The amount of consumers who purchase new cars has declined drastically in recent years. This is due to the fact that used cars can be purchased for a significantly reduced rate as opposed to expensive new vehicles.
However, despite this decrease in sales, many automotive manufacturers continue to produce new cars. Unfortunately, this has created a global problem wherein there are now more cars in the world than there are people.
Why are consumers not buying new cars?
Automotive used car reports demonstrate how the impact of the economic recession has caused motorists to repair their vehicles rather than replace them for a new model. For instance, the 2009 BCA Used Car Market report highlighted that 42% of the motorists surveyed did not plan to replace their car during the recession.
Moreover, the 2013 BCA Report revealed that the amount of households who do not own a car rose from 5% to 28% over the past three years. This presents a worrying trend for the automotive industry as their target consumer market is rapidly decreasing.
The continuous decline in car sales has hit the automotive industry hard with widespread job losses from leading automotive manufacturers. There were approximately 47,000 and 20,000 job losses from General Motors and Nissan respectively in February 2009, as well as a series of notable factory closures including the Southampton and Dagenham Ford UK plants in 2012, which resulted in approximately 1,400 job losses.
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Furthermore, the automotive industry has been forced to rely upon government bailouts as a result of their sales losses; such as when the US government famously bailed out General Motors, Ford and Chrysler in November 2008. This global decline in the automotive industry has led to the formation of “new car graveyards”; wherein unsold new cars can wait for up to two years before they are either sold or recycled to produce yet more new cars.
Many of these problems with unused vehicles occur due to the fact that automotive manufacturers over predict how many units of a vehicle they are going to sell. Furthermore, automotive manufacturers prefer to keep at least 60 days stock in order to ensure they always have enough cars to sell. However, industry average stock levels now sit at 89 days in the USA and as high as 114 days, 107 days and 105 days for General Motors, Ford and Chrysler respectively.
Where do unsold vehicles end up?
Thousands of unsold cars, which are mechanically perfect, end up in what’s known as a car graveyard. These “new car graveyards” often arise due to the fact that automotive manufacturers are guilty of channel stuffing.
The term “channel stuffing” describes the process wherein large amounts of stock are produced and shipped out to dealerships to boost sales figures. Unfortunately if these vehicles are not sold it can be detrimental for the company when these vehicles are returned.
Internet blogger Zerohedge argues that the American multinational automotive corporation General Motors could be guilty of channel stuffing at present. For example, in January 2014 General Motors added another 42,000 cars to their inventory; which amounts for a quarter of their total January sales that year.
This increased inventory raised the total number of cars which General Motors held in storage to 780,000 units. These figures accounted for the second highest inventory level for vehicles that was on record at that time. The following chart demonstrates the monthly inventory levels for General Motors between November 2009 and January 2014:
When you combine these records with information obtained from the General Motors Q3 investors report, the estimated worldwide sales across General Motors’ five main markets in North America, Europe, South America, International and Greater China was recorded to be a total of 7,371,743 vehicles.
Furthermore, when you estimate General Motors’ annual sales of 10 million units, as stated in their 2013 annual report, and you also assume that the number of vehicles in storage remained consistent from January 2014, then you can deduce that approximately 8% of their total worldwide annual sales remained in storage in “new car graveyards” in 2014.
Reducing car prices vs. car graveyards
Automotive manufacturers often refuse to reduce the price of these surplus vehicles in order to clear them because they do not want to lose valuable profits. The only exceptions wherein the sale price of these surplus vehicles is reduced are when new models have been released or when the vehicle has been updated and these older vehicles in storage effectively become obsolete.
Many automotive manufacturers are reluctant to allow motorists to buy brand new cars for a substantially lower price lower than they would pay at a dealership because they believe this would prevent motorists from purchasing new vehicles at their full retail price; opting instead to refrain from buying a new vehicle until the price drops significantly.
Consequently, brand new cars are usually stored on these “graveyard” sites for up to two years. If vehicles remain unsold for a prolonged period of time then they will eventually be recycled to produce new vehicles, which again may be left to await sale on the graveyard.
As well as the financial ramifications of these graveyards, the environmental impact of the overproduction of these new vehicles must be also considered. An enormous amount of energy is used to produce a new vehicle; often releasing more than 17 tonnes of CO2 into the atmosphere.
Recycling these unwanted cars
What’s more, if this vehicle is never used and then recycled to produce another vehicle, which may again never be used, then this seemingly endless cycle is seriously damaging the environment. For instance, in order to produce a medium sized car, automotive manufacturers use as much energy as that which would power the gas and electricity in a typical UK home for up to three years. Subsequently, the energy used to produce these vehicles is effectively wasted and as such is a very inefficient use of the non-renewable resources, which are often used when manufacturing new vehicles.
Despite the ongoing overproduction of new cars there appears to be signs of improvement. The number of new cars awaiting sale on graveyards is now far lower than back in 2009 according to a recent report by USA Today. This is due to the fact that consumers are beginning to buy more new cars as the global economy gradually recovers. Moreover, manufacturers have responded to these purchasing trends by reducing the number of new cars produced to a level which is more suited to the public demand.
Furthermore, automotive manufacturers are producing new vehicles which are more fuel efficient and environmentally friendly than previous models. The improved environmental profile of these vehicles promotes the production of new vehicles to replace older, less efficient models. Ultimately it is hoped that as the economy continues to recover these new cars will find their way to motorists rather than being left in storage.