double in price.
And it got abt 8 miles to the gallon. Could actually watch the gas gauge drop when it was driven.
Tough truck though.
There are grass fields containing thousands of new cars and trucks about 20 miles from my house. I still don’t understand it.
He’s grinding the wrong axe to fix the “problem”. Emission standards have nothing to do with dropping car sales. Even loan lengths aren’t part of it. There’s really just 2 things going on: Car looks aren’t changing from year to year so there’s feeling of “behind” the curve when nobody can tell by eyeball that your car is 5 years old. And now pretty much all the companies make good cars that last a long time, back in the day getting 100,000 miles out of a car was good, now barring accident you should get 200,000 miles. You can see it in how 3 year old cars keep 75% of their new value, that’s the market understanding the mechanics.
Really all that needs to happen is for the car companies to understand their situation and stop making cars they know they won’t sell.
Second or third hand is the ticket. They are out there if you watch what you are doing.
I bought a 75 chev pickup one time for 150 bucks. Granted, it wasnt the best, but the thing got me around for 3 years. Hauled my fuel to my equipment and parts and me back and forth to the jobs sites.
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