Now is apparently not a good time to be in the auto industry, at least as a major manufacturer. CNN Business reports that global car sales plunged another 4% in 2019. Similar losses were observed the year before. It would appear as though auto sales peaked in 2017 at 95.2 million units. Selling nearly 5 million fewer cars just two years later doesn’t bode well for the industry.
The question that no one seems to be asking is this: could car makers be their own worst enemies? More to the point, could their business models be the reason car sales are slumping? The possibility bears consideration.
Possible Causes
The same CNN report that detailed slumping car sales offered a number of possible causes. First is a slowdown in China’s economic growth. As the thinking goes, Chinese consumers are not buying as many cars because their economy has slowed down.
Another potential culprit is a reduction in government incentives for buying electric vehicles. That makes sense to a certain degree. Due to the high retail price of most electrics, consumers are not likely to buy them without the financial incentive to do so. It simply costs too much money to avoid the internal combustion engine.
Next up is a credit crunch being observed in India. The thinking there is that India’s economy will continue to contract as long as credit remains tight. Just like what happened here in the U.S. during the last few years of the previous decade, economic contraction tends to put the damper on big-ticket items.
All three possible reasons do have some merit. Yet they can hardly account for all of the trouble the auto industry has experienced over the last decade or so. So let’s dig a little deeper by addressing a key phrase in the CNN piece: peak car.
A Finite Market
This CNN piece briefly mentioned, in passing, the possibility that the global economy has reached “peak car.” It is a point that deserves more than a single sentence. In fact, it might very well be the answer to the entire question.
The reality is that the car market is a finite market. The world can only support so many cars among those people with the resources to purchase them and the ability to drive them. While some people plan for buying a new car and others just buy one when they need it, the fact remains that the number of potential buyers is finite.
Car manufacturers have spent the better part of the last several decades building cars that can easily last for 20 years. That is not the way it used to be. It used to be that a decent car would peak at about 100,000 miles or 8 to 10 years of driving. Today’s cars can easily go 20 years and 200,000 miles.
Simple math tells you that cars lasting twice as long reduce the need to purchase new cars. Combine that with the auto industry standard of building as many cars as humanly possible and you have a situation in which the market eventually becomes saturated. That may be where we are today.
Most durable goods are subject to limited markets and market saturation. Marine and aerospace manufacturers, for example, know there is only a finite audience for custom yachts and personal jets. They temper their production accordingly. In the auto industry, production has been running flat-out for as long as any of us can remember. Perhaps it’s time to scale back in the knowledge that their cars now last longer than ever before.
