Peak Auto and the Problems It Presents

The auto industry can pray that household income miraculously starts growing much faster, or that it can figure out how to slash costs to make cars more affordable while trying to find new sources of revenue.

John McElroy, Columnist

February 20, 2024

5 Min Read
Ford Focus 12
New-car sales slip as owners keep cars such as '12 Ford Focus longer.

The auto industry faces many challenges, but its biggest problem is that it’s no longer growing. There are certain vehicle segments and several geographic regions where growth is good, but overall, we’ve hit Peak Auto, where new-car sales will likely stay stuck where they are from here on out.

This is especially true in Western Europe, North America and Japan. New-car sales in each of those regions are now lower than they were a decade ago. Even total global sales are lower than they were a decade ago, despite China’s massive growth. And while the COVID pandemic and chip shortage played big roles in that drop in sales, the trend lines were worrying well before COVID hit.

The U.S. market is a perfect example of this. While the numbers fluctuate from year to year reflecting recessions and boom times, the orange line on this chart shows a long-term decline in the percentage of Americans buying new cars. By the way, the peak was in 1978 when the highest percentage of Americans bought a new vehicle, and it’s been a long downward slide ever since.

McElroy chart Picture1.png

If the same percentage of Americans bought a new car in 2019 (the last good year before COVID and the chip shortage) as they did in 2000 the SAAR would have been 20 million, not the 17 million that were actually sold. Or, stated another way, millions of households dropped out of the new-car market over the past twenty years. The only thing that’s kept car sales from sliding further is population growth. The U.S. population grew by 53 million people from 2000 to 2023, and yet car sales are lower now than they were back then. Are you starting to get the picture?

Fewer households are buying new cars because the prices of new cars have stretched beyond their reach. Plus, cars last so much longer these days that people can hold onto them longer, which is why the average age of a new vehicle in the U.S. – 12.5 years and growing – is at an all-time high.

Historically, it took about 25 weeks of income for the average American household to buy a new car. The mean household income in the U.S. right now is about $75,000, meaning those households can afford a $36,000 vehicle. But the average new car costs about $48,000, which is 25 weeks of income for a household that earns about $100,000 a year – well above the mean.

This leaves the auto industry with stark choices. It can get down on its knees and pray that household income miraculously starts growing much faster, or it can figure out a way to slash costs to make cars more affordable, at the same time it tries to find new sources of revenue. And that’s exactly what the industry is struggling with right now.

Tesla’s unboxed assembly process, Ford’s EV skunkworks program and Toyota’s BEV Factory are all about slashing costs dramatically. And the lessons from these projects don’t have to apply only to EVs. They could work perfectly well in slashing the cost of ICE vehicles, too. But all these efforts are still several years away from going into production, assuming they’ll even work.

This is also why you’re hearing automakers talk so much about generating new revenue from subscription services. But they don’t seem to know exactly how to go about doing this. BMW took a public whipping when it tried to charge customers a monthly fee just to use their heated seats. And yet Tesla, Ford and General Motors seem to be having more success charging subscriptions for their hands-free driving systems.

I believe automakers can successfully charge for services but only if they are very compelling to customers, and are only available in their cars, not on their phones or other devices. I’ve seen presentations on potential subscription services in cars that involve searching and paying for hotels, restaurants, concerts, sporting events and the like. But I don’t see customers paying to have a feature in their car that they can already get for free on their phone.

We saw a similar mistake in the mid-1980s when cell phones first appeared. Automakers thought they could integrate cell phones into cars and make a lot of money on them. Those early car phones cost $4,000 (about $11,000 in today’s money) but nobody wanted to pay for a phone that was parked in their garage every night. And so, car phones were quickly relegated to the trash heap of history.

Automakers also will be looking to leverage their expertise to get into new businesses, like energy storage, robotics, autonomous ride sharing, VTOLs and whatever else they can think of. With volume stagnating, the only way they can grow their top lines, besides raising car prices even more, is to get into new areas of business.

Peak Auto poses a real threat to automakers and their suppliers. They can no longer count on volume growth to drive their business upwards. The pressure to cut costs will only intensify from its already intensive levels. And there will be a frantic search for the killer apps that people will pay for in their cars.

McElroy.jpgThis industry has always been a pressure cooker, but Peak Auto is going to push that pressure to levels we never imagined possible.

John McElroy (pictured, left) is the president of Blue Sky Productions, which produces “Autoline Daily” and “Autoline After Hours” on www.Autoline.tv and the Autoline Network on YouTube. The podcast “The Industry” is available on most podcast platforms.

About the Author

John McElroy

Columnist

John McElroy is the president of Blue Sky Productions, which produces “Autoline Daily” and “Autoline After Hours” on www.Autoline.tv and the Autoline Network on YouTube. The podcast “The Industry” is available on most podcast platforms.

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