Has The Car Market Ruined Itself?

The Tough Times for Car Companies#

Things haven’t been easy for most companies this year, but car manufacturers are feeling the pinch more than others.

Tesla has grabbed a lot of headlines because its stock price dropped by over 50% since its peak last year.
Worldwide sales for Tesla have fallen. The brand has become, maybe unintentionally, a political statement, which doesn’t seem to connect well with the folks who usually buy electric cars.
But honestly, other car companies are kinda happy Tesla is getting all the attention, because “under the hood,” they’ve got their own big problems.
Here’s the rundown of the major issues:
- Big brand bankruptcies seem pretty much unavoidable now. It’s just a matter of “will they, won’t they?”
- Trade wars are really messing up supply chains.
- New car makers from China are coming in and selling cars for less, undercutting prices globally.
- Worst of all? People simply cannot afford to buy cars right now.
What’s the response from carmakers to this basic financial reality? They’ve made their cars more expensive than ever.

Merger Talks Fall Through#

Big news on the company side:

Honda and Nissan were talking about merging.
A Reuters source reported on a Thursday that Honda told Nissan it wanted to call off these merger talks.
Honda, Mitsubishi, and Nissan were actually in discussions to form a joint holding company.
Ultimately, they just couldn’t agree on the terms.

The Buyer’s Struggle and the Debt Treadmill#

This brings us to the reality for regular folks. For most people in America, they can’t really afford to own a car responsibly, but because of how things are set up, they also can’t afford not to own one.

The Federal Aid Highway Act of 1956 built out the American interstate system. This basically made most cities super car-centric.
These new highways connected cities, and intense lobbying from automobile manufacturers helped push local public transport out of the way in favor of streets built for cars.
Getting a car also allowed mostly middle-class white Americans to move out of cities into new single-family suburbs designed around needing your own ride.
Check out these numbers from the US Census and the American Public Transport Association:
- 92% of American households own a car.
- Only 55% have access to any form of public transportation.
- And even if you do have access to public transport, it’s often not dependable or practical for where you need to go.
Over the last seven decades, this car-centric setup has really hurt household finances in ways we haven’t seen before.
But it was amazing for the car business.

The American Car Market: Big, Expensive, and Indebted#

America had the world’s most valuable car market for most of the last century.

Today, China has taken the top spot. They buy about twice as many cars as the US.
But, to be fair, China also has nearly five times the population.
Americans also tend to buy much larger and more expensive cars on average.
Even though China buys twice as many vehicles, the total money spent (market revenue) is roughly the same because Americans spend almost twice as much on each car.
Many of the most popular American car models are so big, you can’t even sell them in other major markets.
Carmakers didn’t care in the past because they made so much money from the American market that it was worth building these huge vehicles, even if they couldn’t sell them anywhere else.
Americans are also much more willing to take on debt to buy a new car, whether they choose to or have to. People often roll the “equity” they have in one car into the down payment for a new car, with a brand new loan.
Auto loans have hit a record high: $1.66 trillion.
That’s more than double what it was just ten years ago, back when interest rates were way lower.
So, yeah, America has a kind of risky love affair with big cars and taking on lots of personal debt.

A Potential “Reckoning”#

You might be thinking, “Okay, big cars and debt? Not exactly news.” True. But put together a bunch of current conditions, and it might mean the car market is heading for a big shake-up:

Record high debt levels
High interest rates
Used car values collapsing
High sticker prices for new cars
People’s money not going as far (stagnating purchasing power)
Uncertain economic times

This unique mix might mean the car market has created its own big problem – a reckoning.

The Affordability Gap and Dealership Profits#

Okay, back to the money side. The price of an average new car has shot up way faster than average wages.

Today, an average new car costs just under $50,000.
That’s only about $9,000 less than the average annual salary before taxes.
And buying the car is just the start. Insurance and maintenance on today’s complex cars have also gotten much more expensive.
So, how can people afford to spend their whole income on a car? They can’t, of course.

Here’s where financing comes in, big time:

According to data from the Fed, over 80% of new car purchases today are done through financing.
Dealerships have figured out that this is where they make most of their money.
Today’s average dealership is more like a loan office that occasionally sells a car on the side.
Over time, they’ve gotten really creative with how they structure car loans.

Think about how it used to be:

In the “good old days,” people would save up and pay cash for a car.
Then, auto loans became more common as other costs ate into family budgets. People still needed a down payment, but loans made buying a car less of a huge upfront cost.
Today, dealerships will even use the equity (the value you’ve paid off) in your half-paid-off old car as the down payment for a new one, as long as you do the whole deal through them.
This was incredibly profitable for dealerships because they made money on the new car sale, the used car trade-in, and the financing.

But this whole financing system, like a treadmill, has gotten the market into serious trouble now.

The Used Car Rollercoaster#

Remember when used car prices went crazy high during the pandemic?

Supply chain problems meant fewer new cars were being built.
This shortage caused used car prices to spike.
This was good if you had a car to trade in because you could get a high price for it. This higher trade-in value could then be used as a down payment on a new, more expensive car.
If you were really lucky with a popular model a few years ago, you might have even sold your 3 to 5-year-old car for more than you originally paid for it new.
The catch back then was that new cars were hard to find and often came with dealership markups because demand was so high.
This wasn’t a big problem then, but it’s a huge problem now for those people who bought those cars with markups and high trade-in values and are trying to repeat the cycle of rolling that debt into a new purchase.

Here’s why it’s a problem now:

The average price of a used car has dropped a lot because supply isn’t a major issue anymore.
Used car buyers who are looking for a deal don’t have as much extra money as they did 3 or 4 years ago when interest rates were low and people got stimulus checks.
Things look bad for gas cars, but they are even worse for EVs (electric vehicles) in the used market right now. (More on that point soon).
This means many people who bought cars with significant markups back in 2022 are now “underwater” – they owe more on the car loan than the car is worth today.
Some of these folks can’t even sell their current car without having to pay extra money out of pocket just to clear the loan, let alone use the car’s value as a down payment for something new.

Carmakers Chase Higher Profits#

Adding to the mess, car companies saw that customers were willing to pay those dealership markups and wanted a piece of that action themselves.

When it was tough to get enough parts to build cars fast enough to meet demand, car companies started focusing on building the higher trim variations of their models.
Why? Because these higher trims made more money per unit (higher margin).
Think of optional extras like fancy driver aids, sunroofs, heated and cooled seats, better sound systems, and navigation screens (infotainment). These are sold at a huge markup compared to what the parts actually cost.
In some cars, the components for these features are already installed anyway, and the feature is just turned off electronically if you didn’t pay for the optional extra!
Manufacturers loved this trend of building higher-spec vehicles.

What’s the result?

Today, truly affordable new cars, even from brands that used to focus on economy models, are almost impossible to find.
Mid-range brands are now trying to market themselves as competitors in the much more profitable luxury market.

This kind of shift isn’t only happening with cars. Many companies are either targeting budget buyers or moving their whole brand upscale. As mentioned before, the richest 10% of households now do 50% of all spending and are responsible for all recent economic growth.

But here’s the catch for the car market (and trust the math on this):

The top 10% of income earners only make up 10% of the population.
Not every high-income household is interested in buying premium vehicles. Sure, some rich people collect cars, but that’s a tiny fraction of buyers.
So, relying only on the high end isn’t enough to sell the huge number of cars needed.

The Problem with Cars Lasting Longer#

As car equity shrinks, interest rates go up, and new cars cost more, it’s become harder for dealerships to close deals.

According to data from the Bureau of Economic Analysis, car sales have dropped, but maybe not as much as you’d expect. We’re selling about 1 to 2 million fewer cars each year compared to before the pandemic. Not great, but not a total disaster on the surface.
But here’s an unfortunate truth combining with all these market problems: cars are just getting better.
The average age of cars on US roads has increased by 3 years in just the last decade, according to the S&P Global Mobility Survey.
It’s even gone up by 2 years in just the past four years!
This means people aren’t buying new cars as often.
In the past, vehicle sales were helped by cars being sold three or four times over their life because they didn’t last as long. Now, they last much longer, so they aren’t replaced as frequently.
While new cars might have more complex features that can break, the core parts like the body and engine/transmission (drivetrains) are generally much tougher than they used to be. (Yes, I know someone is already thinking about Nissan CVTs – there are always bad examples, but overall, durability is up).
This makes it a great time to be a used car buyer. Most people are fine with outdated electronics or a broken screen if the car itself is reliable and gets them where they need to go.
This trend also makes new car buyers look for more reliable brands, because even if they plan to keep the car forever and use the warranty, how reliable a car is seen by others (market perception of reliability) can really affect how much they can sell it for later (resale price).

Unreliable Brands Feeling the Pain#

Companies known for less reliable cars are getting hit hard.

Stellantis (the company that makes Alfa Romeo, Dodge, Jeep, Ram, and Chrysler) is getting it from all sides.
They were involved in a lot of the tricky financing and dealer markup stuff when the market allowed.
Their cars are also regularly rated as some of the least reliable out there.
This lack of reliability really hurts their goal of making brands like Jeep look like luxury competitors. When people think of Jeep, they often don’t think “luxury SUV.” They might think of… well, let’s say, that relative who bought a beat-up Wrangler off Facebook Marketplace for cheap, maybe trading a lawnmower for it. You know, just a completely random, hypothetical example.

Too Big to Fail? The Case of Nissan#

It might feel a little satisfying to see companies that maybe cut corners and jacked up prices face consequences. But there are bigger things happening that will likely hurt regular people who just need a car to get around.

Most big car companies are considered “too big to fail.” They employ lots of people in good jobs.
In many countries with big auto industries, cars are a major export that helps the economy.
Carmakers need everything to go right – finance, global trade, customer confidence, labor costs, resource prices – just to make a profit. Struggling car companies are often an early warning sign of wider economic problems.
We’re already seeing governments start to step in to try and help these struggling companies.

Let’s look at Nissan:

Nissan is currently struggling. Their sales have dropped.
Their car lineup is seen as old, and their brand image is at a low point, partly because of very public issues with key engine/transmission parts (drivetrain components).
The problems are deeper than just the sales drop suggests, because a lot of their sales volume came from really aggressive financing deals.
Even when other companies were pushing car loans pretty far, Nissan was known for being willing to give a loan on a new Maxima to basically anyone.
They also made a lot of sales by selling cars in bulk to rental car fleets at big discounts. This boosted sales numbers at the time.
However, rental companies usually only keep cars for 2 or 3 years before selling them on the used market.
This flooded the used market with lots of used Nissans all at once, which caused their resale prices to drop significantly.
Normally, this might not be Nissan’s problem. But to boost sales, the company offered a financing promotion where they promised to guarantee the future value of their cars in some markets.
This put them on the hook to buy their cars back at a price higher than their actual market value.
They got away with this when used car prices were high, but now that prices have fallen, it’s a huge hidden debt (liability) for a company already struggling with debt.
Basically, Nissan made risky short-term moves for sales, and now it’s facing the possibility of complete financial failure (insolvency).
The Japanese government tried pretty obviously to fix this by pushing for that merger between Honda and Nissan.
The idea was a merger of equals to create one of the biggest carmakers globally. But honestly, nobody took it seriously.
Honda was in a much better position: better sales, better brand image, better finances, better products, better management.
The proposed merger seemed like a way to save thousands of jobs in Japan and elsewhere.
This particular deal fell through, which might signal the end is near for Nissan. But you’ll likely see similar government interventions become more common as other automakers face the same kinds of problems.

So, yeah, some companies made bad choices and are paying for it. And unfortunately, the workers will probably suffer the most.

But here’s a spicy take: We, the buyers, also share some responsibility in this mess.

Buying cars is something that you, me, and almost everyone watching are terrible at doing logically or rationally.
Like it or not, the car we drive is often seen as a reflection of who we are and the image we want to project.
Whether it’s an EV to show off your tech stock gains, a lifted truck to show you’re tough in the supermarket parking lot, or a Chrysler Pacifica to signal you’ve given up (just kidding!), cars are definitely a way to tell strangers something about yourself.
Even people who already left a comment bragging about their old, reliable 1996 Toyota Camry that will “never die” are buying an image. Their image is pretending to be above people who care too much about their car.
Yes, car companies have gotten really good at using human weaknesses against us.
But we keep falling for it. Their advertising is almost always about how their cars will make you look rather than what they actually do. It’s all designed to show potential buyers how they could be seen.

And with constant advertising and social media feeds showing off idealized lives, this is leading to some worrying trends:

Multiple studies found that Gen Z (folks currently aged roughly 13 to 30) are the generation most likely to buy a luxury car.
This is despite Gen Z having the lowest overall wealth, lowest incomes, and the highest proportion of debt compared to other generations.
Sadly, many people in this generation are quickly realizing that they might never achieve basic financial independence or even stability.
As a way to cope with that difficult reality, they are doing the next best thing: buying an expensive car to at least feel or look the part, to “roleplay” the life they wish they had.

How Company Perception Can Help or Hurt (Looking at Tesla)#

You know, it feels like sometimes companies are trying to get you financially from every angle. But hey, there’s a bit of good news. While car companies are really good at using brand perception to get us to buy stuff that maybe isn’t the smartest financial move, that same perception can turn around and bite them pretty quick. And that brings us to Tesla.

Tesla’s Recent Challenges#

Okay, so let’s talk about Tesla. From its absolute highest point ever, the company has lost a massive amount of value in the stock market – specifically, more than half a trillion dollars in market capitalization. And get this, that happened in less than 3 months.

A bunch of things have hit the world’s most valuable automaker:

There’s been some uncertainty because of trade wars.
They’re facing tough competition in global markets from really competitive Chinese electric vehicles (EVs).
People generally seem to be shifting back towards cars with internal combustion engines (that’s just regular gas cars, by the way).
Plus, there’s a general broader market slowdown happening, which doesn’t help anyone.

The Elon Musk Factor#

Now, being totally honest here, whether you’re a big fan of Elon Musk or you can’t stand him, you can’t separate him from the company’s brand image. He used to be like the only marketing strategy the whole company needed. But now, he’s turned into someone who is actually pushing a lot of people who might have considered buying an EV away from the brand.

A Bigger Shift: Less Focus on Owning Cars#

Interestingly, other car companies are probably secretly pretty happy that Musk is getting all this attention. Why? Because even though it’s happening slower, people are starting to push back against the whole idea of even owning a car in the first place.

Things like:

Walkable cities
Public transport
Shorter commutes
Car sharing

These have all become way more popular issues across America. And yeah, we’ve got a lot of work ahead to undo about seven decades of planning that was all about cars, but having no car is starting to become just as cool and fashionable as having a really fancy car used to be.

Quick Note on CEOs and Visionaries#

Hey, speaking of companies and people running them, I made a video 3 years ago talking about why good company CEOs probably shouldn’t be big visionaries. And somehow, that video is even more relevant today than it was back then! So, seriously, go and check it out if you get a chance.

And don’t forget to like and subscribe so you can keep learning how money actually works!