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Driving Boom Fades: Will It Hurt Automakers?

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According to a recent study by CNW, the percentage of car-less American households increased to 9.3% in 2012 from 5.7% in 1991. The percentage could further move up to 10% in this year or later according to the study.

Another study by the U.S. Public Research Interest Group (“PIRG”) revealed more shocking facts. PIRG found that motorists aged between 16 and 34 have traveled 23% fewer miles in 2009 compared with 2001. Further, the ratio of cars to motorists dipped 4% from 1.24 vehicles in 2006.

The trend clearly raises a question: Is the driving boom over? It is a complex demographic issue that can be explained by many socio-economic factors. It can also endanger the household vehicle business of automakers in the future, which became a low-margin but stable revenue generating business after the recession.

Two-Fold Problem

Firstly, when we look at the unemployment figures, the continuous improvement looks impressive. Unemployment rate in May decreased to 7.6% in May this year from 8.2% in the same month last year.

Unfortunately, the picture becomes gloomy when we consider the 16 to 24 year age bracket. Unemployment rate in the bracket is very high at 16.1% now. This could definitely take a toll on the automotive industry, since this age bracket can be related to America’s once popular “on the road” car culture.

The upward shift in the retirement age has also aggravated the unemployment problem. The baby boomers, unlike earlier, are willing to work for a long time in order to make up for the loss in wealth during the latest recession. This shifted the retirement age to the highest level in more than two decades, reducing the labor turnover. As a result, youngsters find it hard to occupy seats in the job market.

Secondly, mounting student debt is slowly becoming an impending crisis in the U.S. Outstanding student loans in the U.S. stood at $986 billion in the first quarter of 2013, up $20 billion from the prior quarter. Over 10% of these student loans are more than 90 days delinquent.

While student loans help youngsters graduating for obtaining a high-paying job, the same becomes a burden when they are unable to find their preferred job. If paying hefty installments on these loans become troublesome, can they dare think of affording a new car or other appurtenances?

Changing Priorities

There seems to be a shift in car buying younger generation as the priorities of youngsters have changed due to many emerging needs in the ultra modern life. Youngsters feel much better nowadays by staying connected to friends through Facebook (FB - Free Report) in their newly purchased Apple (AAPL - Free Report) iPad or sipping a cup of newly blended Starbucks (SBUX - Free Report) coffee with college buddies rather than taking a long car ride.

Apart from the opulences, youngsters are inclined to break many social conventions. They now prefer to delay buying homes and achieve parenthood much later than their earlier generations. At the same time, they seem to follow several austerity measures in order to face the uncertainties in the job market such as living with the parents, driving their cars occasionally and saving money.

Also, the younger generation no longer feels the ardent need to purchase cars due to the developing public transit system. Public transport is gaining importance due to increasing traffic gridlock across the major cities around the world. Hanging around the city with the help of ubiquitous public transit system and cabs is much more pleasant and frugal nowadays than being stuck in a gas-guzzler.

In fact, many governments across the world have taken measures to curb the use of personal vehicles. They are levying heavy taxes on new cars, which are making household cars costly. For example, Toyota Motor’s (TM - Free Report) popular Prius hybrid costs over six times higher in Singapore compared to the U.S. due to exorbitant tax rates in the country.

Does it Really Matter to Automakers?

What should be the automakers’ take on the waning driving boom? Definitely, it calls for a change in their marketing strategy, which should be focused more on non-household vehicles or vehicles required by corporations, government agencies or car rental companies known as fleets.

The recent trend suggests that the automakers are already inclined towards fleet sales as the economy recovers and businesses improve. Ford Motor (F - Free Report) sells nearly a third of its vehicles in the U.S. to fleet buyers while Chrysler sells roughly 80% of its minivans to fleet customers. However, focusing too much on fleet sales could be detrimental as they contributed to the Detroit Three’s woes prior to the recession.

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