One of main lessons of the brutal U.S. recession -- that loose credit terms can come back to bite lenders -- may keep the U.S. auto market from returning to the peaks it hit earlier this decade.
Just as subprime lending set the stage for the housing crisis that set off the economic downturn, easy credit played a major role in inflaming demand for high-priced sports-utility vehicles and other vehicles, auto manufacturers and retailers said at the Reuters Autos Summit in Detroit on Monday.
U.S. consumers are expected to buy only between 10 million and 10.5 million cars and light trucks this year, well below the pre-recession peak near 17 million hit in 2005. That level may never be seen again, said Earl Hesterberg, chief executive of Group 1 Automotive Inc, a leading U.S. auto dealer.
"There was quite a bit of subprime component to those 17 million unit years, and there's quite a bit of debate about whether we'll see 17 million again in the next three- to five-year period, if ever," Hesterberg said.
Subprime lending -- loans to less-creditworthy shoppers -- also played a major role in the housing bubble that set the stage for the severe U.S. recession that began in December 2007 and may have ended in the third quarter.
"The correction we've gone through, although certainly more drastic than any of us would have volunteered for, was certainly overdue for consumer balance sheets and corporate balance sheets, for all of us to remember that money does have to be paid back and there's no endless string of growth in anything," Hesterberg said. "I actually think that the correction is healthy for consumers and businesses to get recalibrated to the reality of business cycles."
To be sure, it's not just auto buyers who felt the pinch of credit crunch. Detroit auto giants General Motors Co GM.UL and Chrysler Group LLC each spent a chunk of the year in bankruptcy, with Chrysler finding sanctuary under the wing of Italian automaker Fiat SpA.
Healthy or not, the correction may mean that the United States may never regain its position as the world's biggest auto market, a position it lost to China this year, said Jim O'Donnell, president of BMW's North American operations.
"North America will not ever get back to being the dominant player it was. But that's probably related more to the rise of the other countries than to the absolute fall of the U.S. market," O'Donnell said.
While O'Donnell, like most in the industry, expects U.S. auto sales to rise next year, he noted that recovery "will take time." Auto demand in China and Russia may overshadow growth in the U.S. in the coming years, he said.
O'Donnell also said the U.S. economy needs to wean itself off such a heavy reliance on credit-fueled consumer spending.
"The U.S. and probably the U.K. are the two classic examples where we encouraged consumers to take out debt and you ended up with asset inflation that was nonsustainable, and we're suffering from it now," O'Donnell said. "The lesson that every government has to learn is you've got to be careful with debt. Not only your own debt, but the citizens'."
