I was 70 floors above Downtown Los Angeles when I met a man who worked in mergers & acquisitions at a US bank. His passion was auto dealerships. He said a dealer network in north LA had collapsed within the past few days.
I asked him why and he answered that there were very thin margins. He said that many new cars are sold to buyers for a fraction of their costs to dealers. If the dealership does not have an actively used car business, the new car sales will often not be enough to cover the costs.
The US new car market was only marginally up between January and October, but the growing concern is that things could be worse.
One of the biggest concerns is that US car buyers have shifted to leasing cars, much like in the UK, since the Credit Crunch. The current low-cost deals are running out, and 31% of all new cars are being sold on monthly leases. In the background, there is also the possibility of interest rate increases in the US.
You might think that new-car ownership is still worth the price of these deals, which come at around $260 per month (Rs 18,306).
My friend at the bar disagreed and said that the average American consumer extremely price sensitive. If interest rates or lease costs go up, consumers could be disqualified from purchasing a new car.
All other lessons we’re learning here in Los Angeles The extent to which drivers have taken out significant loans to purchase a car, which they intend to sell, but which also has a $20,000 (Rs 13 lakh) trade-in value is a concern for the industry. People with negative equity are unable and unwilling to buy a new vehicle.
It’s not only the disappearing customers that could cause problems for carmakers but also massive market shifts. The collapse of US car sales and the shift to crossovers and pickup trucks in the US-led to GM closing three plants and removing 14,000 jobs.
These GM plants were operating significantly lower than the 80 per cent capacity considered a break-even point. LMC Automotive figures suggest that GM’s four remaining plants will operate below 50% capacity even after the closures.
In the US, 4.61 million passenger cars were sold between January and October 2018, down 13% from last year. Contrarily, 9.65 million pickups, crossovers, and SUVs were sold, an increase of 8%.
The signs are indeed in favour. The new car market is shifting away from saloons, and consumers are at risk of leaving the market.
It’s no surprise that the financial world is ready for dealer carnage if the US car market suddenly collapses.