2015 has been a great year for automotive sales with a 17.1 SAAR (Seasonally Adjusted Annual Rate). This is especially spectacular when compared to the dark days of 2009 when two automotive giants, General Motors and Chrysler, were in bankruptcy and everyone was ratcheting back production to the 10m market reality. While the uptick in sales is a welcome change, the question on everyone’s mind is; how long will it last?
The bullishness of the economy, a strong dollar, low unemployment rates, and a healthy housing valuation recovery are all fueling this automotive renaissance. But what else could be at work in this mature market? Other possible explanations include an increase in first time buyers, an increase in the average household fleet size, people buying more often, or pent up demand from previous years.
The rate of first-time new car owners has been fairly steady over the last decade. In 2002 12.5 percent of the new vehicle market was first time buyers, while the percentage edged up only slightly to 13.6 percent in 2014. While the US population is slowly growing, traditional first time car buyers are not behaving the same. Millennials and Generation Z are putting off getting licenses and eschewing their older cohorts’ love affair with cars, viewing them as simple transportation. For many reasons, driving is not as much of a priority for them as it has been for past generations, and the expense of buying a new car makes driving even less appealing.
Are households buying more cars? According to the Center for Automotive Research who analyzed data from RL Polk and US Census bureau, household fleet size has held steady at about 2.07 vehicles per household, albeit with mixes moving toward more Trucks, SUVs and Crossovers in the fleet. Household fleets are not expanding in size; therefore the automotive pie is not expanding at the household level. Figure one shows the historical and projected average number of vehicles per US household between 1950 and 2020, with huge growth that has begun to level off.
What is the cause of the vehicle-per-household plateau? Are people cycling through their vehicles more quickly, or are we tapping into dormant parts of the market that may have been waiting it out for better times to replace their vehicles? To find out, we mined MaritzCX’s New Vehicle Customer Study.
We looked at 850,000 new vehicle buyers and lessees between 2002 and 2014 and calculated the age of their replaced vehicles. The average age of consumers’ replaced vehicles is gradually increasing, gaining nearly a year in age from 2002 to 2014. The oldest replaced-vehicle category is subcompact cars, with an average age of nearly 7 years in 2014. The youngest category is large luxury SUVs, at an average of 4.75 years old. About 1 in 5 replaced vehicles since 2009 are 10 years or older; before 2009, it was only about 1 in 8.
According to the numbers, neither an increase in new buyers, an increase in household fleet size, nor a more rapid cycle time can be responsible for this growth. It appears that we are tapping into a part of the market where consumers have been waiting it out for more stable economic conditions over the last several years.
Another driver for the replacement of older vehicles is the demand for more fuel efficiency. About 31 percent of new buyers rated MPG “extremely important” in 2002. That number grew to 45 percent by 2014. The industry has kept up by increasing vehicle fuel efficiency by an average of 24 percent in passenger cars (to 36 mpg) and 13 percent for light trucks (to 21.4 mpg).
Brightening economic conditions, along with a customer eye towards more fuel efficiency, appear to be conjuring up laggard buyers. How long will it last? When will the supply of these laggards run dry? That largely depends on the natural run rate on US vehicle sales, which is currently around 15.6m, based on the Census Bureau Data. If we maintain a 15.6m natural run rate, well above the rates from 2008 to 2013, and provided that we hit the 17.1m anticipated in 2015, those dark years (2008-2013) will have left us with a pent up demand of about 13m units after 2015. Obviously, many of those folks will continue to delay or make other choices (i.e., buy used vehicles rather than new), but with even half that many units in play, it looks like the good times may roll for some time into the future.
