The end of the road: has the developed world reached ‘peak car’?
From boardrooms to showrooms, there is growing confidence in the recovery of the auto industry. However, longer-term data suggest that, cyclical tailwinds aside, the market for automobiles in developed markets could be in structural decline.
If true, what does this mean for the industry? Who will pick up the slack? And how does it impact investors in the sector? Our full analysis can be found at the link on the bottom of the page but, essentially, our research illustrates that for the past decade the developed world has shown signs of hitting 'peak car', a plateau or peak in vehicle ownership and usage. We note the following worrying trends:
- The number of miles driven per capita in Europe and the US has been in decline since 2000 (Fig 1).
- The number of vehicles per capita has fallen since the financial crisis, but was generally plateauing before that.
- The proportion of young people who have a driving licence or own a vehicle has fallen markedly in recent decades (Figs 2 &3) as the result of:
- Urbanisation and better public transport infrastructure.
- The adoption of technologies such as smartphones, which have replaced cars as the ‘must have’ for young people, and social media, which reduces the importance of individual mobility.
- Rising costs of vehicle ownership, and the increased ease of car-sharing.
- The offset from rising ‘baby boomers’ demand is nearing an end as this generation ages.
Figure 1: Kilometres driven per capita
Source: OECD, Schroders, 2014
Figure 2: Driving licence penetration by age (%), United States
Source: University of Michigan Transportation Research Institute, 2012
Figure 3: Propensity to buy a vehicle by age, United States
Source: General Motors, 2013
Our base case is that these trends will continue, leading to a structural stagnation in the developed world auto industry. With no further gains in vehicle density (cars per capita), all future vehicle sales will be driven by demand for replacement.
Will emerging markets ride to the rescue?
The fate of the auto industry will therefore depend increasingly on emerging markets where, fortunately, the prospects for growth are good. The levels of vehicle penetration are much lower than in the developed world - around 10% in China and as low as 2% in India, compared with almost 80% in the US and 50-60% in Western Europe - and should rise with growth in GDP per capita. Most emerging markets are on the steep part of the ‘S-curve’ for vehicle ownership (see fig 4).
Figure 4: Vehicles per 1000 population vs. GDP per capita (PPP), 2013
Source: IHS Global Insight; IMF; Schroders, 2013
It is probably fair to assume that emerging markets can continue to support decent industry growth – albeit with cyclical fluctuations - for at least the next 5-10 years. But a shift in demand from the developed to developing world will necessitate continued restructuring at auto manufacturers, primarily to enable them to sell cars at lower prices in poorer countries. This implies that:
- Capacity needs to be closed in high-cost Europe and Japan.
- Companies will have to refine their model line-ups for their new customers.
- We are likely to see further consolidation in the industry as growth slows and profitability is pressured.
Conclusion: What are the implications for investors in the auto sector?
Ultimately, car companies will only thrive in emerging markets if they have strong brand equity (i.e. premium brands) or can cut costs to compete with (slowly) improving local competition and serve poorer customers. While auto investors are generally concerned with discussions of the cycle, there are also structural trends in the sector that cannot be ignored. When investing in the sector we believe it is important to be cognizant of these trends, choosing companies with a competitive advantage in terms of cost or brand, and where the management teams have a coherent long-term vision for the company. We tend to prefer premium automakers, select emerging market automakers, Tier 1 suppliers and tyre companies as long-term holdings, steering clear (pun intended) of mass market automakers with high cost structures and a high dependence on their home markets.
Please find the full analysis below.
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