Have cars reached the end of the road in the developed world?
The fall in oil prices may provide a short-term boost for car sales, but we believe the market is actually in structural decline, at least in developed markets. Future growth will only come from emerging markets. For car companies to thrive in this environment, they need strong brands or competitive costs, or both.
The collapse in the oil price and the resulting cut in the cost of driving have led to expectations of higher global car sales. While the cut in fuel prices may provide short-term relief, we believe the auto market is actually in structural decline, at least in developed markets. Our research suggests that car sales in the developed world are showing signs of hitting “peak car”: a plateau or peak in vehicle ownership and usage. Future growth, we believe, will come from emerging markets. But car companies will only thrive in these markets if they have strong brand equity (in other words premium brands) or can cut costs to compete with (slowly) improving local competition.
Signs of stagnant vehicle use in the West have been evident for some time. Figure 1 shows that annual kilometres driven per capita have been in decline since the early 2000s in the US and in all major European countries except Germany. Data for Japan also suggest car use has plateaued in the last decade, levelling off at around 10,000 kilometres per capita per year.
Figure 1: The West is driving less
Source: The UK Department of Transport and OECD. Schroders as at December 2014.
Millennials are leading the way
There are myriad possible explanations for this trend, but a good place to start is by looking at the behaviour of younger generations. Millennials – those born in the 1980s and 1990s – are leading the change in driving behaviour. Figure 2 shows the proportion of the population by age who have a driving licence in the US (although a similar pattern is evident across Western Europe). The data clearly show a declining tendency for young people to get their licence in recent decades. More detailed evidence from the UK suggests the turning point occurred in the 1990s.
Figure 2: Young Americans have fallen out of love with the car
Source: University of Michigan, Transportation Research Institute, as at 2012.
Studies suggest that people who delay learning to drive are less likely ever to do so and spend less time in the car even if they do pass their test. Drivers in Britain who learn in their late 20s drive 30% less at any age than those who learn in their teens. Unsurprisingly, lower licence penetration implies lower car ownership, with data from General Motors showing propensity to buy for 16-24 year olds has been falling since 19901.
What explains young people’s lower enthusiasm for driving and vehicle ownership? The most straightforward explanation is rising urbanisation. Even in the developed world, the OECD expects urbanisation to rise from 77% in 2010 to 86% by 2050. As one would expect, there is a correlation between the percentage of a country’s population that lives in megacities and vehicle density. Young people in particular are opting to stay in city centres for longer. Aided by better public transport, this simply makes car ownership less necessary. In a survey by the American Automobile Association (AAA), 45% of respondents who did not get a learner’s permit before their 18th birthday said they could
get around without driving2.
1 “The dubious future of the American car business – in 14 charts”, The Atlantic, 2013.
2 “Timing of driver’s license acquisition and reasons for delay among young people in the United States, 2012”, AAA, 2013.