Autos

The auto industry is facing unprecedented challenges on the technology front and an uncertain future from the impact of driverless and electric cars. But the root problem of the crisis in the auto sector right now is the slide in used car values.

The auto industry is facing unprecedented challenges on the technology front and an uncertain future from the impact of driverless and electric cars. But the root problem of the crisis in the auto sector right now is the slide in used car values.

This sectoral weakness threatens to be a major problem for the US economy, as the auto industry represents 3% of US GDP and accounts for around 5% of the US workforce. When the auto sector catches a cold, the entire US manufacturing sector feels the chill.

Real Vision’s Grant Williams brought us the Big Story in the Auto Sector, drawing upon the expertise of industry analyst Daniel Ruiz who had been tracking the “perfect storm” in used car values for some time.

For Daniel, the trouble started with the NADA Used Vehicle Price Index and the massive decline since mid 2016, combined with negative equity and the proliferation of low cost leases in the retail auto market.

When $50,000 cars are leasing in the mid $400 per month range, you start to see significant pressure on used car values and it becomes ever harder for dealers to sell a one-year old car, when the customer can easily lease a brand new one.

What became extremely concerning to the industry in 2017 was the large inventory ‘overhang’ of models from 2016. Last year’s cars are harder to sell, especially in the face of discounts of up to 20% on new models and ultra-low lease payments.

These inventories of old stock piling up are like a heart attack for the industry.

While this situation plays out, auto companies are also facing the structural shift from advances in technology. Just as Amazon has cut its way through the retail sector, autos are next in line – this is according to Michael Lewitt, who also contributed to Real Vision’s Big Story on the Auto industry and is the author of ‘The Credit Strategist’. He warned that lower volumes are one thing but sub prime loans at unsustainable levels are another, especially in a 2% growth economy.

Indeed, there has been a massive jump in sub-prime delinquencies on auto loans, so much so that Daniel Ruiz claimed it’s looking a lot like a rewind of 2008. Especially when you understand that Santander, one of the largest subprime lenders, only verified income on 8% of their customers. It’s not hard to see the potential for more sub prime defaults.

Meanwhile, Micheal Lewitt points out that just as Amazon used new technology to cut its way through the retail sector – autos are next to be ripped apart by technological change.

The growing threat of ride sharing services like Uber is one challenge but the real problem for the auto industry is the double whammy from both electric cars and driverless vehicles. These are both truly historical shifts that will lead to less cars being sold.

For now though, every major manufacturer is racing to produce better electrical vehicles. And whether you view Tesla as an auto maker or a technology company (and whether you are a bull or bear as far as that story is concerned) one thing that can be relied upon is a whole new wave of competition in the electric car space.

The manner in which auto companies have responded to the challenge of building electric cars is impressive but there are serious questions marks over the future gains for the industry.