Thursday, December 21, 2017

What's Going On?

I love selling cars, the industry gave me a purpose after the shitty experience of being a corporate cog. But I’m truly starting to fear the worst for the American car industry. The industry has shown growth since the dark days of the recession but the business model morphed into an ugly free for all. Automotive credit has become easier in the last few years, and manufacturers are still seeking whatever growth they can come up with in our market at any cost. 

People are buying cars they can't afford or shouldn't even have been able to buy. Used car depreciation is at an all time high for many cars and yet everyday more and more people are trading them in. This whole scenario has a bleak end that became evident when I went to my buddy Paris’ repo lot. He called me to check out a 2016 BMW 435i he jacked for BMW Financial Services. It was a beautiful Estoril Blue M-Sport car with just under eight thousand miles on the clock. I could only imagine the circumstances where someone let go of a year old BMW, but as we walked through I noticed all of the cars seemed to be nearly new. Paris confirmed my fears when he told my about nine-out-of-ten vehicles he’s repossessed in the last few months were model year 2016 or newer. To make matters worse Paris only does work for prime and a few captive lenders, meaning a majority of these cars went out to consumers with good credit. 

On the other end, every time I look up from my desk there is a customer who is absolutely drowned in their vehicle. Six thousand dollars in negative equity is the norm, but I’ve witnessed numbers as high as twenty thousand in the last year. Customers are always astounded by how their car has lost so much of its value so quickly. What they fail to realise is their car was worthless from the beginning. Rebates and incentives are at an all time high at many manufacturers, J.D. Power quoted an average around four thousand dollars earlier this year, and I’m sure that number has risen since then. The problem with high rebate numbers is it absolutely kills the resale value of a car. 

Think about it like this: late in the model year for a new car incentives are through the roof, to the point you could buy a used version of the same car with a couple thousand miles for almost the same price as a new one. This is great when you're taking advantage of the huge upfront savings, it's not so great when twelve months later you find out your car is worth almost half its original MSRP. The used car market reacts to the savings offered on new cars, this trend happened back in the mid-2000’s a few years before the housing bubble burst, when all the domestic automakers offered up “employee pricing” on everything. It was supposed to be a smooth way of marketing large incentives without spooking everyone, but really it was a free-for-all that led to trade in values dipping leading into the opening years of the recession. 

The picture I'm painting for you here is a dark portrait of the American car industry as we know it. When you have consumers packing on massive amounts of negative equity, and taking on payments and debt they should be never be allowed to, it leads us to a dark end. Many analysts have called for a plateau in the upcoming years, but you'd be hard pressed to see the market maintain under this pressure. You're going to see more new cars being repossessed, and more consumers being turned away from new cars because they can't afford the payments. It's a cycle that can only end when the manufacturers and lenders agree to curtail this cycle. I get the question from guys who analyse the industry all the time: “what's going on?” Honestly, I'm not sure, but it's not good. 


  1. Check out for an alternative to the madness

  2. Ethan great insight, thanks for your post. I'm at that age when it comes to cars where they don't move me to make an impulse decision based on "design", looks, or what have you stuff like engines and tech, bells and whistles etc.

    my main concern is utility, which means it's gotta be dependable and long lasting. Problem number 1 is there is so much massive fraud at all levels of corporate fortune 500. Anything from the steel makers faking numbers to airbags and gas mileage etc. That's a systemic problem that erodes faith in what were formerly; ostensibly faithful and honest institutions. no longer; but beyond that, and closer to where the tread hits the pavement, lets say you find a particular model year and manufacturer that you trust and are willing to pull the trigger for a brand new buy: the second problem is, even base models for a decent say v8 truck with nothing is something approaching 35-40k after taxes license and fees. that is literally insane.

    so its a trust, quality and price issue that is not sustainable.
    some companies like bmw are realizing this and offer minimalist models without all the newest cutting edge tech, but this is not a trend i see happening in other segments.

    on the other hand one clear trend is the pricing to the upper end; the high end is getting things like 100K for a truck and they're selling them too; brand new ones. a hundred thousand dollars for a TRUCK. That's half the median price of a house in the country.

    1. and twice the median income

  3. Interesting and informative article. In a way, though, 100K for an entry-level luxury whatever doesn't seem like much when in Zimbabwe, whose dollar was better than the US $ in the early 80's, where now a load of bread runs into 8 figures easy. Our fiat, rapidly inflating (through debt issuance and printing) dollar is probably headed that same way. E.g., look at Bitcoin, just a few of which are now worth more than a BMW.