Auto sales are recovering because of the superior value offered by manufacturers -- not because of the economy. What else explains why auto sales recovered in 2011 while so many other economic indicators remain poor? Do increased sales volumes in 2011 mean that the US economy is recovering or is it indicative of the automobile's value proposition to the consumer?
While most agree that the economy is slowly improving, unemployment is still north of 8.3%, the real number is 11% when you consider the millions that have given up. Furthermore, wages are flat or declining, the housing industry is mired in too much inventory, foreclosures are on the rise and home prices are still dropping. So why the recovery in autos?
The automobile industry is recovering and will continue to recover for two unprecedented reasons that have nothing to do with economic recovery:
1) Pent up demand -- The average age of the automobile is almost 11 years old. Aging vehicles, unreliable transportation and the threat of expensive repairs is forcing the consumer to invest in a new car or truck.
2) Superior value proposition compared to other purchases -- Due to technological advances, lower costs, improved gas mileage and intense competition the car and truck buyer is getting great value when compared to other products and services. Consider that you can get a car for almost the same price as you can a cell phone and satellite TV.
During uncertain economic times money flows first to those products that provide the greatest value and are most needed. The recovery in the automobile sector this early in a very sluggish economic recovery is demonstrating that Americans consider the automobile a good value and necessary purchase.
Remember in 2005 when the auto industry recorded 17 million sales? We also broke records for home and vacation home sales, retail sales were exploding, the savings rate was below 3% and if you could 'fog a mirror' you'd be approved for a loan.
The numbers don't lie about autos:
- 2011 car and truck sales were 10.7% better than in 2010.
- Ford topped 2 million in sales for the first time since 2007, up 17% with profits of $6.6b
- GM was up 14% and recorded annual profits of $7.6b
- Chrysler rebounded a remarkable 37%
And the auto recovery is not limited to the Big 3. All other brands including Kia, Hyundai, Nissan, Volkswagen (up 26%) expanded. The only exceptions were Toyota and Honda which suffered as a result of natural disasters in Japan and Thailand but are also back on track.
So does this suggest people have more money to spend today? No. In fact, the savings rate went down in 2011 after spiking in 2009 above 6% and wages continued to erode. The best case to justify these volume increases are advancements in technology, improved gas mileage, increased reliability and the superior value offered by auto manufacturers. When value exceeds price people spend money.
When you can buy a new car with no money down, have full warranty protection, great new technology and use it worry-free everyday it makes sense to the consumer to commit to a purchase.
Edmunds.com predict 2012 volumes will exceed the levels of 2011. TrueCar.com offer up sales to exceed 13.8m in 2012.. I believe that the auto industry will exceed 14 million in sales in 2012 even with the possible threat of the rise in the cost of gasoline this summer. But we have to wait until the end of the year to see who is right.
Regardless, this is good news for the economy overall because as it has been said, "as the auto industry goes so goes the rest of the economy."
Grant Cardone, NY Times Best Selling Author and Sales Expert
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