This year’s Detroit Auto Show must be beaming with positivity, because 2015 will go down in history as the best year for automobile sales ever. This is a stunning reversal for an industry that was facing bankruptcy in America in 2009. 2016 will smash new records once again, as forecasts are predicting over 18 million vehicles will be sold this year. Low gas prices, low interest rates, low unemployment, and a relatively stable economy mean that people are taking the plunge and driving shiny new cars and SUVs off the lot in droves. As a longtime car industry insider recently told me, “2015 was a great year for everyone in the car business.”
In fact, most Americans have little choice but to invest in new automobiles, since the average age of cars on U.S. roads recently hit a record eleven and a half years. While cars are lasting longer because they’re more durable than they used to be, there’s little doubt most people with eleven-year-old vehicles would buy a new car if they could. Much of the boom in auto sales is simply pent-up demand from people who could not afford to upgrade during bad economic times.
The recession bludgeoned the big three automakers in this country: Ford, General Motors, and Chrysler. GM and Chrysler declared Bankruptcy, while Ford, contrary to popular knowledge, did receive government help. We shamed the auto CEOs in congressional hearings, and made them sell their corporate jets. In the end, the U.S. government lost over 11 billion dollars bailing out GM to save millions of jobs. The quick rebound of the auto industry has become a political talking point for politicians who championed the bailout, including President Obama.
Right now, things are smooth and splendid, but how long this boom in auto sales is going to last is anyone’s guess. As a casual observer, I see a few disturbing trends developing. Many of these same unsustainable business practices that prevail today led to the near death and destruction of our national auto industry just a few years ago.
A growing minority of business analysts are seeing a bubble building in auto credit. As interest rates go up, loans will become less affordable. In the meantime, with so much cheap money streaming through the financial system, people with low credit scores who probably shouldn’t be getting loans are somehow getting them. Cheap money has also inflated used car values, which is helping bring down lease prices.
In fact, more people than ever (25% of new cars) are leasing vehicles because it’s become a whole lot cheaper with low interest rates and high resale values upon the completion of the lease term. This whole business model is predicated on inflated used car prices, and should that ever change, the entire system will fall apart quite rapidly.
Another trend that’s driving profit growth for American automakers are low gas prices. It’s well known that SUVs have a better profit margin than conventional passenger vehicles. With gas prices down in the dumps, this creates a bonanza for automakers. While our fellow citizens suffer from temporary amnesia about how much it costs to run their behemoth trucks when gas prices are closer to historical averages, SUVs fuel a boom. Make no mistake, much of what brought GM to its knees during the recession was being overly reliant on SUV sales. Oil can spike quickly, and can reverse this boom in a blink of an eye.
In the medium-term, higher interest rates and higher oil prices will eventually come to pass, and the industry will have to readjust to a much lower volume of sales. In the longer term, cultural changes threaten to eat into the automaker’s bottom lines. Millennials, now the largest demographic in the United States, are more comfortable with car-sharing services, public transportation, and are less likely to embrace an automobile-oriented suburban lifestyle.
Right now, the doom and gloom seem confined to a future that has not yet materialized. We can only hope that the leadership in the American auto industry is working to make sure their companies’ finances are solid enough to weather inevitable economic and financial swings. During the next recession, it is America’s hope that we won’t see history play out once again, because this time, they’re probably won’t be enough political support to bail them out.
