As Average Age of American Cars Nears 12 Years, a Challenge and Opportunities for Manufacturers
The average age of American cars has risen almost relentlessly for well over a decade. The level reached 11.6 year in 2016 and is expected to grow this year to over 12 years. That fact is a double-edged sword for car makers. Cars are better built and last longer. On the other hand, a 12-year-old car is considered old by many people, and they may be in the market for a replacement.
The fastest growing segment of the “old car” inventory is vehicles that are over 16 years old, according to IHS Markit. The number of these cars is expected to grow 30% from last year through 2021. That will put the number of units in this category at 81 million, against a U.S. driving population of 220 million. A silver lining in this trend is that many households have more than one car.
U.S. new car sales are expected to be just over 17 million this year, very close to a record. The number is expected to dip slightly next year, but incentives and the economy could affect that modestly. One thing is for certain. As new car sales stay flat, major manufacturers have to jockey for market share to keep sales, and likely profits, rising. This, in turn, can drive new buyer incentives.
The U.S. new car market can be broken into three huge segments. The first is sedans and coupes, many of which are light and get low gas mileage. These have become unpopular as gasoline prices have stayed low. The next is crossovers and sport utility vehicles, a market that has done well, again due to some extent on low gas prices. These vehicles tend to get fairly poor mileage ratings but the cost to operate them is also affected by low gas prices. The final segment is full-sized pickups. Many people do not know how large this segment is. It has only three vehicles. Among them, they will account for 2 million new sales this year. They are the leader, the Ford Motor Co. (NYSE: F) F-Series, followed by General Motor Co.’s (NYSE: GM) Chevy Silverado and the Fiat Chrysler Automobiles N.V. (NYSE: FCAU) Ram. As a group, their sales will be up about 5% this year, against slightly lower sales for the entire industry.
One challenge the car industry has set for itself is very long finance periods for many cars and light trucks. Financing of 0% APR for 72 months is not unusual. It will be financially hard for people to sell these vehicles until they have paid off the entire amount owed. This creates an inventory of cars that will be six years old before they are sold or traded in.
Car companies are up against a market in which several tens of millions of people will not buy new cars soon. On the other hand, some people with aging cars will want to replace them, particularly when companies offer aggressive incentives. The balance between those two groups will drive some new car sales in the future. Unfortunately for the companies, no one knows how much.