Planning for Peak Auto

Last year automakers set the all-time record for new car sales in the U.S. market. But based on historical trends, those sales should have been a lot higher. Thanks to stagnant incomes and alternative transportation choices, a smaller percentage of people are buying new cars. We may never see sales go above the levels they hit in 2016.

In 2001 automakers sold 17.4 million vehicles in the American market. Last year they sold 17.5 million. But since 2001 the population of the U.S. has grown by more than 39 million people. That means a smaller percentage of the population is buying new cars. If the same percentage bought cars in 2016 as they did in 2001, sales would have hit 19.7 million, or 2.2 million units higher.

This is not a one-time fluke or some kind of aberration. It’s a long-term secular trend that is only going to become more pronounced.

Right now the main cause of fewer new-car customers is that the average American family has seen its income flatline for nearly two decades. Those people have been priced out of the new car market. So they’re turning to used cars. And they have plenty of great choices, especially with Certified Pre-Owned cars, which are in very good condition and come with a warranty.

But in the very near future, ride sharing, car sharing and mobility services are going to pull even more customers out of the new-car market. In fact, it’s already begun. So far the effects are so small that few have noticed. But the people who have are coming to alarming conclusions.

Two years ago Barclay’s put out a hair-raising study called “Disruptive Mobility,” predicting U.S. auto sales will fall 40% by 2040. It forecasts that General Motors will have to cut 68% of its North American manufacturing plants while Ford will have to close 58%. It predicts the total vehicle parc in the U.S. will drop from more than 250 million today to under 100 million.

And it’s not just Barclay’s. A few months ago another study from a firm called RethinkX, titled “The Disruption of Transportation and the Collapse of the Internal-Combustion Vehicle and Oil Industries,” predicts the number of cars in the U.S. will drop to only 44 million by 2030. It says automotive manufacturing will drop by 70% and car dealers will cease to exist. It says all this will cause global oil demand to fall so sharply oil will drop to around $25 per barrel, and that oil prices might collapse in only five years.

And it’s not just RethinkX. More recently a study from Merrill Lynch titled “Mobility Services: Reducing Car Ownership and Car Usage” follows the same line of thinking, but is not quite as alarmist. It predicts the global car parc may not grow that much from where it is today.

The automotive industry is predicated on scale. Automakers need to sell millions of vehicles to pay for the heavy investment needed to bring them to market. And yet, even with today’s healthy sales, automakers and suppliers are under enormous pressure to boost their margins. Imagine what will happen if the market – and margins – begin to shrink.

Maybe all this helps to explain GM’s global retrenchment. By selling off Opel, and shutting plants in Russia, Indonesia, South Africa and Australia, GM reduced its manufacturing capacity by roughly 1.5 million units. GM says it did this (along with closing down car sales in India) to step away from money-losing operations. No doubt that’s true. But if you believe the market is going to shrink a lot over the next two decades, then this strategy makes even more sense.

The auto industry is entering a very dangerous and turbulent time. Automakers and suppliers are focused on growth and expansion. But it may be time to start thinking about Plan B, that is, planning for a world where we won’t need as many cars, or models, or brands, or automakers.

I suspect that won’t happen. When you’re making billions in profits no one wants to rock the boat. But if the studies I’ve cited here are right, you’re either going to determine your own destiny or let someone else do it for you.