Even before the economic impact of the pandemic had reached American shores, analysts had noticed that people were keeping their cars longer. While this development worried car companies, the economy was roaring along, and it was thought that economic growth would overcome the marginal increase in the length of car ownership.
However, 2020 has changed all of that as the recession word has made a comeback in American and what was considered a blip now has the potential to become a long-term trend. If you are not convinced, then look at the streets around your home in Central Oregon as you will notice that many of the car being driven more than four years old.
According to statistics from the U.S. Department of Transportation, the average age of light-duty vehicles, that is cars, trucks, and SUVs to you and me, increased by more than 10 percent to 10.5 years. This means that the average car on the road today was first built and sold during the Great Recession.One category of vehicles that are remaining on the road longer are pickup trucks. The Energy Information Administration, which reports to the Department of Transportation, reported that the average age of pick up trucks has increased by nearly 24 percent over the last decade. This was followed by a 20 percent increase in SUVs and an 8 percent increase in cars.
While part of the reason for the increased length in service is that today’s cars are more reliable than ever before. However, this does not tell the entire story as the car market, like all markets, is primarily driven by economic forces. These include the cost of new vehicles and the creditworthiness of car buyers.
Given the fact that wealth and income gaps have been growing fast in recent years than almost any time in modern American history, is it should not come as surprise that many buyers are holding off on getting a new car. However, industry analysts remain unsure how this trend will impact the market in the long-term.
While changes in the auto market were front and center in the negotiations between labor and management during last year’s strike at General Motors, the changes in car ownership go beyond the number of years someone keeps their car.
These trends include the rise in electric vehicles which require less maintenance over time, car sharing, autonomous drive vehicles, and urbanization. While many are rethinking where they live as a response to the COVID pandemic, it is too early to tell if America will undergo another wave of migration from the cities to the suburbs as it experienced in the 1950s and 1960s.
For automakers, this means that the future is becoming harder to forecast as multiple disruptions are heading their way. In one scenario America might only need a fracture of the number of new cars currently produced within the next three to five years. While this is a potential worst-case scenario, such a turn would massive ramifications for the auto industry and the economy.
As far as the industry is concerned, a dramatic reduction in the number of cars produced would leave to a round of layoffs and factory closings across the country. This would then lead to suppliers also needing to scale back their operations.
The long-term impact might be a collapse of the entire automotive supply chain. While the government bailouts of Chrysler and General Motors managed to avert this during the Great Recession, how government would react when there is little to no clarity on whether demand would bounce back is a different story.
As a consumer few new cars might mean higher prices, which would probably force automakers to hold on to their cars for even longer. However, this could create an opportunity for new products and services for car owners.For example, if you owned an Audi and were considering keeping it on the road for an extended period of time, then you might want to check out Olive’s Audi extended warranty options.
Another option for thousands of current car owners might even be to forego ownership altogether. Instead they would opt for carsharing schemes, public transportation, or even cycling.
This approach would have a dramatic impact on the monthly budgets of struggling wage earners as the money they used to spend on their cars could be used for other purchases or even savings.
What does this mean for industry executives and policy makers? For starters, car companies need to trim their balance sheets – especially their liabilities. Also, there is the possibility that the funds used to bailout the industry in 2009 might not be available this time around as trillions have already been allocated in response to the pandemic and bigger crises such as a potential wave of evictions and the solvency of the Social Security and Medicare trust funds are looming.
Either way, the nature of car ownership is changing, and this is bound to have an impact on the economy over the long run.
