I know this sounds strange and it’s not what anyone in the industry wants to hear, but the auto industry has stopped growing in almost all the major markets around the world.
A decade ago, car sales were booming. The industry was on a path to build 100 million vehicles a year, an historic milestone. But sometime around 2017, global vehicle sales peaked and that target was never hit.
The data backing this up comes from the OICA, or the International Organization of Motor Vehicle Manufacturers. It shows sales were growing until around 2017, when global production hit 97 million vehicles. But then something strange happened, as sales and production began to fall.
And they started to decline three years before the COVID-19 pandemic and chip shortage really crippled production. Even so, everyone was sure that once COVID and the chip shortage was behind us, we’d be back on the growth path toward 100 million vehicles a year.
But that hasn’t happened. Last year new-vehicle production topped out at 89 million, and it seems unlikely it will go higher this year.
Here’s the problem. Almost every major car market in the world has stopped growing. This is true of the U.S., all the countries in Europe, Japan, South Korea and most surprisingly of all, China.
The numbers tell the story. Take a look at U.S. sales. They peaked in 2016 and then started to slide. Remember, this was at a time when interest rates remained low, and before car prices shot up 30% due to COVID and the chip shortage.
In Europe, the story is the same. According to data from the ACEA, the European Automobile Constructors Assn., sales peaked in 2016, then started to drop. They really fell during the pandemic and have not recovered. Like the U.S., the European market is still several million units below its peak.
The same is happening in Japan. Data from the Japan Automobile Manufacturers Assn. show that sales were their strongest in 2017, before sliding downward.
And in South Korea, sales have been stuck in the doldrums, slowly declining since 2016.
Deliveries in China aren’t falling off, but they really haven’t changed much in a decade. Sales vary from year to year, but they’re stuck at around 22 million passenger vehicles annually. Car sales were actually higher in 2016 in China than they were last year, according to data from the China Passenger Car Assn. This does not include exports or commercial vehicles.
This is why I’m saying the industry already has hit Peak Auto. Sales were actually better a decade ago.
There are a few places where we will see sales go up, notably India and Africa. But all the traditional car markets have stalled out and started to fall. What the heck is going on here?
I don’t think there’s any one reason; there are a number of them.
First, market saturation. In the U.S., Europe, Japan and South Korea, everyone who wants a car pretty much has one. There isn’t some big, underserved sector of the population that is suddenly going to run to dealer showrooms or start buying cars online.
In fact, the only thing that’s kept the U.S. market growing over the last two decades is population growth. But in the U.S., population growth has dramatically slowed, and the same is true in most of Europe and South Korea. Japan is seeing its population shrink by about half a million people a year. And in China, population is coming down by 3 million annually.
Populations also are aging. Japan and all the countries in Europe have the highest percentage of people over 65 years old. And older people just don’t buy as many cars.
The third reason is car prices. A new car is now out of reach for the average household, especially in the U.S. and Europe. Prices are just too high. Many of those households are turning to used cars. But even those are painfully expensive for a large percentage of wage earners.
And it’s not just the price of cars. In the last five years the cost of car insurance and maintenance and repairs has skyrocketed. The total cost of ownership is much higher today, especially in the U.S.
The American Automobile Assn., says it now costs $12,300 a year to own and operate a new car in the U.S. That includes depreciation, which a lot of people ignore. But that’s still money coming out of their pockets.
What are people doing? They’re holding onto their cars longer than ever. The average age of a vehicle in the U.S. is now 12.4 years old and rising. That's the average for cars and trucks combined. For cars alone, the average age is 14 years old. And remember, that’s the average, which means there are an awful lot of cars out there older than that.
One reason people are able to hold onto their cars for so long is that they last a lot longer than they did in the past. Galvanized steel means the fenders don’t rust. Stainless-steel exhaust systems practically last the life of a car. The interior upholstery might be lumpy but it still holds together. And so more people are holding onto their old cars and will continue to drive them until the wheels literally fall off.
Of course, you can’t ignore the impact of other forms of transportation. Trains, buses, subways, electric scooters, e-bicycles, in some cities, robotaxis mean people don’t have to own a car to get around.
Put it all together — saturated markets, aging and declining populations, sky-high car prices, the soaring cost of ownership, people holding onto cars longer — and suddenly you can see why we’ve hit Peak Auto.
There are serious implications for the industry here. If the market isn’t expanding, then how do you grow your company? One way is to raise prices, but higher prices is a key reason why sales are not increasing.
Another way is to grow market share. But everyone’s trying to boost their market share. And most car companies will be lucky just to hold onto the share they’ve got.
You can try to find new sources of revenue, such as selling subscriptions for things like hands-free driving. And maybe that will pan out. But so far, the jury is out over how much car owners will pay for additional services in their cars.
And of course, there’s always cost cutting. But all cost cutting does is help preserve your profit margins. A car company can’t grow by cutting costs. At some point you run out of costs to cut.
We're entering unchartered territory. Not only has the auto industry never encountered this before, I think it doesn’t even want to talk about it. I know I haven’t heard a single automotive CEO talking about Peak Auto. Have you?
