Curbside Newsstand: “Demographic ‘Time Bomb’ Awaits Automakers” – In Addition To The Other Ones

If you want to really know why the Big Three’s stock prices are stagnant and GM is shuttering five plants, you need to read this article by Mark Gottfredson, a partner at Bain & Co’s automotive practice.  It’s one of the more succinct single articles I’ve come across recently that spells out the impending challenges. If the inevitable next economic downturn, the uncertainty of the EV market, and the huge changes in the technology and use of vehicles/mobility weren’t challenging enough, a massive demographic time bomb is about to go off. Yes, 2018 may very likely have been Peak Car.

According to this analysis, demographic trends alone will account for a reduction of vehicle demand of 20% by 2025, or down to 11.5 M vehicles, the same as during the 2008-2009 “Carpocolypse” recession. Specifically, the 15 to 64 year old (key car buying) demographic, which will experience zero growth due to lower birth rates and sharply increased barriers to immigration. If it hadn’t been for the catch-up effect after the Great Recession, sales would have been significantly lower already. That one-time effect is over now.

Now add in the additional ingredient of an economic downturn. It’s impossible to know just when and how severe it will be, but a slowdown or recession is considered likely in the next 12-18 months.

The collapse in U.S. auto sales in the coming recession could be as severe as in 2008-09. But this time, the sharply lower demand will be permanent. The number of U.S. vehicles in circulation includes 10.5 million in excess of structural demand, a result of overexuberant purchases during the 2010-17 economic expansion.

The surplus is likely to deepen the sales drop-off in a recession. By the time the economy starts to recover, changing demographics will have significantly reduced the pool of potential car buyers.

And one product cycle further down the road, or in some 6-8 years, the next wave hits:

As if that weren’t bad enough, a third shock will hit the industry in the mid-2020s, as EVs reach a tipping point. The magnitude and speed of the coming disruption to internal combustion engines could match that which Nokia and BlackBerry faced when Apple launched the iPhone.

The one-two punch of electric and autonomous vehicles will wreak havoc on the global automotive value chain. Traditional auto dealers will suffer a steady structural decline in every profit source, including new-vehicle sales, financing, repair and maintenance. Once distinguished by powerful brands, autos increasingly will become commodities, particularly to the next generation of consumers.

…a shift to EVs, autonomous cars and mobility services could leave automakers saddled with plants and other vital assets unable to earn expected returns, a shock that many may not survive.

The double punch of a recession and shifting demographics on the eve of that transition could cripple automakers before new technologies even take off.

What to do? Commit or wait?

We can see how various auto makers are doing variations of that. In Europe, VW is all-in on EVs, and BMW, Mercedes and others are close behind. But they really don’t have a choice. All of them are falling behind the tough EU CO2 emission limits, because of the steep decline of diesels and the growing size of cars. EVs are the only solution, or be faced with massive fines. The big three Germans are committing $68 billion in just the next three years alone on EVs, AVs, and related mobility technology. There’s no walking back now.

And it’s important to remember that the Germans have a huge exposure in China, which is mandating massive increases in EVs.

GM has put a big chunk of its future on Cruise, its automation unit, as has Ford with Argo. But while all three American manufacturers have been talking about coming EVs, (genuine mass-market cars, not loss-leader “compliance-mobiles” like the Chevy Bolt), they’re clearly not as deeply committed yet as the Germans.

Meanwhile, Toyota is straddling the fence somewhat with their well-established and cost-efficient hybrid system. That’s currently working out very well for them in Europe, where their sales are up strongly, and over 60% of their sales are hybrids. In the US, that’s not so much the case, as the current crush with big trucks and SUVs and cheap gas have actually reduced their hybrid sales. And Toyota is late to the battery EV game too.

One apparent alternative to going all-in like Tesla, at least for the time being. Or just to be as nimble as possible, and batten down the hatches. Will that be good enough?