The legacy car market is collapsing, and high tariffs cannot save it.

Carmakers in North America, Europe, and Japan show lower unit sales than 10 years ago

Jan 06, 2025

Bullets:

North America, Western Europe, and Japan are high-priced car markets, with average prices now over $50,000 for new cars in the United States.

Legacy car brands enjoy very large per-unit profits, by selling large SUV's and pickup trucks, and by locking out low-cost Chinese-built models.

But they are also in mature markets, with overall car sales far below those of ten years ago, and ever farther below industry estimates of where new car demand would be at this time.

Ironically, it is US, Japanese, and European carmakers that are struggling with overcapacity. Factory utilization is at near-record levels for the past five years, and companies are laying off, reorganizing, and merging to buy time.

China, meanwhile, is playing a different game, and dominating markets in Southeast Asia, South and Central America, Africa, and East Europe, where our legacy brands cannot compete on price.

Report:

Good morning.

This generation of legacy carmakers, from the United States and Europe, is likely the last. For the rest of this century, cars will be built in China, or in countries where China has set up factories that are plugged in to China’s supply chain.

These are the monthly costs of buying a new car, in the United States. The report comes from the Federal Reserve, and analyzes how interest rate cuts might help people buy cars. In the second quarter of 2024, the costs to own a new car in the United States hit a record, of $1,100 per month. That includes principal and interest payments, gas, and insurance. It does not include maintenance or taxes. This is a shocking number, and explains why cars are just unaffordable to most of the country now.

73% of Americans say they’re delaying the purchase of a new car, and more than half say they’re going to work a second job or work longer hours to buy their next car.

The Fed crunched the numbers and learned that cutting interest rates doesn’t make much difference. Cutting rates by 50 basis points cuts the monthly cost by 9 dollars. There is some good news on gas prices; if they stay low there is another $14 dollars in monthly fuel savings. But nobody thinks car insurance premiums will go down, and car maintenance and repairs aren’t even included in the $1100 monthly number.

73% of Americans who look at car prices think they’re way too high. If they seem crazy even to us, how do they look from the rest of the world, where they can buy a new Chinese car for less than $10,000? The world is breaking apart into two blocs, North America and Western Europe, where legacy carmakers have erected high tariffs to keep Chinese cars out, and that means they can focus on building only the highest-profit vehicles. That’s not going to work for long, though. Because car markets in the United States and Western Europe aren’t big enough to support all those old brands.

So our market is collapsing on itself, companies are shutting down or merging or reorganizing to stay alive, but they’re just trying to buy time. If most Americans say they need to work overtime hours to buy a car, politicians will be listening to those people, instead of Detroit.

Up to now, lawmakers have put up trade barriers to affordable cars, and that’s probably going to continue for awhile, under the new administration. But in the US market, the problem is that pickup trucks and SUV’s are by far the most profitable. The United States is a large, high-margin market—carmakers are making lots of money at over $50,000 per vehicle, and 28% of cars sold in the US are over $60,000. That’s the good news, for companies that build cars. The bad news is that the high-price markets are mature markets. A mature market is one that isn’t growing.

This analyst goes back 10 years, company by company. In North America, Western Europe, and Japan, the car industry is shrinking. Vehicle sales are lower than they were 10 years ago, and revenues at the 6 biggest manufacturers are either treading water or going down. This is contrary to what experts thought would happen. Back in 2010 they forecast that car sales in the US would be 20 million a year in the US by 2020. It didn’t happen:

General Motors sales has fallen the most. In 2023 GM sold nearly 4 million fewer cars compared to 2023, and GM was even helped by their minority interest in Wuling Auto, which sold a million cars here in China.

Ford is selling 30% fewer vehicles compared to 10 years ago. They’re making more money, though, but not when adjusted for inflation. The only good news is Toyota, who gained slightly, about 9 percent or so over the past decade. Volkswagen is down by 900,000 units, Hyundai down 600,000 cars—but Hyundai is making more money, because they’re making more expensive cars. Honda sales are off 11%.

In these mature markets, then, the legacy car brands are selling fewer cars, but have been holding on by selling much more expensive ones.

But now China, supply chains, and household economics are forcing a reckoning, everywhere. There are a lot of headlines back home about Chinese “overcapacity”—how they build factories that could oversupply markets. China doesn’t believe they’re doing that. They’re building factories that will create new markets, in addition to competing in ours. China has built “staggering capacity in car manufacturing”, enough to build 50 million cars a year. That’s twice what China needs, and enough for half the global market.

What China has done in the car industry is the same as what they’ve done in a hundred others. They surveyed the global car market, and asked, what will be the global market demand for affordable cars? Not pickup trucks at $50,000—but everything else? What’s the market, and what will the market be if our brands can make money at lower price points than anyone else? At the same time, they develop the supply chains for that industry, and build productive capacity here, the factories.

China also made big bets that electric vehicles would be the most affordable, and also the most preferred, by global car buyers. China invested heavily in those supply chains and technologies. They started here, in the Chinese market, which is now the world’s largest. China now dominates the sales of all EV’s across the world, and now is exporting them by the millions—last year China passed Japan and is now the world’s biggest car exporter.

A particular feature of Electric Vehicles is that the car itself becomes a commodity. They’re like electronic devices, and those are always getting faster over time, getting better over time, and getting less expensive over time.

All this presents an existential challenge to our own companies. Electric cars are the only ones that can be built affordably, and sold profitably at under $20,000. But China builds all of those. So the US industry is at near-record excess capacity, running under 75% in 18 quarters of the last 19.

The US, Europe, and Japan simply cannot build affordable cars, in any markets, and that means that China will have the entire world outside the highest-tariffed areas where lawmakers specifically exclude Chinese brands. “China is playing a different game”—they don’t care about the tariffs in our countries, because they can just take the whole rest of the world.

The US, Western Europe and Japan are mature markets, and unit sales growth is negative. But Southeast Asia is a growth market, and booming. South America and Central America are booming markets. Africa is. East Europe is. When our top car industry analysts sat down 10 years ago, to plan industrial capacity for the US car market, they forecast the need for 20 million new cars a year by 2020, they missed, and built a lot of capacity they didn’t need.

When Chinese car industry analysts sat down 10 years ago to build capacity for the Chinese car market, they planned for it to be the biggest market in the world. But they also asked themselves, if they can get the price down, to under half where GM and Ford and VW and Toyota are selling their cars for, what will the markets be then? What will global demand be for cars at $15,000? And then they built capacity for all that.

Same strategy, every industry: electronics, shipbuilding, solar panels, now cars. Next, jet planes. Eventually, Chinese supply chains and manufacturing just overwhelm producers everywhere else, and the tariffs and import bans crumble away. It’s now three fourths of Americans who can’t afford a car. Eventually, our politicians will have to start listening to them.

Resources and links:

Bloomberg Opinion, A ‘Made in China’ Crisis Awaits Big Auto

https://www.bloomberg.com/opinion/articles/2025-01-02/a-made-in-china-crisis-awaits-big-auto-in-2025

An Automotive Frankenstein Is Born

https://substack.com/home/post/p-152868505

Bloomberg Opinion, Jay Powell Makes a Heckuva Car Salesman

https://www.bloomberg.com/opinion/articles/2024-09-20/fed-rate-cuts-to-lower-cost-of-car-ownership?sref=kOk687Pk

To Catch Up in EVs, Detroit Needs to Invite China In

https://www.bloomberg.com/news/articles/2024-09-16/how-can-us-beat-china-in-affordable-evs-copy-byd?sref=kOk687Pk

New Research from Edmunds: Affordability Concerns Among American Car Shoppers Aren’t Going Away Anytime Soon

https://www.edmunds.com/car-news/edmunds-study-affordability-concerns-remain.html

Major Car Markets (and OEMs) Have Stopped Growing