Part of Carmageddon, But Consumers Demand It
The average age of passenger cars and trucks on the road in the US ticked
up again in 2019, to another record of 11.8 years, IHS
Markit reported today.
When I entered the car business in 1985, the average age had just ticked
up to 7.8 years, and the industry was fretting over it and thought the trend
would have to reverse, and customers would soon come out of hiding and
massively replace those old clunkers with new vehicles, and everyone would
sell more and make more. But those industry hopes for a sustained reversal of
the trend of the rising average age have been bitterly disappointed:
This rising average age is largely driven by vehicles lasting longer – an
unintended consequence of relentless improvements in overall quality, forced
upon automakers by finicky customers in an ultra-competitive market where
automakers struggle to stay alive. To make it in the US, they have to
constantly improve their products, and stragglers that can’t compete are left
unceremoniously by the wayside. US consumers are brutal.
This unintended consequence of rising overall quality contributes to the
dreadful industry problem: The US, despite constant population growth, is a
horribly mature auto market.
In 1999, so 20 years ago, new vehicle sales reached a record of 16.9
million units. This record was broken in 2000, with 17.3 million units. Then
sales tapered off. By 2007, they’d dropped to 16.1 million units. Then the
Financial Crisis hit, GM and Chrysler went bankrupt, Ford almost did, and
peak-to-trough, sales plunged 40% to 10.4 million units by 2009.
The recovery has been steep, and in 2015, finally the old record of the
year 2000 was broken, but barely with 17.48 million units, and in 2016, the
industry eked out another record of 17.55 million units. And that was it.
Sales have fizzled since then. So far in 2019, the data indicates that sales
are likely to fall below 17 million units, according to my own estimates,
bringing the industry right back where it had been 20 years ago in 1999:
Yet, given the longer average age of the vehicles on the road across the
entire fleet, even stagnating sales produce a rising number of vehicles in
operation. So it’s not that Americans as a whole have fewer cars – far from
it: They have more cars, and those cars are on average older.
The number of vehicles in operation (VIO) in 2019 rose by 5.9 million
units from 2018, to a new record of 278.3 million vehicles, according to IHS
Markit. In other words, during the 12-month period, about 17 million new
vehicles were added to the national fleet; and about 11 million units were
removed from the fleet, either by being sent to the salvage yard or by being
exported to other countries.
What you see in the chart above is the future supply for the used vehicle
market. Used vehicle sales will likely come in just under 40 million units
this year – so about 2.3 times the sales volume of new vehicle sales.
The fact that the average age of the vehicles in operation is rising
doesn’t mean that all people hang on to their cars longer. On the contrary.
Sure, we drive a car we bought new 12 years ago; it’s in great shape,
looks good, the six-figure odometer reading is just a blip, and we’re going
to hang on to it because there is no reason to get rid of it. We know other
people on the same program. Millions of Americans do that.
But other people have two-year or three-year leases, and this is a booming
business. More and more people lease. And when the lease ends, their old
vehicle is returned to the leasing company, which owns the vehicle, and which
then sells it at auction, where a dealer buys it and then sells it as a used
vehicle to a retail customer. These vehicles are only two or three years old,
and often in mint condition.
Then there is the huge fleet or rental cars of about 2.2 million vehicles
that are turned over every couple of years or so to enter the used-vehicle
market, much of it via auctions held around the country.
In addition, there are corporate and government fleets that get turned
over at different intervals, and those units end up on the used vehicle
market.
So the rising average age doesn’t mean that Americans drive the same
vehicle for a longer period of time – though they can, and many do – but that
there is a strong market and demand for good older vehicles, and people buy
them and drive them for a few more years.
But it is an issue for automakers. They could sell a lot more vehicles –
and I mean a whole bunch more – if their vehicles on average reached the end
of their life after eight years. But our finicky consumers don’t go for this
program anymore. Quality is one of the factors that decides whether an
automaker is going to make it or whether it will die.
What’s left for automakers to do to increase revenues in this environment
of two decades of stagnating unit sales? A three-pronged industry strategy
has emerged: Shift customers to more expensive vehicles, such as from cars to
trucks and SUVs; load the vehicles with more goodies each year, such as
driving-assist features; and jack up the prices pure and simple.
And automakers have been doing it across the board, which has the effect
that for many Americans, new vehicles have become too expensive, and they
stopped buying them, which puts further downward pressure on unit sales. But
Wall Street, which keeps pushing automakers to go further and further upscale
– because that’s where the money is – hasn’t figured this out yet.
Here are six charts on the used-vehicle market, plus my “Chart of
Carmageddon” for new vehicles. Read... Used-Car
Wholesale Prices Surge, Retail Volume Drops. New Cars Sink Deeper into
Carmageddon
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