Every August, the movers and shakers in the car business get together in Traverse City, Michigan, for the Center for Automotive Research's Management Briefing Seminars. There are speeches and discussions about the state of the automotive industry and likely directions for its future.
This year, one of the main themes was concern about future growth in the new car market. There are worries about the European market and the BRIC (Brazil, Russia, India and China) markets that everyone thought would be the hot growth markets for the next ten years aren't working out quite as expected.
But market we need to look at is our own. The U.S. market has a major problem and it's one of our own making.
We're running out of customers.
Light vehicle sales, which include cars, vans, SUVs and pickups, peaked at over 17 million in 2000 and 2001 and then fell to the mid-to-upper 16 million-unit range until 2006. In 2007 sales fell 2.5% to 16.1 million sales.
From 2007 to 2009, auto industry sales fell 35.4% and both General Motors and Chrysler LLC went bankrupt and required government assistance to survive.
From 2009 to 2013, sales mushroomed 49.4%, making vehicle sales one of the strongest components of the recovery. But the pace of growth is slowing. So far this year, total sales are about 5.5% ahead of the first nine months of 2013.
So far so good, right? Well, not exactly. Manufacturers are having to offer more incentives and are relying more and more on subprime loans to get deals done. In the meantime, the average age of vehicles on American roads is more than 11 years - an all-time record.
Consumers, still shell-shocked from the crash, are paying down debt rather than incurring more; young people, who should be entering the years in which they begin to buy new cars, are instead struggling with student loan debt.
So the manufacturers, almost without exception, are embracing the Willie Sutton philosophy. Willie Sutton was a bank robber who, when asked why he robbed banks, supposedly answered "because that's where the money is."
Rather than robbing banks, the automakers are looking where the money is: affluent buyers. And they are chasing them with ever-pricier products. The average transaction price for a new vehicle is over $30,000 now.
But that's a finite market: the rich will only purchase so many vehicles per year, meaning a sale for one brand is a loss for another.
The real solution to the problem is to create more customers in the wider population. How does one do that? By championing wages that allow people to buy new cars.
The decline in real wages and real purchasing power across a huge swath of American workers means lost sales.
And for the automakers, it starts at home.
Members of the United Auto Workers union have a base wage of $28/hour or $58,240/year. Sounds like a good income and a lot of people wrongly blame those union wages for the financial troubles at Chrysler, Ford and GM. But that wage hasn't changed since 2003 and its purchasing power in 2014 is equal to just over $45,000. That $13,000 loss is enough to buy a Chevy Spark or a Nissan Versa - without financing.
Tier Two workers make about $15/hour or $31,200/year. Bringing them up to union scale would give them an extra $27,040 annually. That's the price of a pretty decent car.
Since the minimum wage was last raised, the price of a Big Mac has increased 30%. A similar increase in the minimum wage would bring it to $9.42/hour or $19,604/year, a $4,524 increase. That's 12 months of car payments (yes, I know there would be other priorities, but I am just using this as an example.)
Give consumers the ability to consume and they will. Give them back the purchasing power they had and sales will grow - which is a far better, and longer-lasting, way to increase shareholder value than stock buybacks, layoffs and other such games.
Make new customers; do well by your workers and they'll do well by you. With any luck, the concept will spread.
Note: Before anyone brings up Henry Ford and the $5 wage in 1914, Ol' Hank didn't do it because he was a nice guy (he wasn't) or because he wanted to pay his employees enough to buy the cars they built (it wouldn't have added that many sales). Ford paid the outrageous-for-the-time wage to reduce turnover and training costs. It provided Ford Motor Company with enough additional production to more than cover the cast of the new wage.