Bad For The Auto Industry, Good For Rebuilding
By Doug Kaufman
The headline in the Dallas Morning News caught my eye: "New Car Customers With Negative Equity Are Growing Problem For Auto Industry." The words "negative" and "problem" are well-recognized around this segment of the "auto industry" so, of course, I read on to see how this story would impact the Engine Builder reader.
To my relief, I realized that in this case, what's bad news for "them" may, in fact, be good news for "us."
The article (published at the end of May) gives a kind of status report of the zero-down financing available since General Motors introduced the practice following the September 11 terrorist attacks of 2001. While they were credited with stirring (or even saving) a sluggish vehicle market, zero-down, long-term loans may finally be too much of a good thing.
The problem, it seems, is that customers owe more on their current vehicles and need larger incentives to cover their old car payoffs. This, of course, means their new car costs even more, putting them into a cycle of increasingly higher car payments. Dealers in the Dallas area say some customers are taking 120 percent new car loans so they can roll the debt from one car (or more) into the new loan. Some are likely still making payments on cars that returned to rust years ago.
One woman, who traded in a Mercedes with "major problems," was in just such a situation. She was so far in debt from other car loans that she put $22,000 down on a Ford Explorer and then made $1,200 monthly lease payments for the next two years. That's paying nearly $51,000 over two years for a $30,000 vehicle that she doesn't even get to keep! In a word, ouch!
According to reports, as many as 85 percent of customers are "upside down" in their auto financing owing more than their vehicles are worth. Industry analysts worry that new car sales may slow because of the negative equity problem.
When I discussed this topic with industry icon and frequent Engine Builder contributor Doug Anderson, he reckoned that this may prove to be one of those lights at the end of the tunnel that DOESN'T turn out to be a train. Couple negative equity with newly increasing interest rates, says Anderson, and you have the perfect opportunity to see this industry reverse some of its momentum.
Can you take advantage of the chance? Here are a couple of suggestions: look into available financing options that you can use to offer your engine-buying customers a realistic payment plan. Also, continue to advertise the cost-savings sense (and dollars) that repowering makes.
The sales numbers in Part 2 of the Machine Shop Market Profile are down from last year. This news from Dallas may be an early indicator that next year's numbers may finally be swinging the other way.