The evolving auto industry

Mitchell Thomas, BridgeTower Media Newswires

I recall as a teenager looking at new car prices that were on average $2,500. The lack of current accessories and safety equipment on most cars kept the price relatively affordable. The average income was $8,900; an average vehicle accounted for about 28% of your annual earnings.

Today the average pedestrian vehicle is $33,560-or 64% of your earnings. The modern car has driving aids, safety features protecting the driver and occupants, and the luxury suited for a king 30 years earlier. These features, necessary to meet federal safety standards and consumer desires, have elevated prices beyond affordability.

The auto industry, knowing that these price issues were forthcoming, created welcoming financing devices to move inventory. Rebates, zero or low financing, longer term duration on loans, favorable leasing arrangements, free service and higher trade allowances have been presented at one time or another by manufactures and dealers.

These aggressive tactics, used to sway a decision to select one brand over another, cannibalized the industry, turning it into a commodity-driven matter. This saturation of strategies has become so common that consumers are reluctant to respond, putting a diminishing return on the industry and creating burgeoning inventory.

The favorable leasing arrangements of two and three years ago have come back to hurt dealers with an overabundance of cars in the used pipeline. These vehicles are becoming favorable buys because of price competition.

Unfortunately, some of this has backfired against the industry itself. The age of an average vehicle is 11 years old. Swapping the old buggy for a new one is less frequent and often done when the old car has lost its usefulness due to repairs and age. The main issue facing the consumer today is the deluge of options and affordability.

Manufacturer brands that were once exclusive to the upper end of the market are now offering more affordable cars to a younger generation, expanding their ownership base. This issue has also affected the lower scale of product offerings.

The Toyota, Nissan, Honda, Hyundai and Kia all offer a selected line on the upscale market. Once a manufacturer has a customer, the goal is to maintain that relationship throughout that customer's purchasing years, thus the expanded economic range of products.

The manufacturer and dealer know it is costly to retrieve a customer, while it is cost effective to anticipate their upcoming needs to maintain that loyal relationship. This reach can become generational; do you recall what brand your parents drove?

Automobile models come into fashion and then are slowly dismissed. Minivans and station wagons were the must-haves in the '80s; now SUVs and trucks appear to have supplanted their role. Most SUVs with elevated suspensions and AWD will never go off-road and many pickups will rarely carry anything in the bed, which shows how much of an effect marketing has on our decisions.

Manufacturers are enjoying enormous profit margins from these vehicles, where the average car (now slowly selling) is less than half.

Take a look at the current top selling vehicles: most are trucks and SUVs. The development stage of a new model for a manufacturer is a dynamic process-where a billion-dollar investment is on the line for success and a lead time of at least three years is necessary for introduction. Failure of a mainstream consumer accepted product can leave a manufacturer crippled. A prime example of this is Mitsubishi, which continues to slowly recover from its setback.

Tesla is changing some of the landscape regarding dealers and product innovation and development. It takes a maverick to move the direction of an industry. The longevity of Tesla is not the consideration, but the transitioning of the thought process is notable.

The younger generation is apprehensive toward auto ownership because it is cost prohibitive. This presents a problem for both dealers and manufacturers.

The mission in the future is to change the car from a simple transportation mode to a device that interacts with your everyday communication. This is why you are seeing Google, Apple and Microsoft venturing into this industry; changes are on the horizon. Autonomous cars are coming in the near future, suggesting broadening vehicle ownership for the elderly, disabled and those under the influence. Once safety and insurance coverage issues are resolved, I think the government and municipalities will be more willing to accept this technology.

Currently the inventory of 121 days of unsold vehicles is at historic highs, burdening both dealers and financing arms. The default rate by subprime finance owners continues rising to levels not seen since the last recession.

The potential for dealer defaults and a consolidation in the industry is imminent. Dealers who used to pass off financing to the banks are now intricately involved with maintaining the payback for the duration of the loan. Used cars values are beginning to fall more precipitously, making certain loans upside down quickly.

The auto industry landscape is evolving into a scenario we may not recognize in 10 years. Investments with the expanded use of lithium batteries, cameras, computer chips and interface screens are becoming more prolific in design and function. Materials like carbon fiber and aluminum are constantly used to reduce weight and improve fuel mileage. Alternative fuels are still in development like hydrogen, electricity and propane; however, an infrastructure must be implemented to make them practical for distance and refueling.

The days of a stagnant industry-where all you saw was a change in the body design each year-are far behind us. Technological advances and luxury are the new focus, which consumers are anticipating and desiring. Happy motoring.

-----

Mitchell Thomas is an International Equity Analyst/Portfolio Mgr./Head Trader for Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully's Trail, Pittsford, NY 14534 (585) 586-4680.

Published: Mon, Jul 10, 2017