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US Auto Sales: Recovery? What Real Recovery?

China, Company Strategy, Economics, Sustainability, Technology, US
By John Richardson on 01-Jun-2016

Car-Dealership-with-flagsBy John Richardson

IF you look at last year’s US auto sales in isolation, the plan to transform the fortunes of economically struggling Wilkes County in North Carolina makes every bit of sense. In 2015, 17.5m vehicles were sold in the US, higher than the previous all-time peak year for sales in 2000.

Government and business planners might thus be seen to be on the right track by attempting to encourage automakers to open factories in Wilkes County. To this end, computer controlled lathes and mills, and a programmable practice production line, have been made available for students at high schools and community colleges, according to the New York Times. Robotics has also been added to curriculums in an effort to create a new generation of high-skilled auto workers.

But what if this skill set is just plain wrong? What if the 2015 sales figure was a mere blip in a longer term decline in US auto sales? For me, there is actually no “what if” at all when you look more deeply into the data.  On an individual basis, people in the US are driving 6% less than the record set in 2004.  The market peaked at 840 vehicles per 1,000 population in the subprime years, and is now back at 2000 levels of around 810 vehicles per 1,000 of the population. And you have to put last year’s record sales into the context of the fact that the population is 13% bigger than in 2000.

Crucially – as we discuss in our study Demand: The New Direction for Profit – you must also consider this:

  • US auto loans had risen from $700bn in Q2 2010 to $1trn by Q3 2015. At the same time, the average credit term had reached a record of 67.9 months during 2015.
  • More than four out of five cars are bought with some form of credit, with 87% being financed at an average amount of $29,000 in Q3 2015.
  • As a result, new-car buyers now keep their cars for an average of 6.5 years, and so those buying a new car in 2016 will not return to the showroom until the end of 2022.

As was the case with demand for housing during subprime, this is not a sustainable rebound in autos demand. It is instead demand that has been brought forward from future years due to very cheap finance, resulting from the US Federal Reserve’s longstanding policy of ultra-low interest rates. And when and if credit conditions significantly tighten there has to be a risk of these autos loans turning bad.

Why are people driving less miles, and why has auto ownership per 1,000 of the population declined? Here is why:

  • All the evidence shows that when you get older, you drive less miles and America is getting older. The retirement of the Babyboomers and the dramatic drop in birth rates since the 1970s is pushing up the number of retirees versus workers.
  • Young people no longer regard owning a car as “a rite of passage”. You no longer need wheels to keep in touch with your friends, as you can do this via Facebook and other social media. There is also an environmental pushback against car ownership amongst younger people.

Longer term, computer-driven cars present another challenge for growth in auto sales globally. Why own a car at all when you can instead summon an autonomous vehicle only when you need it, via a smartphone app?

Pushing the shift to autonomous vehicles will be affordability as ageing populations squeeze income levels. The personal calculation will be, “Why should I spend all that money on a car when it’s going to sit in my garage, unused, for more than 90% of the time”.  And the environmental factor will again come into play here, as owning a car will be seen as wasteful and so unnecessary.

The end result will be lower long-term growth in car auto sales. Individual car ownership will decline in favour of pooled vehicles that are optimised to ensure that they are on the road nearly 100% of the time. In other words, more miles will be driven by far fewer vehicles.

What is therefore the answer for Wilkes County, and for “middle America” in general? How does the US go about dealing with stagnating middle class incomes?

There is nothing wrong with the Wilkes County idea of teaching robotics at high schools and community colleges. But if these skills are heavily tailored to fit the autos industry, future employment opportunities will be very limited – for all the reasons given above. Instead, just think of how robotics could be used to extend the quality and quantity of life of America’s rapidly increasing number of retirees.

And more broadly, an explosion of innovation is necessary in order to create the products and the services to serve the extra one billion of consumers globally that is the result of advances in medical science. Two hundred years ago, global life expectancy was just 25 years. The fantastic new is that today many of us can expect to live 20 years beyond the age of 65, which is many countries is the standard age of retirement.