'Automotive bubble' puts carmakers at risk
'Americans have significantly overbought:' analyst
Paul Brent
Financial Post
Monday, August 26, 2002
The North American auto sector has seen sales grow so strongly, and for so long, that an "automotive bubble" has developed that could devastate the industry if it burst suddenly, a noted automotive analysts says.
Despite a U.S. economy that dipped into recession, and a stock market plunge that has wiped untold billions from investors' net worth, consumers -- particularly American consumers -- are still buying cars in record numbers, said Dennis DesRosiers of DesRosiers Automotive Consultants Inc. of Richmond Hill, Ont.
"Americans have significantly overbought," said Mr. DesRosiers "An awful lot of it has been the auto sector squeezing costs out, making vehicles more and more affordable and incenticizng consumers to overspend, but consumers in the United States have responded through these different stimulus and significantly overbought."
Thanks in large part to interest-free financing introduced post-Sept. 11, the U.S. auto industry is on track to sell more than 17 million vehicle in 2002, which would mark the fourth consecutive year it has surpassed that threshold. To put it into context, the market averaged 14.6-million autos sold during the preceding years of the 1990s.
Based on an analysis of U.S. vehicle sales and driving age population, Mr. DesRosiers recently calculated that auto ownership has risen from about 90% at the beginning of the last decade to 99.8% of the population. (In Canada, by comparison, just 66% of the driving age population owns a car, DesRosiers found).
In the U.S. case, in other words, everyone who could own a car, on average, does.
Eliminating a significant part of the population that is either too old or too poor to drive must mean suburban driveways are cluttered with second, third and fourth cars, the consulting firm concludes.
"Right now we are in a position where there is an automotive bubble that has developed," Mr. DesRosiers said. "Americans could buy somewhere between 30% and as much as 50% fewer vehicles per year for four or five years and still very adequately meet their transportation needs."
In part, that's due to the four-year buying binge the U.S. consumer has just enjoyed, but the automotive industry has also put itself in an uncomfortable position by its own success.
Cars, vans and light trucks are simply better built than they were 20 years ago. Instead of lasting for 150,000 kilometres before heading to the auto wreckers, the shiny new metal now rolling off assembly lines lasts an average of 250,000 before it's destined for the junkyard.
About two-thirds of the cars and trucks on the road in the United States were purchased since the mid-'90s buying binge began.
With sales at an artificially high level thanks to incentives (which General Motors Corp. just last week said it will end next month), the question for the industry is whether the downward trend will be gentle -- 2% or 3% annually for a number of years -- or a sudden plunge that could be set off by more grim economic news or an international crisis.
In 1991, the year of the Gulf War, auto sales fell 11% from the prior year to 12.5 million vehicles and didn't recover to historical levels for three years. Since then the industry has enjoyed nine years of near-record sales results, including 2002.
"My analogy is they don't have enough garages in the U.S. to house all these cars," said Aron Gampel, deputy chief economist at Bank of Nova Scotia, who is more sanguine about the rising vehicle ownership rate in the world's largest auto market.
"Clearly the risks are that after such a strong burst of spending that some giveback is likely, particularly if you get the massive incentives and discounting, which have been very, very important to the overall market performance, are reduced.
"But they have been reduced before and then have had to be reinstated. I think that may be one of the recurring issues that the automakers have to deal with."
In 1991, the North American auto market was significantly less competitive than it is today. Then the Big Three really were deserving of the name and European and Japanese carmakers were happy being niche players.
Today, the only carmakers that can fairly be described as niche competitors are Korean carmakers, which have targeted the low-priced segment as the Japanese did before them.
Today, led by the Japanese, foreign companies have come to dominant the passenger car segment and are now taking aim at the last Big Three bastion -- minivans, sport utility vehicles and pickup trucks.
© Copyright 2002 National Post
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