The Times certainly hit a nerve Sunday with its feature asking whether Americans will kick the new car habit. In 24 hours more than 200 reader comments have poured in. The majority appear to be critical of Detroit and tilted toward holding on to their old cars longer.
It’s a biased sample, no doubt. Times devotees are often stereotyped as niche consumers by self-described 'mainstream' Americans.
On the other hand, we’re in a tough economic era now. And “we” isn’t just Times readers or even Americans. It’s most of the world. In a cash-poor climate, will new car sales surge in China, India, Southeast Asia? Certainly you couldn’t supply the pent up demand in the tomorrow’s elephant markets using just the levels of production they have running today. But how much will those people be able to afford new cars if their employers can’t export to the U.S., Europe, and Japan?
Imagine a world in which new car production stayed depressed. What would happen to the balance of car production and car distribution activities? Surely a lot more work would have to be done in the distribution system: more servicing, more spare parts sales, more aftermarket parts manufacturing to service older vehicles, more varieties of warrantee, more effort to get a used car or truck to its next owner. Lots of things. The shape of the auto industry would be very different.
What would a major car company look like then? Producers (that survive) would still have the best chance of dominating, you’d think. But their mix of legacy activities and incumbent investments would have to change. In a scenario of fewer new cars, influence and market power wouldn’t emanate as strongly from the point of production. It would be much more diffuse, and centered downstream closer to customers. I.e.: in distribution channels.
Maybe car companies, which have relied forever on a franchise system of stagnant dealerships, will want to rethink their creaky distribution model. In this regard, their weakened financial condition may actually provide an opportunity. The handcuffs they’ve been forced to wear by state regulators is falling off as bankruptcies move forward. In any event, car makers have already announced they must shed thousands of dealers. Auto distribution is going to look different, one way or another. Could one way for the majors to prosper in a new, leaner world be to forward integrate into distribution like Apple did? The question then would be, What is the smartest way to enter retailing?
For investors seeking long-term returns in automotive, my guess is that the thing to look for is a management team that knows the nuts and bolts of distribution and has the strategic vision to reinvent the system. We haven't yet seen any indication of that in the new government financed playbook.