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.
Do you work for dial an argument? Gezzuz...I never said it started in the 60s. But that sure in hell is when it took off in S.CA. I was here and lived it, were you?
Wowza...
“Few even needed 2 cars back then because only 1 parent had to work. Generally, those times were so great, Mom could stay home and actually raise the kids. Try to keep up tex”
You jumped in but totally missed the thread.
“I never said it started in the 60s. But that sure in hell is when it took off in S.CA.”
The 60’s began the death of the hot rod era. The 60’s enabled any dude with the cash to walk into the local stealership and walk out with a muscle car ...
“1941 Harley 90” Flathead side valve”
Come again?
The standard of living in the USA is in rapid decline.
It would be nice to have a choice of rear wheel drive instead of front wheel drive. Unless yo are wealthy the only choices are the Mustang,Challenger and the Camaro. Why does every sedan have to be FWD? These manufactures are like lemmings.
Oh sure, the 60s were the death of the hot rod era in S.CA. Wow...You have no clue. Zip. You best argue that with someone who’ll buy it.
Chrysler 300, Charger, Chevy SS
Ya tex, it came off the Harley showroom in 1941 a stock 80 ci V twin. When I got it it went to 90 ci.
You have no clue here.
Really pricey vehicles. How about a rear wheel drive v6 Accord? That would be nice.
I have no clue? You are the one to claim to have had a 1941 Harley 90 ...
You’re the individual who think a ‘41 80ci side-valve Harley never existed. So why would I care what you think? Again, you have no clue.
I agree but apparently some see it very differently.
FWD’s are cheaper, lighter and get better mileage. Also easier time add AWD as an option.
Hmm. After you got caught your 90 suddenly became an 80 ...
Salaries have not kept up with technology, globalism and medical advances. We are poorer in a lot of ways. Our daily lives may be marginally better but we are less secure economically than ever before.
Do you not understand #230? Wow...
Only marginally so. So why don't you drive a FWD? Why is every luxury, exotic, sport,pony and race car rear wheel drive?
“You’re the individual who think a ‘41 80ci side-valve Harley never existed.”
Nope. I am the one that flagged your 41 90ci post.
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