I usually enjoy reading Zero Hedge because the insights are often interesting and I think pessimism is an underrated virtue these days. However, this guest article on unsold cars is so demonstrably false I had to take a break from my Sunday morning to dispute it.
It is an admittedly appealing idea to think that automakers, unable to sell cars, are just wildly producing them and then dumping them around the world in an endless cycle of mass production hysteria. So much of the modern economy seems senseless and inexplicable, which is why an article like this seems to give some credence to the feeling many of us have inside that something is terribly wrong.
The visuals are strong, the headline is clear, and you almost don't have to read the article to viscerally understand the problem. I, more than anyone, get the appeal of this story because it seems to largely rip off an article I wrote — including the images and headline — more than five years ago (which itself was largely a rehash of a Guardian article).
I would think that most intelligent people would read this and obviously see the flaws but, alas, I've had enough emails about it this morning that I feel the need to refute it. And since it's a (bad) copy of something I wrote, I have an extra responsibility to kill this misunderstanding before it has a chance to spread.
I'll get to a point-by-point refutation in a second, but if you don't have time for that just look at the photos and look at my article and then look at a Google Satellite pic of those same places and you'll see they're gone.
There's even an update in the post where either the author, Vincent Lewis, or Tyler Durden — ZH's mysterious author — realized there was a fault in their knowledge and they say this:
UPDATE: Currently May 16th, 2014, all of these cars at the Nissan Sunderland test track have disappeared? Now I don't believe they have all suddenly been sold. I would guess they may have been taken away and recycled to make room for the next vast production run.
Well, if you don't want to believe that in five years they couldn't sell a few hundred cars at a price above the recycle rate then I can't help you, because you must be so paranoid you think that Fudgie The Whale is the secret symbol of the illuminati.
He does say "The car industry would never sell these cars at massive reductions in their prices to get rid of them, no they still want every buck. If they were to price these cars for a couple of thousand they would sell them. However, nobody would then buy any expensive cars and then they would end up being unsold. Its quite a pickle we have gotten ourselves into"
It is true you can't sell a car for $500 and then hope to sell the same car for $15,000, but even at the deepest point of the recession car companies were able to sell all these cars with discounts well above the low rate this guy is thinking of. There's just a lack of basic understanding of how the world works here, which we'll get into.
So let's go through point-by-point because it's Sunday, I was supposed to spend this morning playing video games and watching bad action movies, and I don't want to have to come back to this.
If the fact that I'd written this post five years ago wasn't proof enough that these photos are old, most of the cars in the piece that are identifiable are very old. There's a bunch of old Honda Accords that are a generation-and-a-half old, and even some Dodge Durangos that are pre-bankruptcy.
Go back into the Getty or AFP or AP sources for these photos and you'll see, by and large, they're photos from the middle of the post-recession Carpocalypse when the car market collapsed in Europe and the United States.
Do they legitimately show a backlog of cars that were overproduced in advance of massive drop in demand? Indeed, they do, but the companies producing them (in this case Nissan) corrected this problem, oh, four-to-five years ago. It was a temporary condition.
If you look in the Getty Images library there are also photos of Nazi troops in Paris and this one of Michael Jackson singing at the Super Bowl.
Does that mean Paris is full of Nazis and Michael Jackson has been reincarnated? Nope, it's just that photos are recordings of light on a flat medium that capture a moment in time.
There are a small number of people who think cars are just produced as soon as you order them from the dealer and then they're shipped to you. This author seems to think that's what happens or else he wouldn't be so worried about cars building up in ports.
That's what ports are for. Automakers estimate how many cars they think they'll sell and then they produce that many, on schedule, and park them outside the production facility. Then they're taken to a port. Then they're shipped to the markets where they're sold, the cars are parked, and then shipped by train and truck to dealerships.
Below are parked tens of thousands of cars at Royal Portbury Docks, Avonmouth, near Bristol in the United Kingdom. If you look on Google Maps and scan around the area at say 200ft you will see nothing but parked up unsold cars. They are absolutley everywhere in that area practically every open space has unsold cars parked up on it.
The port in question is within about 200 miles of a population of 45 million consumers and handles roughly 700,000 vehicles per year. They do not individually unload and ship each car as that would be wildly inefficient. Instead, they ship many of them, in boats, and then unload all of them, and then send them to their various points of sale.
In the same port you might find containers full of iPhones and iPads. That doesn't mean there are millions of unsold iPads and iPhones, that's just how almost all manufacturing has worked through all of history.
He does this with the Port of Baltimore, despite the fact that we're on the way to selling nearly 16 million cars in the U.S. this year. How do you explain where those cars come from and get shipped if not in large numbers, using ports?
One of these rail yards references in the piece, which you can see here, is barely half full (Europe's car market is still slowly recovering).
The author also seems to suffer from the illusion, based on constant references to the date of Google Maps screen captures, that these are constantly updated satellite images and not — as is the reality — images (much of which is actually taken from a plane, not a satellite) that are, on average, one to three years old.
The problems then just keep on mounting up. In the end, the unsold cars that are say 2 years old will have no alternative but to be either crushed up, dismantled and/or their parts recycled.
There's a basic misunderstanding of how cars actually work. There's a fear here that there are millions of cars just piling up (there are not) and that these cars, untouched for a few years, are going to suddenly fall apart.
When a car is left standing idle, all the oil sinks to the bottom of the sump, and then corrosion begins to set in on all the internal engine parts where the oil has drained away.
Cold corrosion is when condensation builds up in the cylinders and rust forms in the bores. The engines would then start to seize and would need to be professionally freed before they could be started. Also the tires start to lose air and the batteries start to go flat, indeed the detrimental list goes on and on.
As anyone who works on cars knows, you can often find an old car that's been sitting for years, give it a new battery, a little gas, and often get it working. While it's not the ideal condition, a modern car with new seals and fresh lubricants can easily sit for long periods of time and be perfectly fine to drive.
But that's even granting the premise that these cars have been sitting for years, which they haven't.
We had a harsh winter and it meant that car sales slowed down, unpredictably, in the first quarter of the year. Because car production happens so far in advance of car sales, this meant a build-up in inventory.
We measure inventory in "days" that can be generally understood as how long it takes for a car to be sold. Automakers try to keep levels at between 60 and 65 days supply. This may seem high, but companies don't want to run out of cars to sell so they try to keep a decent inventory available to ship.
Being unable to predict that winter would slow new car sales below expectations, more cars were produced than could be sold to keep it at that rate and inventory levels in the U.S. rose to about 76 days in March before falling to 69 days in May. Not great, but not terrible (GM's is fairly bad, it's worth noting).
Automakers will probably idle plants this summer to make up the difference, depending on how quickly they imagine sales will rebound.
The author is conflating this with "channel stuffing," which is when automakers try to make it seem like they've sold more of a product than have been purchased by shipping everything to a distribution center, with the effects of the bad winter.
Indeed, carmakers do all sorts of dumb things to make it seem like they've sold more cars, but what you're seeing is easily explained by first quarter sales and there's no evidence that we've seen to indicate something particularly nefarious.
I just keep re-reading this and wondering how any sane, intelligent person could believe it. There are so many weird assumptions here, like the idea that families used to buy a new car every year and now they don't and that's why this is happening.
That's simply never been true. If you look at the stats: At best, in 1969, the average car on the road was 5.1 years old. In 2013, the average car was 11.4 years old.
But mostly, this article lacks any reasoning for how or why., as in how are car companies finding the money to produce millions of unsold cars and why are they doing it?
The answer is simple: They aren't.
Even at the height of the recession and the resulting Carpocalypse, the number of cars sold in the United States was 10.4 million (in 2009), which is still a ton of cars.
Bottom line: This is paranoid nonsense that has the tiniest bits of reality inside of it, like a giant turd sprinkled with truffles. My advice? Don't swallow it.