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Auto Industry: Crossroads or Cliff

by Roger Lanctot | 11月 25, 2015

Consumers are buying more new cars, keeping them longer, driving them less and dying more often. That is the tale of the automotive industry in the U.S. in 2015.

Of course, the key bullet point in this tale is the increase in highway fatalities based on preliminary figures for Q1 2015 released earlier this year by the National Highway Traffic Safety Administration. New car sales are on the rise supporting strong price increases and dealer profitability and stimulating an ocean of new car introductions. But the early indication, from Q1 2015 data, is that both the number of and rate of fatalities are on the rise.

This reverses a long prevailing trend of reduced highway fatalities:

SOURCE: NHTSA

As the economy has recovered, more people are driving less but dying more often.

All the good news regarding sales and industry profitability can be distracting from this reality.

The word from NADA and J.D. Power at the NADA/J.D.Power AutoConference LA last week is that fewer dealers (since 2008) and increased vehicle sales has translated to more profitable business for dealers as average retail prices have risen and incentives declined. But the good news has stimulated product development which will contribute to a hyper-competitive environment coinciding with a peak in the vehicle sales cycle.

SOURCE: J.D. Power & Associates

We’re selling more cars and making more money, but the sales cycle is hitting a peak with more new cars coming just as sub-prime loans and leases ramp up.

The automotive industry is either at a crossroads or a cliff, it seems. This was made clear by John Humphrey, senior vice president and general manager, global automotive, for J.D. Power in his presentation at the NADA / J.D. Power AutoConference LA last week.

Humphrey’s key data points:

1. Vehicle sales are on a trajectory to hit 17.3M units for the year (including fleet sales) – the most since 2000.
2. Retail vehicle sales are forecast to hit 14.2M – the most since 2002.
3. These sales are coming at an average price of $30.3K - $400 more than in 2014 – suggesting lower incentive activity – ie. the industry is not “buying sales.”
4. Record retail revenue of $430B is forecast.
5. U.S. production on the rise – approaching 13M units – still below peak production.
6. Dealer base of 18,000 – up only modestly.
7. Higher sales, fewer dealers = higher margins.
8. Cyclical auto industry is approaching an eight-year peak – which has historically preceded a downturn.
9. 98 new/redesigned cars in 2015 – 100 expected in 2016.
10. Only 50% of car models grew sales in 2015 vs. 75% in 2013 – competitive pressures are increasing.
11. Leasing 28% and 72-month loans 34% are up – monthly payments up - $471.
12. Cars with negative equity are up at 29% and subprime loans are up at 17%.
13. Small/Compact SUVs & Large pickup sales are up – vs. small/medium-size cars.
14. Gen Y will have an impact – interested in technology and willing but maybe unable to spend – college debt, not thrifty.
15. Baby boomers actually have higher willingness to spend on tech.
16. U.S. has more cars/capita than any other country – with a correspondingly tiny amount of money spent on public transportation. With population growth and urbanization on the rise in the U.S., something will have to change.

It is the best of times and the worst of times. And the good news trumps any omens or outright bad news – highway fatalities are on the rise. And there is no short-term reward for preparing for the worst.

But there are definitely signposts of concern ahead. Humphrey’s description of the U.S. leading the world in per-capita vehicle ownership suggests the existence of an auto-centric society – but it is a society expected to see a 40% population increase in the next four decades, he says, with much of that population flocking to major cities where car ownership will be a lower priority.

While the Gen Y population is the largest demographic segment and is moving into its car-buying years, Humphrey expresses concern regarding the ability of these buyers to afford new cars. This, then, becomes the more salient question – not whether these consumers are interested in cars but whether they can afford cars.

The largest current car buying population remains the baby boom generation with significant growth in vehicle purchasing coming from drivers over 80 years old. Once again, the strength of car buying from this population is likely to obscure the sources of future demand (and their product requirements) which will not only be Gen X and Gen Y but also emerging markets.

The needs of the aging car buyers in developed markets will increasingly be at odds with the automotive priorities of the growing number of emerging market buyers.

Looking at global demand through the lens of the U.S. auto market is remarkably misleading with the developing world home to most global auto industry growth and dominated by much younger buyers. The 50-80-year-old buyers of BMWs, Audis, Mercedes and Cadillacs in the developed world are matched in China, for example, by buyers in their mid-30s.

The best news of all, though, is that all these car buyers, around the world, tell researchers that safety is a top priority. So maybe safety is a commodity that the leading Western auto makers can bring to the developing world.

(For the purposes of this commentary I am ignoring electrification and autonomous driving - but self-driving cars will play a unique role in supporting an aging population of drivers in the developed world and enabling new driving opportunities in the developing world.)

As for the U.S., it is clear that the National Highway Traffic Safety Administration is not up to the task of saving lives. The agency has struggled in its self-stated goal of making progress on collision avoidance. The best the agency could show from its efforts in 2015 was a statement of intention by a sub-group of auto makers to prioritize the implementation of automatic emergency braking on more of their cars.

This cooperative approach was sought by the agency with the knowledge that a rule-making process intended to enact a mandate could take as long as a decade to implement. We need to save lives today.

Perhaps it is time for NHTSA to take a page from the U.K. safety tester Thatcham’s playbook and PAY consumers to buy cars with advanced safety technology. With nearly 100 people dying on U.S. highways on a daily basis, it is time for drastic measures.

Normally, I’d appeal to the insurance industry to take a role in promoting safety systems by offering discounts, but it is by now clear that insurers prefer to remain on the sidelines when it comes to mitigating fatalities. The challenge for NHTSA is that recent legislation proposed on Capitol Hill in Washington will reduce rather than increase NHTSA funding on a consecutive annual basis.

So the agency tasked with mitigating fatalities, which was subject to devastating cuts during the Reagan Administration, will not soon recover its clout in Washington or elsewhere.

With sales and profits still on the rise it will be hard to convince the auto industry that it needs to do anything to mitigate rising fatality rates. With insurers on the sidelines it is left to NHTSA. Two measures that might have an immediate impact would be safety system incentives for new car buyers and, a favorite of mine, a national don’t-touch-your-phone-while-driving requirement.

The good news of increased vehicle sales in 2015 is sadly clouded by the increase in highway fatalities. Someone needs to take possession of that reality and do something about it and that “someone” is NHTSA. The good news from rising vehicle sales and profits in 2015 is creating an industry-wide case of distracted driving.

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