The role of cars in our lives (pt II)
Part 2 of 3: The spell of Edward Bernays
Back to where it all began
The auto industry learnt how to exploit our psychological vulnerabilities a very long time ago. In large part, thanks to a man named Edward Bernays, who in the 1920s crafted manufacturer-funded propaganda campaigns to entrench beliefs amongst Americans that linked car ownership to national identity and appealed to their suppressed desire for power.
The work of Bernays is more famously associated with convincing women to incorporate smoking as a key part of the first wave of feminism or his role in bacon being adopted as a hearty American breakfast essential — both funded by clients looking to sell more products.
It was a perfect storm. In 1919, General Motors launched its captive finance arm, General Motors Acceptance Corporation (GMAC), to unlock its ability to sell cars to prospective car buyers that couldn’t afford to buy immediately. This was quite a leap for any manufacturer, if you bear in mind that car purchases were still predominantly made in cash at this point.
In an effort to close the gap on Ford’s lead, competing car manufacturers were paying closer attention to the prospect of captive financing. By 1923, almost half of GM’s new car sales would be driven by car loans through GMAC, a feat considered a huge success within the group.
Henry Ford, the pioneer behind the Model T, resisted advice for Ford Motors to offer car loans, on the moral basis that he feared its destructive potential for customers.
He believed that in the absence of cash, consumers should maintain thrift and save for their cars. While Ford was not exactly a moral beacon, his hesitations highlight questions about the pitfalls of credit to fund consumption.
Four years after the launch of GMAC, Henry Ford’s concession, following the pleas of his management team (including his son) for a response to consumer credit, was the launch of a savings plan called the “Ford Weekly Purchase Plan”. It would work much like any other savings account, meaning buyers only got the car after saving enough money to purchase it outright. Not much of a concession in the end.
The weekly purchase plan failed to sufficiently boost sales volumes for Ford like the GMAC car loan did for General Motors.
Despite that, it wouldn’t be until well after Henry Ford’s death that Ford Motors would eventually go on to launch Ford Credit, their own captive financing business. A full 40 years after the launch of GMAC! I can almost imagine what Henry Ford would say to us now…
Henry Ford wasn’t alone in his apprehension toward consumer credit. A century before the Model T, Thomas Jefferson warned of the potential for credit to perpetuate what he called “self-enslavement”. That’s quite a powerful statement if you consider that the former U.S. president knew a thing or two about enslavement as a seasoned slave master of 600 slaves in his lifetime.
The art of the car buying con
In addition to the ever-present financial dangers of car loans, the structure of the car buying transaction leaves much to be desired. The default information asymmetry means the average buyer is at a significant disadvantage from the start. The typical buyer knows far less about how the car is likely to depreciate, what the optimal financing structure for the car should be and what it will cost to keep the car operational during the loan term.
Where are the warning labels telling us about these potential dangers? Why do we accept this information asymmetry and carry all the risks?
It’s all thanks to the powerful allure of car ownership, which drives our dependency on car loans and in turn, props up auto manufacturing globally. We were spellbound by the propaganda, so we obeyed the order to buy on credit and car sales volumes continued to grow.
The dealers were promised their cut to perpetuate this construct. Once we were ready to commit, the dealers would deliver timely recommendations that our pending car loan is best paired with some “protection”. It’s the perfect fear-mongering setup that now has us buying all manner of insurance products by the time we drive off the lot. Continuing the drug metaphor, these supplementary products are like when the drug peddlers progressed to crack cocaine.
Today, car dealers make more money from selling loans and value-added products than they do from selling the car itself. Dealers are not bad people, but the incentives are broken and the system upon which they operate is dangerous.
Show me the incentive and I will show you the outcome — Charlie Munger
The party seems to be coming to an end and the hangover is settling in…
Now the dealers are feeling the pressure of the same car ecosystem upon which they once thrived. The inflection point for car loans is upon us, with global car sales last year seeing their steepest decline since the great recession and experts don’t think things will get much better from here. The car loan is reaching the limits of its sorcery and consumers need a new alternative if there’s to be any salvation.
Why the world of private cars veered so far astray
Looking back, the car rental industry was sufficiently satisfied with serving holiday makers and business travellers. That is until the new mobility kids on the block showed up and started stealing their lunch. So they’ve only just awoken to the idea of doing more for private and shared mobility.
Leasing companies on the other hand grappled with customer separation anxiety of enormous proportions, making them a better fit for serving established businesses whose needs don’t change often (read: not most people). If you’d like to see what insecurity looks like on paper, read the termination clause of a car leasing contract. You’ll be hard-pressed to find a more vindictive approach to customers.
So in the absence of service companies obsessed with doing more for the masses in need of private cars, it’s no wonder the industry found itself blindsided by the upstarts (Uber, Lyft etc) that redefined mobility as we knew it.
The manufacturers were focused on selling more cars. The car rental and leasing companies were content guarding their own crown jewels — though this is now changing. So the historical hope of spreading access to private cars fell on the lenders and banks. Without alternatives, we obliged and accepted car loans as the status quo.
You’ve probably heard someone talk about an airline they love, but have you ever heard anyone talk lovingly about their car loan?
Banks price and sell risk for a living, so it shouldn’t surprise anyone that their preference would be to price our risk, fund the car and sell us car loans instead of building the mobility service we really needed.
To be fair, they just don’t have the operational depth to run a mobility service well anyway. Imagine your bank trying to operate your favorite airline just because they have the money to fund the planes. South Africans definitely appreciate that you need a lot more than funding for airline success…
The incredibly wide portfolio of products that banks have, makes it really difficult for them to respond to the overwhelming volume of growing customer needs. So the fact that the car loan was starved of innovation isn’t an isolated case in their product stable.
For this reason, a slew of new customer-obsessed challengers are entering the fray in the hopes of reinventing the banking experience (Discovery Bank, Tyme Bank, Bank Zero etc). It’s happening globally too, with well funded fintech businesses like Revolut, Nubank and Chime sprinting to usher in a new era of digital banking.
With a view of how we got here, let’s explore an alternative path we can take in Part 3 of 3: Redefining our relationship with cars.
