Friday, October 28, 2011

Alan Mulally On Pent-Up US Car Demand

I caught Ford CEO Alan Mulally on one of the two business cable networks, CNBC or Bloomberg, earlier this week on the occasion of the firm's earnings release.

Mulally was excited about the average age of the US auto fleet, which was somewhere in the 10 year range. He noted that this was an all-time high.

Fair enough, but is that really a fair historic comparison?

I drive a Subaru that is by no means new. But it's in infinitely better condition at its 7+ years than its predecessor, a 1986 Subaru, was at the same point in its life. My current car has had fewer serious problems than the earlier one. For example, my older one lost a timing belt, which is a car-stopping problem, after about 7 years. My present Subaru hasn't suffered that. Instead, it had a leaky fuel injector, which was, while annoying and not inexpensive to repair, not a problem which caused the car to cease functioning.

Today's cars are much more difficult, both stylistically and condition-wise, to gauge in terms of age. Bodies don't rust as easily, the quality of design and assembly are higher. Overall, a ten year old car doesn't look the same today as a ten year old car did, well, ten years ago.

So I wonder if Mulally's engaging in some wishful thinking. Yes, I understand that recent double-dip recession fears have eased. And I understand that US car sales have been good lately.

Yet I don't see the employment and income growth statistics which would seem to underpin a truly robust growth in US car sales. Moreover, as cars age much better, and, aside from computerized safety and communications systems, which are not essential for driving, have added fewer new systems, like anti-lock brakes, power systems, and such, it's not clear to me that financially-strapped consumers feel the need to replace their cars so quickly.

It would be interesting to know how the average US fleet age has changed with respect to economic conditions and the evolution of cars themselves over the past several decades.

I'd also be curious to know the composition of Ford's and other makers' recent sales growth. My hypothesis is that the growth has probably been among higher-end, higher-priced cars. Bought by upper-income consumers who haven't been affected by the last four years of US economic turmoil.

While it would be nice to accept Mulally's cheerleading about US fleet age and imminent replacement sales at face value, I just can't. There seem to be too many conflicting signals to make such a simple extrapolation.

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