Credit Crisis, Automaker Troubles Forever Changes Landscape

The last decade, with its cheap credit, gasoline and sales gimmicks by auto makers, fueled one of the greatest auto sales booms ever seen. In the United States and Canada, sales of new vehicles were averaging over 17 million each year, with some families owning up to three vehicles and purchases of high-priced, low mileage SUVs and other large vehicles filling the coffers of the North American Big Three manufacturers.

In the last year, that landscape has changed, with analysts seeing one of the most dramatic market corrections since the Great Depression which eighty years ago sent world economies tumbling. This time, the economic downturn is being driven by the coming together of several severe economic crises: the collapse of the housing market in the United States and the near simultaneous drying up of world consumer and business credit, precipitated at first in the U. S. by the collapse of Bear Stearns and the insolvency of other major U. S. financial institutions, which then spread to other big banks and lenders around the world. In its wake, the North American auto market deteriorated, bringing with it profound changes to the automotive landscape that some say will be permanent.

Meny Grauman, senior economist with CIBC World Market Inc. co-authored a paper with Jeff Rubin that took at closer look at what the post-recession U. S. vehicle market would be. While it is always a bit tricky to apply U. S. trends to Canada, Grauman says the basic conclusions of their report has relevance for Canada as both economies are intricately tied together, especially as Canada exports many of its vehicles to the U. S. for sale. In the report published in early March, Grauman and Rubin write that after two-and-a-half decades of uninterrupted growth “U. S. automobile ownership metrics are likely to deteriorate markedly over the next five years, with both vehicles per household and vehicles per driver falling back to levels not seen since the late 1980s.”

Auto Market Smaller

“In the U. S., after the last big oil shock, Americans have been on a very big buying spree and bought too many vehicles, and that is not sustainable,” Grauman says.

Much of this growth was driven by all-too-easy credit financing, with Americans taking on greater amounts of personal debt in order to buy everything from personal electronics to cars and homes. With that easy credit now gone and the disappearance of other kinds of auto financing and leasing options, coupled with rapidly dropping car production levels, Grauman and Rubin predict “roughly five million vehicles will likely come off the road every year over the next five years. Overall, by 2013 we predict that there will be 25 million fewer passenger vehicles traveling on American streets and highways compared with 2008.”

Things are not much brighter in Canada. In late March, Scotia Economics, published by Scotiabank and Scotia Capital, found that total automobile sales in Canada have steadily declined since 2007, from 1.65 million vehicle sales in 2007 to 1.64 in 2008 and a precipitous decline predicted for 2009 with sales dipping to 1.38 million. This drop is being hastened by the declining economies of British Columbia and Alberta: “Preliminary data through February indicates that sales in these two provinces have plunged 35 per cent y/y– nearly 10 percentage points worse than in the rest of Canada.” Ontario is expected to be hit hard with production in the auto sector dropping some 30 per cent in 2009.

Further turmoil will likely be created as the major North American automakers struggle to survive. In March, President Barack Obama and his administration announced they were not happy with the proposed plans submitted by General Motors or Chrysler for restructuring the companies and how they would deal with their creditors so as to secure further U. S Treasury loans. The administration demanded new plans from both companies, but the prognosis for the auto giants amongst analysts is not heartening. Moody’s Investors service announced it still sees a 70 per cent chance of bankruptcy for the automakers because of their difficulties with creditors.

What all this means is that the dynamics of the vehicle buying public will be fundamentally altered in the next few years, as well as the kinds and ages of the vehicles on the road.

Fewer cars, younger cars

One result of all of this turmoil will be, as mentioned before, fewer cars on the road as more people forego buying a third or even a second vehicle.

“The days of owning two SUVs, for example, are over,” says Gerry Fedchun, president of the Automotive Parts Manufacturers Association. “I see a downsizing of vehicles as people move from buying up to buying what they need and can realistically afford.”

CIBC’s Grauman agrees that in the next few years the vehicle ownership numbers for households and individuals will drop. Currently, there are over two vehicles per household in the U. S. and 1.2 vehicles per licensed driver. The reasonable level for a household is two vehicles or less, and only one vehicle per licensed driver, he says.

One result of this consumer divestment will be the kinds of cars on the road will change. Dimitry Anastakis, professor of history at Trent University who has written extensively on the Auto Pact and the Canadian auto industry, says due to the earlier car buying binge and the current radical reduction of new vehicle purchases, the fleet on the road right now is very young, and the economic tough-times will cause people to hold onto these cars much longer than before, both as a cost-savings measure and as a consequence of the auto makers scaling back their buyer-incentive programs.

This is the one bright spot amongst all the dour economics news. Because people will be holding onto their vehicles longer, they will spend more money on vehicle upkeep and repair. Ryan Robinson, senior manager in charge of automotive research with J. D. Power and Associates says independents could stand to benefit from this.

“The data we look at suggests there are some 14 million vehicles on the road right now,” Robinson says. “You have people spending somewhere between $800-$1,100 on repairs for their vehicles after they get past the three-year market, and people with four-to-12-year-old vehicles are spending on average $900 on repair and maintenance.”

Because it has become harder to get financing for new vehicle purchases, people will spend more on their current vehicles to keep them running smoothly, so independents could very well see increased revenues during this automotive and economic crisis. But it will be a challenge, says Robinson. That will come from dealership operations that will aggressively move to take business away from independents in the off-warranty years of a vehicle’s life. Already, there are signs dealership service operations are moving aggressively in this direction with new advertising campaigns and consumer reach-out campaigns.

“Canadian consumers will go back to the new vehicle dealer more often than not when the vehicle is still under the manufacturer’s warranty,” he says. “But when those vehicles start to get into the four-to-six-year range, dealers still maintain some 30-49 per cent of that vehicle service market, with relatively little attention being paid by them to getting those older vehicles in dealer’s service bays. They realize that the front-end of the dealership operation is not providing much to the bottom line so they are now focusing on the back-end of the operation and they are starting to actively market agressively to owners of older, off-warranty vehicles.”

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