It’s that time of year when we like to take a look at the year in review and examine upcoming trends. We interviewed Tom Libby, Automotive Analyst for Polk, which was recently acquired by IHS Automotive, to give us an expert’s take on some interesting developments in the automotive industry.
State of the automotive industry
Libby notes that the industry is doing very well; in fact, last month it was up between 8 to 9 percent through October compared to October of 2012. Libby observes that in contrast with past economic recoveries, the auto industry is actually heading the U.S. economy this time. “We’re approaching where the industry was pre-recession; it is very healthy in sales and profits,” Libby says, “Next year we will be where we were pre-recession.”
Key forces both driving and holding back the recovery
Says Libby, “Some of the main drivers of the recovery include very low interest rates and pent-up demand from the downturn in 2008/2009. Also, the stock market is doing well, which then encourages people to spend their hard-earned money.” He also explains that many manufacturers are growing and accelerating new products and designs.
Libby claims that problems in Washington, lack of stability in the Middle East, and low consumer confidence levels could be holding the recovery back in some ways.
Noteworthy trends of 2013
Longer finance terms
Libby states that a longer vehicle term has gained a lot of traction with consumers, with some purchase finance contract terms extending up to 97 months. “Lower monthly payments always seem attractive,” Libby points out, “however, it takes longer to break even, and often times, consumers aren’t considering the overall cost of the car.”
Longer terms generally stem from consumers’ desire for smaller monthly payments, but they also may be related to the increase in quality of new vehicles. For example, the current average vehicle on the road is 11.4 years old, the highest average in 12 years, according to Libby.
Fewer people ages 18-34 purchasing vehicles
Some blame the economy, others blame technology (why drive to see your friend if you can just text?). No matter the explanation, Polk data shows that the percentage of Millennials purchasing vehicles has steadily decreased. In fact, according to Edmunds, people ages 18-34 accounted for just 11.4 percent of the new car market in 2013, down from 14 percent in 2008.
“Millennials are in much more debt than their counterparts 10 years ago,” said Libby. “Crippled by debt, they are delaying buying a home, getting married, and purchasing a vehicle.” He predicts that as the economy improves and young people find jobs and reduce their debt, they will be back to purchasing vehicles.
Continued dominance of midsize sedans
According to Libby, several vehicle segments have seen strong growth since 2008, including small vehicles and compact vehicles; however, the midsize sedan continues to be the core of the industry. Luxury and luxury crossover segments are also doing very well, with the compact luxury CUV segment quadrupling in market percentage in the last five years. And Americans still love their trucks: large pickups are seeing an 8.8 percent rise from 2012.
Libby observes that vehicle segments seeing a decline include mid-size pickups, minivans, and large non-luxury sedans. Electric and hybrid vehicle sales, while increasing slightly, have been stagnant due to recent lower gas prices.
Growing popularity of leasing
Leasing has become increasingly popular among U.S. drivers. Ally experienced this trend earlier in 2013 with a 33 percent increase in lease accounts in the second quarter from a year earlier. According to Libby, in the first seven months of 2013 leases accounted for 20% of all new vehicle transactions.
Why the jump in popularity? Libby explains that manufacturers are increasingly using it as a tool in the non-luxury part of the market. Previously, leasing was traditionally used to offer luxury vehicles with lower monthly payments compared to purchasing, allowing shoppers to afford a luxury vehicle
Trends to watch for in 2014
As mentioned previously, leasing has been on the rise. Libby predicts that in 2014, leasing will be back to what it was pre-recession.
Consumer access to information
According to Libby, another important trend of 2014 will be a continued increase in customer access to vehicle information, making them even better equipped to negotiate with dealers. Libby also notes that almost all automotive manufacturers will be in a good position to compete for business and consumers will benefit from a wide variety of options and information.
Libby predicts that the industry overall will continue to become healthier as manufacturers’ balance sheets stabilize.
Innovation in design
Manufacturers continue to improve vehicle efficiency. Libby explains, “In general, manufacturers are building smaller, more efficient vehicles and reducing any weight possible within the vehicle, whether it’s by changing under-the-vehicle aerodynamic styling or using different materials.” He claims that this trend is mainly due to Corporate Average Fuel Economy (CAFE) standards, the Environment Protection Agency’s fuel economy regulations.