An article titled ‘Industry Fears U.S. May Quit New Car Habit’ asks this question:  “For all the drastic cuts and financial overhauls that are meant to secure a future for General Motors and Chrysler, their prospects in coming years will be determined more by the answer to a simple question: Can American drivers live without that new-car smell?”.  It is a question I have been pondering for at least the past 4 months.  4 months ago my wife and I were contemplating trading her car.  We didn’t, largely because we found the trade-in value of her car had dropped precipitously last October – November, and that drop in trade-in value was not matched by a % drop in new car sticker prices let alone a matching drop in absolute $ prices.

As I have said many times on this blog – and as reported in the referenced article – in the 2002 – 2007 period Americans borrowed against their houses, had access to easy credit, and in the case of ‘new car

deals’ had access to cheap short-term lease deals.  As reported in the article, this sent U.S. new-car sales to more than 17 million a year – in circumstances where the U.S. new car market now has collapsed by 46% to below 10 million per year.  The question now is:  What will be a ‘normalized’ level of U.S. new car sales going forward.  If I am right in my belief that the U.S. (and most of the rest of the world) have undergone profound economic realignment, interdependencies, and change (particularly) after 1999 I seriously doubt U.S. new car sales will return to former levels in the foreseeable future.  I believe there are many reasons for this, including:

•    I expect the availability of credit to the U.S. consumer group will be far reduced going forward from what it has been;

•    I expect U.S. consumers are likely to have less disposable income going forward as further jobs are lost, some of those with jobs see their ‘number of days employment per week’ cut back, and – importantly – sales taxes and personal income taxes rise to pay the burgeoning U.S. Federal, State and Local spending and debt burdens;

•    the auto industry for many years (at least as I see it) has depended on ‘built-in obsolescence’.  In the past several years cars and light trucks have been better engineered, and their interiors and paint jobs now stand-up better than they did in the past.  Accordingly, simply put, with reasonable care and maintenance cars and light trucks last longer than they used to;

•    car insurance may become more expensive, particularly if significant inflation rates are experienced going forward; and,

•    a large number of excellent used cars will be available to consumers as leased cars come off lease.

Moreover, aside from what I think will be a reduced ‘new car market’ measured in numbers of cars sold, it strikes me that higher sales (measured in # of cars sold) of good quality sales, less expensive imported cars from China, Korea and other developing countries likely will replace what otherwise might be sales of more expensive ‘built in North America’ cars.  If I am right, none of this augers well for the North American car industry going forward.  That said, well run car maintenance and repair businesses ought to flourish as there is little doubt that as a car or light truck ages wear and tear means escalated parts and service requirements.

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