The Future Of Car Buying: Small Cars Are Now American Favorites
ANN ARBOR, Mich. (AP) -- Big cars and trucks are out. Smaller ones that offer more for your dollar are in. And many drivers will hang onto the new cars they buy longer.
We've seen some of this before -- in the 1970s. But there's reason to believe that this time, American car-buying habits have changed forever.
Scarred by the worst financial crisis since the 1930s and still leery of high gas prices, people are walking into showrooms intent on spending less. The trend is strongest among baby boomers, who are 44 to 63 years old and make up a quarter of the population, dealers and industry analysts say.
A generation ago, boomers drove the economy out of the second-worst recession since World War II. After the downturn ended in 1982, they went on a buying spree throughout the '80s; for many, free-spending became a way of life that didn't end until last year. But their investments and home values have taken a hit. And with time running out until retirement, economizing on the second-biggest purchase most people make has become common.
"Up until now it's 'I want bigger and more than I had last year,'" says Jerry Seiner, who owns several GM franchises in the Salt Lake City area. "This has been the biggest awakening of the United States population since the Great Depression."
Ford's top sales analyst, George Pipas, describes the shift as one from "conspicuous consumption" to "careful consumption."
To a degree, the shift has been forced on consumers. The Great Recession ended the days of easy credit, which propelled car and truck sales most of this decade. During the boom years, almost anyone qualified to buy a new vehicle. Zero percent financing on purchases and cut-rate deals on leases kept monthly payments low and encouraged people to trade every three or four years. Sales ballooned to record numbers of about 17 million vehicles a year in the first half of the decade.
Today, loans are harder to get and come with higher payments. About 60 percent of buyers finance a new car, and many no longer qualify for luxury models -- or want big monthly payments.
So many drivers will keep running up their odometers and scale back when they do buy, continuing to push down sales of large cars, sport utility vehicles and luxury brands. A poll taken in April by research firm AutoPacific found that 59 percent of recent buyers will keep their cars four years or more, up from 46 percent in 2008. It's easy to keep a vehicle longer because of improved quality.
On a recent evening, Haiying Sun of Ann Arbor, Mich., drove his family's 1998 Ford Windstar minivan to Howard Cooper Honda to look at new cars. And look is all he did. Although the van has 80,000 miles on it, Sun says he can wait for the deal he wants.
"I don't think this car is too bad," he said. "I still can drive it for maybe two years."
The trends suggest annual vehicle sales will stay close to this year's 10 million level instead of rebounding to mid-decade levels. It was the collapse of the sales rate to as low as 9.57 million in January 2009 that pushed GM and Chrysler into bankruptcy reorganizations financed by the federal government, leaving Uncle Sam with a controlling stake in GM and as broker for Fiat's takeover of Chrysler. Even mighty Toyota, which has done relatively better than most, posted the biggest loss in its history in its last fiscal year.
"I think caution will be with us for a while," says Martin Zimmerman, a former Ford Motor Co. chief economist who now teaches at the University of Michigan. "That will color people's willingness to go out and buy houses or buy cars."
Even before the collapse of Lehman Brothers triggered the financial industry meltdown a year ago, buyers' habits were starting to change. Fresh off a summer that featured $4 per gallon gas, people entered showrooms thinking smaller and armed with dealer invoice prices and rebate offers gleaned from Internet sites.
Small cars made up just 12.6 percent of the market in 1998, but that has grown to 21.1 percent, according to Ward's AutoInfoBank. The popularity of the federal government's Cash for Clunkers program this summer showed that Americans will embrace small if they're being budget-conscious or if they get a good deal. In August, the last month of the program, sales of the smallest domestic cars tripled from a year earlier.
Automakers are banking on the shift being permanent, unlike the last big swing to small cars, which followed the Arab oil embargo in 1973 and another oil shock at the end of the decade. People went back to larger cars as soon as oil supplies increased and gas prices went down. From the '80s until last year, gas stayed relatively cheap. Besides big passenger cars, the "light truck" market -- minivans, SUVs and pickups -- exploded and U.S. automakers made billions.
This time, though, higher gas prices are more likely to stick. Even though gas has dropped to around $2.50 a gallon, few expect it to stay there. The end of the global recession and burgeoning auto markets in China and India are expected to increase the demand for oil. Higher government fuel economy standards also will drive sales of small cars.
The shift will leave Detroit automakers no choice but to figure a way to make money on compact cars. In the past, these were money losers for U.S. car makers and were subsidized by big cars and light trucks.
GM and Ford say contract concessions from the United Auto Workers make it possible to turn a profit on U.S.-built compacts. GM even says it can make money on subcompacts built in Michigan, but Ford and Chrysler will build them in lower-cost Mexico.
Those who buy smaller vehicles or non-luxury brands will still want the amenities they've become used to, such as voice-activated phones, navigation systems, heated leather seats and premium sound systems.
That's what Art Shand, 48, a building industry consultant from Palm Harbor, Fla., was looking for when he decided to lease a third car to keep from racking up miles on his family's other two vehicles, an Acura MDX luxury sport utility and a BMW 5-series sedan.
Although he could afford another premium brand, he shopped for value and leased a Hyundai Genesis, the Korean company's new entry in the luxury market.
It has all the amenities sought by Shand, yet costs nearly $20,000 less than a BMW 535i.
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First Posted: 09-10-09 06:15 PM | Updated: 09-10-09 06:27 PM