After nearly collapsing during the financial crisis, the US auto industry has roared back.
Back-to-back record sales years in 2015 and 2016, when over 17 million new vehicles rolled off dealer lots, yielded fat profits for carmakers, which have been enjoying historically high transaction prices, low gas prices, and a big consumer move to moneymaking pickups and SUVs.
You wouldn’t know how generally buoyant and optimistic the industry is, however, from the near daily cadence of headlines about how a massive disruption by self-driving cars and electric vehicles in underway, how the market is tanking because the automakers will sell only 16.5 million vehicles this year, and, my personal favorite, how a subprime auto-lending Armageddon is coming.
“A decade after the mortgage debacle, the financial industry has embraced another type of subprime debt: auto loans. And, like last time, the risks are spreading as they’re bundled into securities for investors worldwide.
“Subprime car loans have been around for ages, and no one is suggesting they’ll unleash the next crisis. But since the Great Recession, business has exploded. In 2009, $2.5 billion of new subprime auto bonds were sold. In 2016, $26 billion were, topping average pre-crisis levels, according to Wells Fargo & Co.”
Later, Coppola reports that the auto-lending market is nothing like the mortgage market – these stories always do – but not before the dog whistle has already been blown. The article is a lengthy analysis of the connection between a single automaker, Fiat Chrysler Automobiles, and a single lender, Santander, a major player in subprime lending.
We’re meant to conclude that this connection is inherently compromised, just because Santander and FCA have combined to sell cars to people with credit scores in the 600s. The story also contains a chart that shows subprime defaults ticking higher, but that arguably is due more to loan volumes than to underlying weakness in overall loan portfolios.
Keep the catastrophes coming
- Business Insider
If the reporting is accurate, then Santander and FCA have been playing fast and loose with some lending standards. But then again, the outcome of a busted subprime loan is simply a relatively quick repossession and resale of the vehicle. Investors might lose out on auto-backed securities, but they knew that was a possibility when they accepted their risk premium.
Subprime is just the most reliable topic for auto-market naysayers these days. The monthly sales data, however, is a close second. For several years, the US market has been running at a historically high pace as consumers worked through pent-up demand (vehicles on US roads are over 11 years old on average). A perfectly healthy market is anything above 15 million, the so-called replacement rate, or churn of consumers trading in old cars for new ones.
As the pace has been running below 17 million for the past few months, collective doom has become the order of the day. Sales should be declining from last year’s elevated levels – it’s wishful thinking to assume that a cyclical business won’t be, you know, cyclical.
But the routine declines have led market observers to predict a catastrophe, rather than a 100-year-old industry that has seen countless declines deal with another one.
The disruption that isn’t
- Thomson Reuters
That’s a micro aspect of the gloominess. The macro aspect entails a massive disruption of the way we build, sell, and buy vehicles. Uber will eat the automakers’ lunch – even though the $70 billion ride-hailing company is in a full-on management crisis. Tesla will eat the other automakers’ lunch – even thought the $50 billion electric-car maker sold fewer than 100,000 vehicles last year and EVs make up only 1% of the global market. Self-driving cars will end driving as we know it – even though not a single truly self-driving vehicle can be found for sale today.
It’s all well and good to get ahead of trends, but the 17 million US auto market of the past two years won’t be falling to zero anytime soon. So why all the negativity?
The story since the financial crisis and the bankruptcies of General Motors and Chrysler has been one of monumental recovery. The US market, the world’s most competitive, is stronger than ever. But that story has gotten boring. Success, success, success. Who wants to read about that? Bust must follow boom, right?
Well, no. More often than not, in the car business, booms are followed by adjustments, then the boom resumes, until over the course of a few decades the industry does shift. Classic example: In the 1950s, GM controlled over half the US market; almost 70 years later, it controls less than 20% – but it’s still the market leader.
Not a sexy story
- Screenshot via Elon Musk
I’ll be the first to admit that this isn’t a sexy story, but the dynamics of most of the world’s car markets aren’t actually all that sexy. The vast majority of people buy or lease cars for mundane reasons: They need to get from A to B, regularly and reliably. The auto industry does a very capable job of addressing this need, while not incidentally employing droves and providing consumers with massive choice, everything from $15,000 basic transportation to hypercars that go for $2 million.
The auto industry is, at base, predictable. I think that’s actually why there’s so much fretting about it. Much of the rest of the economy has become sketchy and unpredictable, unstable. Communications technologies were easily disrupted, a lot of low-margin manufacturing of commodity goods has left the US, automation is intensifying, and finance during the financial crisis was revealed to be less a value-pursuing proposition and more a risk-manufacturing apparatus.
Car companies, meanwhile, have tended to their core businesses and tended to them well. Yes, they’ve also thrown their hats in the rings of EVs and self-driving, but those experiments aren’t draining the balance sheets. The bottom line is that people still want to buy old-fashioned cars. And the industry has been doing a bang-up job of serving that want. There’s every reason to assume it will continue to do so.