Too Many Cars . . . Not Enough Market?

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As we watch the slow-motion train wreck that is the dying U.S. automotive industry, it’s easy to blame the economic situation for the debacle. And it’s certainly a contributing factor. Or more precisely, an accelerating factor.

It has made matters worse – and faster.

But there has been little discussion of the overcapacity issue that underlies the problem – and which is far more serious and which has been quietly bleeding the industry white for years now.

What’s “overcapacity”?

Too many vehicles chasing not enough market.

The industry – that’s all the carmakers put together – tries to sell on the order of 11-12 million new cars in the U.S. every year because that’s how many cars they build. The problem is it’s hard to sell that many cars in the U.S. even in the best of times.

And it’s even harder to sell them at any kind of decent profit.

For years, long before the recent economic situation, the margins on most cars have been slim – and getting slimmer. Often as little as a few hundred bucks, net, per car.

Think how lousy a business that is. A car is a hugely complex thing comprised of thousands of individual components that must be manufactured at various locations and then assembled into a single unit. Literally thousands of people and several weeks (if not months) of assembly process are involved in the creation of a finished, ready-to-drive car.

All that work – to net maybe $400.

Another problem: Modern cars have an extremely long shelf life compared with the cars of the past. With decent care, they can (and do) last 15-plus years and more than 200,000 miles. But the auto industry continues to churn out new cars on the 1960s-era assumption that most of the existing fleet gets recycled every 5-7 years or so.

Result? Inventory (new and used) stacks up.

And yet, each year, it seems another automaker jumps into the already overcrowded waters with yet another model to compete against the existing multitude – making it ever harder for everyone to earn a buck off the already-there stuff.

There was an exception to this – SUVs – during the period that ran roughly from the early 1990s through last year. Profit margins on SUVs were huge – as much as $10,000 or more per vehicle on a high-end model such as a Lincoln Navigator or Cadillac Escalade. Why? Because at first, there were only a few SUVs on the market – far fewer (both model-wise and total numbers-wise) than the emerging market for them.

So the automakers could charge more for them.

SUVs were also easier and cheaper to build than passenger cars – which helped uptick the profit per vehicle. But the real reason they were such money-makers – at first – was because supply lagged behind demand.

Now, of course, the market for SUVs is glutted, too.

Which gets us back to the overcapacity issue.

The U.S. population has roughly doubled since the mid-1960s, going from around 160 million to over 300 million today. That’s everyone – not just the people who are in the market for a new car – which of course is a much smaller number/percent of the total.

But the number of active “players” in the US car market – brands of cars and types of cars – has expanded by triple or more during that same period.

In 1970, GM controlled about 50 percent of the U.S. car market; Ford and Chrysler each had about 20-something percent. AMC was a bit player. VW, Toyota, Honda and Nissan (then Datsun) hardly registered. And they produced small cars only – not the full range of models from econo-boxes to SUVs and luxury cars they offer today.

Mercedes, BMWs, Audis and Volvos were exotic curiosities one rarely saw outside of places like New York City and Los Angeles.

And of course, there was no Acura, Lexus, Infiniti; the luxury car market in the United States was the virtually exclusive province of Cadillac and Lincoln.

Within each model segment – mid-size family sedans, for example – there were typically three or four major contenders circa 1970. Today, there are more than a dozen contenders in this same segment – and it’s similar in virtually every other segment. Meanwhile, the buyer pool has not increased in parallel with the increase in the number and types of vehicles being offered.

And of course, each vehicle sold these days tends to remain in service two or three times as long as the typical car of the ’60s or ’70s – which was beer can fodder by about 100,000 miles.

This combo – a surfeit of vehicles and a much slower turnover rate across the board, has created a much weaker, less solvent industry – precisely because the industry has given us cars that are so much better than they used to be in so many different varieties.

Ironic, isn’t it?

Competition and consumer choice are good things, of course. But there is such a thing as too much – and too many.  

It’s like the toothpaste aisle at the store. Do we really need 20 or 30 different versions of Crest?  

Billions of taxpayer dollars have already been thrown like so much confetti at the floundering automakers in order to assure that not a single car company goes under, economic viability be damned.

But this will only preserve a bad situation for a little while longer; the jobs supposedly saved will  inevitably still be lost in the long run. Because the market’s just not big enough to absorb 12 million new cars being added to the mix every year.

Eventually, reality will have its way – but from the looks of it, not before we bankrupt ourselves in a last-ditch effort to deny the obvious.

Throw it in the Woods?

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8 COMMENTS

  1. Check into it more closely. They’re making money – relative to what they were losing before. But overall, the industry is still in a depression and (bet me, I dare ya!) soon things will be going South in a big way again.

    An economy with an unemployment rate of 15-17 percent on the verge of massive inflation is not one in which the car industry’s going to be selling new cars hand over fist.

  2. Your article should have been written a few years ago rather than now. You have not read any news lately how the US automakers are making so much profit. How about the GM IPO. You need to remove this article because it does not match the news and facts of today. They have also reduced the number of vehicle types. Your facts are wrong.

  3. I think you’re on to something there… the main purpose of PR/advertising is to convince people they need things they really don’t. With cars, it includes such things as 18, 19 inch wheels on family vehicles and AWD and 130-plus MPH top speed capability….

  4. I have a similar theory that extends throughout the US economy. It is simply that everyone has enough. People start with what they need and can afford, but pretty soon you have everything you need, and the rest is “want” items which are purchased with disposable income, after necessities. For the manufacturing and marketing side of the equasion you have to resort to goose feeding or givaways. Neither a sustainable strategy. This same theory applies to unemployment, we have everything we need and dont need more people building more stuff. I don’t know the solution, but I’m beginning to understand the problem.

  5. The US should have either gone protectionist like Europe and restricted foreign companies access to the market or opened up the market and let it pick the winners and losers (no bail-outs, loans, and subsidies). It did neither, choosing instead to open markets and also try and prop up native companies that could no longer compete against cheap labor. The end result is the loooong slow decline into bankruptcy for US car companies and eventually the whole country. Sheesh!

    • I agree –

      I consider myself Libertarian, but with one exception: So-called “free” trade. No such thing; never has been, likely never will be. It’s as much a naive fantasy that doesn’t take into account human nature or the realities of the world as is the “equality” doctrine of Marxism.

      • I agree with you that we do not need things like vehicles that can drive 130 mph plus but those are the kind of vehicles people like you buy. If you do not buy them, they will not produce them. I drive a lower powered car of today and I am sure it will drive well over 100 mph if I tried and it has less than half the HP many vehicles of today have. I would guess that 75% of the cars today could probably reach 130 mph if they do not have limiters on them. The only thing that will bring the unneeded power down is a huge increase in gas price or government mandates which I am sure you are against. I would say large wheels are a personal choice and I have nothing against it as long as they are optional. The problem with many of them is the huge cost to replace them.

        • Actually, my “everyday driver” is a 1998 Nissan Frontier pickup with a four-cylinder engine and manual transmission; it has never been driven faster than about 80.

          I do have a sport bike that will do 170-plus, though.

          But I use it. Therein lies the difference!

          What I find stupid/wasteful is that the average driver who never drives faster than 80-ish is driving around in a car capable of 130-plus.

          The over-large rims are just in poor taste – but if that’s what people want, let ’em buy it.

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