By Peter M. De Lorenzo
Detroit. As the auto companies marshal their troops for the big year-end sales push with promotions like “The Season of Audi,” “December to Remember” (Lexus), “Happy Honda Days” etc., it’s clear to me that the gaudy numbers aren’t sustainable, and that we’re moving into a transitional phase whereupon the classic automotive executive tunnel vision takes over.
What does this mean? Well, there is no hard-and-fast demarcation, but while the sales prognosticators are shrugging their shoulders and saying, “We’re not really seeing any changes in the market, it’s full speed ahead,” or something like that, and experts within and outside the business insist that the difference this time around are the higher transaction prices and the consumer public’s seemingly insatiable hunger for crossovers, SUVs and trucks - make no mistake, the storm clouds are gathering.
Incentives are the highest they’ve been in almost five years, and that is setting off alarms in a few quarters, because inevitably that will hammer used car prices, and when that happens it begins a cycle of creeping sluggishness that invariably affects the larger market. But the bullish in the industry are insisting that really doesn’t matter either, that the low inventories (except for a few deadbeats, like Fiat) suggest that this torrid sales pace will go on, if not forever, at least for the foreseeable future.
But even hardened industry veterans are starting to soften their usual braggadocio by putting qualifiers on their predictions, suggesting that they’re “optimistic” and “hopeful” that this circus will run at a torrid pace until at least next summer, instead of saying it with emphatic certainty. But that’s not the only sign that things are starting to change.
Some of the luxury German nameplates (Audi for one) are starting to suffer because the cost of doing business - meaning the ball-busting incentives needed to move the metal - is starting to have an impact on dealer profit margins. And when that starts happening in the luxury car business, believe me that does not bode well for the rest of the industry.
I’ve written about the “commoditization of everything” in a previous column, and this is a looming danger for all of the mainstream luxury automakers (I’m leaving the purveyors of super limited production “boutique” luxury cars out of this discussion).
Go to any website of the usual suspects: Audi, BMW, Lexus, Mercedes, Porsche, et al, and you will see a roster of incentives and come-ons. From their perspective it’s just the cost of doing business but in reality it has a negative, cumulative affect on image and desirability. And besides, if they have to slap on cash and incentives in a “hot” market, what happens when it cools? I’ll answer that for you: It’s going to get ugly real quick.
One ray of light, something that suggests that there are some positives in this burgeoning incentive frenzy, is that Ford did the amazing thing of walking back from a sales push that wasn’t working. Its “Friends & Neighbors” program, which assured consumers that they were getting the best deal, was announced in early November as the sales program that would carry the division through to the end of the year. Except it didn’t deliver the desired results. Even though it was basically a repackaging of existing incentives, dealers weren’t happy with it and consumers didn’t like it all that much either.
Now, it needs to be said that in the “old” Detroit days the Ford dealers would have been told to pound sand and deal with it, but Mark LaNeve and his sales troops listened and changed the program on the fly. And a new Ford sale program will be announced tomorrow. This suggests to me more than anything else that at least in some quarters, business as usual isn’t business as usual, which is as remarkable as it is commendable.
But back to the prevailing winds threatening the overall industry. What I’m seeing today are a lot of the classic, “What, me worry?” shoulder shrugs and platitudes coming from executives with either frightfully short memories or who have never experienced a serious downturn after a significant run of euphoria. I get it. The numbers are gaudy and the profits are real, so it’s hard to tap someone on the shoulder and say, “I hate to tell you this but it isn’t going to last” because they’re just not all that interested in hearing what you have to say and besides, like most auto executives, they prefer to listen to the dulcet tones of their own thought balloons.
I’m not sure where this blind naivete emanates from. It could be that despite being saddled-up with the “right” business degrees, it’s obvious that some who are new to this business are unable to separate their classroom perspectives from reality. It’s akin to a weather reporter sitting in a studio saying it’s sunny and calm outside, while black clouds have gathered overhead, the winds are picking up and it’s starting to hail.
But the harsh reality of observing years of ups and downs in this business has taught those who know better, or should know better, to be wary. Very wary. Because the moment the thought that this might go on forever creeps into the consciousness of some of these executives, you can be certain that will be exactly the moment that the inevitable slide begins in earnest.
I know executives in this business love talking about the fantastic SAAR (Seasonally Adjusted Annual Rate) that’s happening right now for light vehicle sales, which is at a rockin’ 18.23 million vehicles, but this just in: There is no “forever” in this business. Instead, there are hard-won lessons and time-honored adages, and there is nothing “forever” about it.
To say the automobile business is predictably cyclical doesn’t do it justice. This is the most death-defying roller-coaster ride imaginable. The rush from the euphoric highs is only exceeded by the stomach-churning lows, and this cycle has been repeated over and over again throughout the history of this industry. In fact it is so ingrained in this industry that it has become part of the standard operating procedure, playing out like clockwork.
That all of this is lost upon too many people immersed in this business is at the very least unfathomable and more to the point, simply inexcusable.
Make no mistake: the stench of inevitability is out there. Indeed it’s starting to waft over this business as you read this.
The fact that for too many who should know better it’s colorless, odorless and invisible is really too bad.
And that’s the High-Octane Truth for this week.
Check out the latest episode of The Autoextremist on AutoextremistTV below. -WG