A no-brainer during a recession is for people to continue to drive the old cars they own to save cash when there is not an urgent reason to purchase a new vehicle.
Today, the median age of passenger cars, excluding light trucks, has moved up over the past decade to 8.9 years from about 7.5 years in 1994. Personally, I am way above average in owning a 1992 BMW and a 1989 Merkur Scorpio (that was only imported to the U.S. in two years, 1988 and 1989, by Ford who made them in Germany). Since I drove a 1988 model Scorpio for over 235,000 miles before transitioning it to a "parts car," my old automobiles have plenty of life left in them.
The worldwide automotive industry has the capacity to make an astounding 94 million vehicles each year. That's about 34 million too many based on current sales, according to researcher CSM Worldwide, or the output of about 100 plants.
Over the next year or so, carmakers will idle factories and lay off thousands--and U.S. and Chinese carmakers will absorb much of the pain. The manufacturers' challenge will be to cut the production overhang without losing the ability to ramp up when people start buying cars again. In November, Toyota slashed production in Japan by about 27%, the biggest cut in 30 years. But in North America, where the has the capacity to build some 7 million more vehicles than the market is buying, Toyota, Honda and Nissan are so far slicing on the margins. They are slowing production, cutting contract workers, and postponing plans to open more factories because they're keen to grab share once the U.S. comes back.
The so-called Big Three don't have that kind of wiggle room, and shrinking at home promises to be wrenching. To become profitable, according to Michelle Hill of consulting firm Oliver Wyman, U.S. automakers will need to close at least a dozen of their 53 factories in North America in the next few years.
GM may be closing plants at home, but it is not retrenching in China, where it is much easier to furlough workers and rehire them when things pick up. Toyota is actually expanding its Chinese operations (even though there is industry overcapacity in China today) and in October announced its sixth plant.
Carmakers expect sales to revive starting in 2011. And no one thinks they can take out 34 million vehicles' worth of production by then. What they're relying on, says Michael robinet of researcher CSM, is population growth and a sales bonanza in 2013 as people finally start replacing aging vehicles.
How Consumer Credit Affects the Economy
Self-liquidating credit is a loan that is paid back, with interest, in a moderately short time from production. Production facilitated by the loan – for business start-up or expansion, for example – generates the financial return that makes repayment possible. The full transaction adds value to the economy.
Non-self-liquidating credit is a loan that is not tied to production and tends to stay in the system. When financial institutions lend for consumer purchases such as cars, boats or homes, or for speculations such as the purchase of stock certificates, no production effort is tied to the loan. Interest payments on such loans stress some other source of income. Contrary to nearly ubiquitous belief, such lending is almost always counter-productive; it adds costs to the economy, not value. If someone needs a cheap car to get to work, then a loan to buy it adds value to the economy; if someone wants a new SUV to consume, then a loan to buy it does not add value to the economy.
Source: BUSINESSWEEK, January 12, 2009