Who Really Bought a Car in July?
July was another hot month for car sales, with today's data releases showing the market remains on track to set a new post-recession high of almost 17 million units this year. Longer loan terms, lower lending standards and growing lease rates have the new car market racing toward its redline, and there's talk of a bubble forming in car sales. That concern is well-founded. Like a well-tuned engine, the car market's performance upgrade must be matched with better safeguards against overheating and misfiring. Unfortunately, the quality of car sales data in the U.S. has not been improved to meet the specifications of our hopped-up market.
Even to those who regularly cover it, the U.S. auto-sales reporting system remains dauntingly, and unnecessarily, complex and opaque (note the major correction on this "insider's guide to auto sales reporting").
Here's what U.S. car sales are not: registration numbers. In other mature auto markets such as Europe and Japan, every new car "sale" reported monthly is backed by a registration. Not so in the U.S., where a gap of almost 1 percent between the sales reported by dealers and the number of new vehicles registered is tolerated as normal. Last year, more than 140,000 new cars were officially sold to U.S. retail customers but never entered the fleet.
This became an issue when Mercedes accused BMW of inflating its 2012 sales, running up a gap between sales and registration by including cars sold to dealers for loaner fleets. BMW's defenses only highlighted the depth of the problem. In response to discussion of cash discounts dealers received in July 2012 to purchase vehicles for loaner fleets, the chief executive officer of BMW North America argued, "everyone does it." The subtext: These data discrepancies are in the short-term interest of every executive who occasionally finds himself a few hundred (or thousand) units short of a bonus at month's end. Only in the high-stakes, hyper-image-conscious luxury car game does self-policing of these volume-dumping tactics actually take place.
Perhaps even more troublesome was a defense that BMW's spokesman gave by e-mail in February 2013: "State-provided registration data, as reported by Polk, can lag 60 or even 90 days after an especially strong sales month. Throw in a holiday and the delay is inevitable. That's what is playing out here." So, not only do new car sales have an officially-tolerated margin of error, but that margin also can't even begin to be accurately verified for a given month until at least the end of the next month.
This state of affairs creates a huge blind spot around the problem of dealer self-registration, the practice of converting unwanted new cars into low-mileage used cars that has become a profit-sapping fixture of Europe's depressed car markets. Without consistent, specific and timely registration data to check against reported sales, the market has only the word of dealers and automakers themselves that every reported "retail sale" was in fact made to a consumer and not registered as a courtesy car, dealer rental or simply a discounted "demo model." Or shipped as "gray market" exports to China, the destination for as many as 35,000 new luxury cars each year according to an estimate in the New York Times. Most China-bound gray exports are likely U.S.-registered, raising the possibility of unforeseeable drops in demand as federal authorities crack down on the business
Short-term incentives for dealers and manufacturers to squeeze extra volume through various loopholes in the auto-sales reporting system are enormous, but the law of supply and demand can only be evaded for so long. With the size of the U.S. fleet failing to keep pace with gaudy sales numbers and the average vehicle age rising to more than 11 years, the market fundamentals don't suggest endless growth beyond the approximately 800 car per 1,000 people level.
And, as a 2008 report from the Laboratory for Energy and the Environment at the Massachusetts Institute of Technology noted, "There is considerable uncertainty about the scrappage rates of motor vehicles." This makes it difficult to know for certain what the supply of available vehicles is, reinforcing the analysis of Morgan Stanley's Adam Jonas that "the US auto cycle has clearly moved from a 'need to buy,' to an 'I just want to buy' type of consumer mindset."
Ultimately, accurate data is the only way to prevent the kind of serious overestimation of demand that has brought the industry to its knees several times before. By standardizing "sales" as registrations, and improving transparency in data collection and availability, the auto industry can start moving past its historical boom-bust pattern.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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