Better Quality Cars Are Killing Auto Industry (GM)(F)
During the 1970s and 1980s US car companies like Ford (NYSE: F) and GM (NYSE: GM) got into trouble for building low quality cars. They tended to have to be in the repair shop more than the Japanese cars coming into the US and that lead buyers to move to the quality of imports.
There was a time when Detroit felt that quality was not terribly important, at least over the long haul. Americans liked to replace their cars every two years.
Unfortunately, Detroit started to make better cars and the Japanese kept their quality high. That lead to a situation where keeping a car for several years was a real options.
In an ironic way, the improvement in quality is coming back to haunt all of the companies that sell cars in US market. As people feel pinched for money they want to delay buying a new car. And, their current car or SUV is still in good shape.
According to The Associated Press “In 2007, 41.3 percent of all cars were 11 years or older, compared with 40.9 percent the year before.” The median age for a car moved up to 7.1 years.
None of this bodes well for car sales in 2008. Auto makers already predict a domestic market with total vehicle sales at about 15.5 million down from 16.1 million in 2007. But, the extended life of the car could push the number of new cars sold this year below 15 million. That would take about $25 billion in car sales out of the economy.
GM and Ford are betting that 2008 is the year in which they will turn the corner toward profitability in North American during 2009.
That is not going to happen. The cars they make last too long.
Douglas A. McIntyre