Have We Reached Peak Auto?
2016 was a great year for American automakers; sales rates were at their fastest pace in 11 years. Apparently, demand has fallen and now automakers are left with large inventories to move. Despite aggressive incentives, sales have continued to trend downwards. According to the article, these types of sales rates can decrease the growth of America's economy by .1%.
America’s auto industry was running full throttle at the end of 2016, with sales at the fastest pace in more than 11 years. Now the Check Engine light is on.
Purchases of cars and light trucks declined in March even as automakers employed heavy incentives to spark demand and reduce inventory. The economic implications of the sector’s slowdown will probably be more modest but are likely to include production cutbacks, tempered consumer spending and fewer employment opportunities on the nation’s assembly lines.
So, have we reached peak auto?
Reference:
[Peak Auto?](https://www.bloomberg.com/news/articles/2017-04-05/peak-auto-these-char…)
If you want to mess up your day, read about the impending sub prime auto loan crisis.
Not comparable to the subprime mortgage crisis, by a long shot. The size of that industry (sub auto) pales in comparison to mortgages, you can repo a car fairly quickly compared to regaining control of a house, and the assets are considerably cheaper in magnitude on the car side., as well. If your argument is similar to house anyone with any credit can walk into a dealership and buy a car, similar to '07-'08 times, it is also important to realize cars are usually necessary to get to and from work (having a car will guarantee income and you can sleep in it vs. a house which is immobile). Our society trains consumers to purchase the biggest and best they can afford, most people do not live below their means, and unfortunately this includes subprime customers as well.
I didn't really make an argument of any kind, I simply posted a sentence about how bad subprime auto loans are.
Adopting a chicken little mentality over subprime auto loan defaults seems shrill to me. Subprime housing wasn't really such a big deal because it was subprime - it was a big deal because of:
The sheer volume of debt issued ($500bn/year underwritten at peak, I believe?) Subprime auto is nowhere near that.
The fact that pre-08, a tremendous number of synthetic derivatives were constructed out of the same dwindling pool of raw materials (i.e. loans). Demand dictated that underwriters scrape the bottom of the credit barrel for loans.
The fact that the long positions of these synthetics languished on balance sheets of sleepy blue chips that were not wise to the risks and did not set aside sufficient capital reserves to cushion themselves in the event of a liquidity contraction. The people trafficking in subprime auto debt aren't seeing "AAA" and ending their due diligence there... they're special situations investors that are familiar with the risks.
The fact that the rest of the credit ecosystem pre-'08 had evolved to accommodate these outsize long positions on said balance sheets. I don't think there's an analogue with subprime auto loans to the overnight contraction of the commercial paper repo market that was seen in 08 when RMBS and CDOs started getting marked down.
I doubt subprime auto bonds and associated synthetics are valued in the peculiar way that housing bonds/synthetics were. Recognize that part of what made 08 so bad was that some of the people participating in zero sum bets on synthetics (truth be told, the ones on the losing side of the bet) also got to determine the value of those positions on any given day, which arguably gave way to a host of perverse incentives which enabled the excesses as well as the sharp drawback when it all came tumbling down. I imagine there is more third party interference in the valuation of these auto loan products, and with it, less potential to sustain astronomical book values that are out of line with the fundamentals.
Among other things.
Last year we received a lot of talk about this, but demand remained fairly strong and some even suggested concerns were overblown. I had been thinking several consumer finance companies (CPSS, CRMT, Allied, SC) and others were likely exposed. I think that what's happening is divergence in demand trends between used cars and sedans vs. trucks. Used cars are definitely set for a large infusion of volume with consumers being overly leveraged and older cars coming to the lot bringing prices down. Also, with trends in oil markets looking up in the medium term, we might get a slowdown in demand for trucks and SUVs because they won't be as economical.
Either ways, today had a WSJ article discussing if consumers may look to add expenses elsewhere potentially benefiting other industries. There's no way to fully know where consumers will turn and odds are it won't be retail. It certainly is shaping up to be interesting.
For short ideas check out CRMT.
The declines in sales given increased subvention throughout tax season does not paint a pretty picture.
Just look at the average duration of an auto loan. It's going into 6-7 years. Absurd. US automakers are also offering pretty crazy rebates and incentives.
/delete
Some car companies, such as Ford and Uber, get it. The future of the car industry (whether that's 3 years or 20 years from now) is autonomous. Ford will be launching an autonomous fleet in major U.S. cities in 2020. Build a really nice car at cost of $30,000 and charge $5/ride 30 times/day and you've got revenue of $55,000/year. Your car would probably have a 2-year life with such heavy use but it would throw off $100,000+ in revenue. Make the car electric and reduce your maintenance costs by 90%. Owning a fleet of autonomous electric "taxis" is a much, much, much more profitable model for car companies than the present system of churn and burn with auto dealerships.
If Ford, Uber, et al do it right, they could be swimming in cash the way Google and Apple are. If I had the courage of my convictions (which I don't) I'd be long on the auto industry. But alas, it's easier for me to predict than to put my money where my mouth is....
A few thoughts:
The total amount needed in inventory would definitely drop but by how much? Most cars are static for 90% of time but for the other 10% they're used by everyone at once (commute traffic etc).
Not disagreeing with you, however, I think it'll be more likely for car companies to sell to smaller (relative) operators of fleets. With turnover rates of 2-3 years it'll be much more efficient for automakers than the higher turnover rates for pubic consumption.
I mean, there are challenges, but Mercedes has already announced that the taxi fleet is where it's going (by 2025 is its target), as well as Ford (2020), so they apparently think these challenges are surmountable. I think they are surmountable because the transition doesn't happen overnight. If it did, I think your concerns would have more validity.
Hence my comment on infrastructure. Autonomous uber doesn't work on a coal fueled power grid
Also you are lacking logistics costs related to said fleet. What are they supposed to do when not in use? Block the street?
I don't know. What does a normal car do when it's not being used...?
/delete
And resourceful entrepreneurs will work with the car companies to provide the needed real estate. Funny how the free market works.
/delete
As a real estate guy, of course I've considered it. We think about autonomous cars all the time and their potential impacts on our developments. We're even actively considering converting a piece of urban property into a garage for such a thing.
The problem is, you're a Luddite and you think that any challenge facing a technology is insurmountable. Parking is the least difficult challenge to surmount amount autonomous technology of all the potential, real challenges facing it.
/delete
Even your insults aren't creative.
Or interesting.
Or cogent :/
Don't you have a FIN101 class you should be showing up late to?
EDIT: I notice you edited your comment. You really take this stuff to heart, don't you?
I realized that so I deleted. Thanks. Yes, and I am beat and realized I wasn't making any sense and being a jerk.
Let no good deed go unrewarded - a silver nanner for you.
I appreciate it. Sorry for the derail.
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