America's car companies are still operating on the premise that the new car market will recover in a year or two. It may not rebound from its current annual run-rate of 10 million light vehicles to more than 16 million where it was three years ago, but surely it will get back to 14 million to 15 million.
There are several reasons this may not happen and they will make being in the business of making and selling new cars less attractive even when the recession ends. The U.S. car companies will have to augment what they do now to become profitable and remain profitable because the business that they were in for a century has changed too much. (See the 50 worst cars of all time.)
When growing tobacco started to become less profitable for farmers, they rotated some portion of their land to growing corn. Between feed and the ethanol industry they did well. As a matter of fact, the ethanol industry had a supplier and that allowed the alternative energy movement to grow into an industry. Alternative use of assets is central to a number of industries that need to be revitalized. The car business has a chance to use its strengths to gain back some of its vitality permanently if it can make this transition.
The stages of car ownership that work to the benefit of the car company and its dealers begin when the consumer buys a car, but often ends when the auto warranty expires. Once car owners have to pay real cash to keep their vehicles running, they often try to find alternatives to dealer-based service. The small business website Manta lists 135, 967 auto repair shops in its directory. There are probably many more than that but getting an accurate count of businesses that may employ only one or two people is almost impossible. The National Automobile Dealers Association, in contrast, reports that about 21,000 car dealers employed 1.1 million people in 2006. Since there are probably more than 100 million cars and light trucks on the road, many people are getting their cars repaired at some place other than a new car dealership.
As car sales have dropped, the relationship between the manufacturers and dealers has become extremely contentious. The dealers blame the auto companies for a lack of good products and access to consumer credit. The car companies want the dealers to buy more inventory to give them much-needed cash flow. Dealers are going out of business and fairly soon Chrysler and GM may be gone.
The idea that car sales are going to go back to the 16 million level even if GDP begins to grow rapidly is a pipe dream. Americans realize that a well-built, well-maintained car is good for 100,000 miles or more and perhaps six or seven years of use. Americans are learning that the hard way because they can't afford new cars, but it is a lesson which is not likely to be unlearned. People are going to keep cars longer and fewer new cars are going to be sold. America's car companies are in a better position to refurbish or repair cars and trucks than local mechanics are. Their service departments have almost uniformly well-trained people. They have access to new parts from the manufacturer. They have the ability to schedule and control the flow of service to customers. They can loan customers cars. And, they are literally dying for business.
New car companies are in the business of selling parts, and, by the way, making refurbished engines. Parts suppliers to the major car companies are insolvent in some cases and almost every firm in the industry is facing years of declining demand.
The maintenance of cars that are no longer new but have to be repaired over time is a tremendously large and very profitable business. Building and selling new cars has lost most of its luster. And, it is not a stand alone industry any more. There is too much competition and not enough money in it.
A company like Ford has the opportunity to get into a very profitable business which would bring in billions of dollars in sales a year with only a very modest investment. A car owner who has a vehicle that was made in 2005 with 80,000 miles on it can probably be made nearly new. It can certainly by rebuilt so that it is at the level that a "certified pre-owned" car is. Most of the auto dealers take low mileage trade-ins and, after a few modest repairs, sell them as nearly new. They even carry a warranty. A car dealer with skilled mechanics and parts from the original manufacturer can take a four- or five-year-old car and transform it into one that operates like a one-year old car with a modest amount of work. It is profitable work for the car dealer and the car company which supplies the parts. It helps keep parts manufacturers in business and pushes up sales through the entire chain of industries that make, sell, and service automobiles. (See pictures of Detroit's decline.)
If Ford does go into the business of rebuilding millions of its own cars for customers, the group that will suffer is independent mechanics.
The first and most powerful argument against a major car company refurbishing its own used products is that it will keep people from buying new cars. In some cases that is true. But, the fact that Ford's sales monthly are down as much as 40% undercuts the logic. As people keep cars longer, the argument will be less compelling. Most new vehicle buyers now probably fall into two groups. The first are people whose vehicles are so old or badly damaged that they need a new car. The other group is people who want a new car, can afford a new car, and will walk into a dealer and buy one any day they please. By not refurbishing a Ford and making money in the process, the No.2 U.S. car company risks having some of its owners buy a Toyota (TM) when the time comes. But, a Ford owner who wants his Ford made "good as new" is going to come back to Ford (F).
The counter to the concern that people who want a rebuilt car will not buy a new car is that dealerships are empty, as empty as graveyards at midnight. Offering to refurbish cars at a fair price will bring in a lot of customers. Most of those people will at least look at the new models. With $5,000 cash back and 0% financing for a decade, some of those customers will trade in what they have and leave with the latest model. Right now, those potential buyers won't set foot in a dealership. Once their warranties are up, they will go to the least expensive mechanic with a reasonable reputation and ask him to install rebuilt parts.
Ford and its peers have a chance to revitalize most of the dealerships, their suppliers and their own companies while making a lot of money in the process. The cost of refurbishing a car can be financed, just like a used car can be. A person who pays $4,000 to upgrade a car he already owns is probably a better risk than someone who buys a used car with 20,000 miles on it for $20,000. The car company has a chance to make money on each and every customer who comes in to have his car improved.
Ford could also wait and hope that it will have 15% of a U.S. car market that produces 16 million vehicle sales. It will be waiting for a day that will never come.
— Douglas A. McIntyre
See the 50 worst cars of all time.
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