Automotive economics 101: U.S. auto industry rises again

Americans are known for having an overwhelming love and admiration for the automobile.

The rate at which people purchase automobiles has increased as the industry has progressed. Now, the U.S. economy appears to be bouncing back from its recent economic recession, and with it so has the demand for automobiles.

“The love affair of the automobile is still alive and well,” said Brad Nikles, the dealer principal of Nikles Motor Company, a registered General Motors dealership located in Mason City, Ill.

The Manufacturer:

A long-time player in the automotive industry, Nikles has seen how sales have been influenced by changes in the economy, as well as by tactics of manufacturing companies. The industry has not always displayed the positive outlook on future profit that it does now. Mistakes of the past are currently having an impact on how production is viewed among American automakers.

Production was dramatically increased around the beginning of the economic downturn in an effort to increase profit. Manufacturers began to produce automobiles at a rate much higher than domestic and global demand.

“They kept thinking the answer was to make more product,” Nikles said. “That not only wasn’t the answer, it was actually the problem. You have to build the right numbers for the right audience.”

Dealers had more automobiles than the market needed, which forced them to sell the cars at prices lower than their worth in order to make a sale. As availability peaked, the value of a new automobile began to gradually decrease in response to overproduction.

Dealers are forced to adjust to receiving fewer shipments from manufacturers as production has leveled back out.

The Dealers:

“When compared with the past, the dealership hasn’t been receiving the allotment we need from the monthly allocations,” said Douglas Stark, the general manager at Nikles of Petersburg.

Nikles of Petersburg is a registered Dodge-Chrysler dealership located in Petersburg, Ill. The population of Petersburg is small, barely surpassing 2,000 people. Due to the inability to compete with sales of their larger competitors, local dealerships across the country are not receiving their monthly allotment of vehicles. As large dealerships begin to tower over their smaller counterparts, there is growing concern of what the future holds for dealerships such as Nikles of Petersburg.

“What has recently changed is the decreased production levels and the eliminating of several divisions and models of cars,” Nikles said. “The number of retail dealers has also decreased in most part to match supply and demand.”

Chad Vanness, owner of Fulton Ford in Fulton, Mo., has discovered his own approach to coping with allocation issues.

“The true supply and demand principle is a challenge, but if you’re willing to make a deal with the devil then you can get what you want,” Vanness said.

Fulton Ford is in its first year of business and has already significantly surpassed the sales of the previous owner, who went out of business. The dealership’s current inventory is estimated at 70 new automobiles compared to the 20 of the previous owner.

Vanness and his wife Christina have learned to add capacity to their car lot by knowing how to play the market. Due to Vanness’ willingness to bargain with his local sales representative the inventory of his recent lot has increased. If it means that they will receive a highly valued automobile through an exchange, the Vanness’ volunteer to also receive an automobile seen as less valued merchandise. The end result is increased inventory for their dealership. By this method, Fulton Ford has avoided any allocation issues that may have been faced by a new dealership of such a modest size.

The Market:

According to a study of factory production in the U.S. by Bloomberg.com, demand for motor vehicles has increased for manufacturers. Cars and trucks were selling at a rate of 15.2 million in September after climbing in August 2013 at the highest rate since 2007.

It all amounts to the basic economic principles: supply and demand. In the past, the supply of automobiles reached record numbers, which left demand to decrease significantly. The recent control in supply by automotive manufacturers mended this demand issue, increasing income for dealerships nationwide.

“Expansion tends to start lowering the value one would get on an individual unit,” said Jan Dauve, professor of agricultural economics at the University of Missouri.

Dauve said that since the recession, the average income for a U.S. household has been continuing to increase. Part of individuals’ earnings are invariably directed towards the automotive industry as household income begins to increase. When the auto industry is doing well, it generally means that the overall economy is in fairly good shape.

So what is to be said for the future? That may be unknown. But as for now at least, America seems to be back in the automobile business again.

 

Betty Thomas

About the Author Betty Thomas

Agriculture began to influence my life at a young age. My father is a sixth-generation farmer, so it only seems right to pass on the tradition. I’m from a small, rural community where a large portion of the local economy is centered around agriculture. I was born and raised on a farm outside of Oakford, Ill., and wouldn’t have had it any other way. A friend took a college visit to the University of Missouri one weekend, and I decided to tag along. I immediately fell in love with the hospitality and beauty of the campus. With such a strong agricultural school and journalism school it seemed to be the perfect fit. Looking back there is no place I would rather call home.