September 06. 2018 11:36PM

Why Detroit's hubris makes now the best time to buy a new car

By KYLE STOCK
Bloomberg


On a good day, car dealers can bend time.

Ever wonder why you start seeing ads for next year’s models several months early? Thanks to creative release dates, the industry has historically sold tomorrow’s more profitable vehicles today as summer turns to fall. But that chronological magic is starting to fail, and they’re increasingly being forced to sell yesterday’s cars tomorrow.

In the decade since the recession, dealerships have started to find themselves in a pickle come September, leaving them struggling to get rid of current-year models as the next-year iterations arrive. The inventory glut is largely a function of misplaced optimism as American automakers ramped up production over the past few years.

And in the coming months, that imbalance will worsen, as demand for new vehicles dips for the first time in almost a decade.

“I don’t think they understand the gravity of the situation,” said Edmunds.com analyst Ivan Drury. “This is becoming a chronic, real issue.”

In the fourth quarter of 2017, only 46 percent of new vehicles sold in the U.S. were a shiny new 2018 model, compared with 73 percent a decade ago, according to Edmunds.com.

To make matters worse, the stale products spilled over. In the first quarter of this year, almost one in five vehicles sold in the U.S. was an older model — a 2017 or even 2016.

That’s almost double the level from 2008.

Matt Jones, senior consumer advice editor at Edmunds.com, knows the challenge well; he spent 12 years selling sedans and SUVs. These days, as he drives past dealerships on his way to work in Santa Monica, Calif., he counts the share of old vehicles on the lot.

The results haven’t been encouraging. “Some of these cars could potentially have been sitting there since 2016,” he said. “I’ve seen dealers sell brand new cars at used-car auctions just to get them off the lot.”

The glut is corrosive to the auto market in a number of ways. Most directly, consumers find themselves with more power at the negotiating table.

That leverage comes at a cost, trimming the profit margin for the dealer, the manufacturer or both. Eventually, an excess of inventory can also sour relations between those who make the cars and those who sell them.

“It’s a complete boondoggle,” Drury said. “You’re causing competition among your own vehicles.”

Next year’s cars tend to show up in August, adding to the current year’s inventory which dealerships rush to sell before Dec. 31, according to Truecar, an online shopping platform matching buyers with local dealers. “There’s a challenge in managing the overlap,” said Truecar Senior Vice President Eric Lyman. “Especially when you don’t have a major product change, it becomes messy.”

This year, the crush will come as consumers grapple with rising interest rates and gas prices. They’re also starting to keep their vehicles on the road longer. New tariffs on aluminum and steel thanks to the trade war launched by President Donald Trump complicate the quandary for car companies, forcing them to choose between smaller profit margins or price hikes that could further cool sales.

All of these factors will add to the industry’s existing inventory problem, spelling bad news for manufacturers and dealers.