The U.S. Auto Market Is Poised For Solid Growth
The U.S. auto market had a stellar 2012 with the total market size growing 13.4% to 14.5 million units. For 2013, the U.S. automakers are forecasting growth of about 6%. Based on the improving economic outlook, an average age of vehicles in the U.S. above historical norms and the improved financial standing of the major auto makers, we expect to see moderate-to-high growth in the next two to three years.
Factors Supporting Growth
There is still a pent-up demand for vehicles caused by the great recession of 2008. The U.S. auto market collapsed in 2009 to 10.4 million units from 16.1 million in the previous year. Since then, it has been a path of recovery with annual sales reaching closer to pre-recession levels.
A considerable number of customers postponed buying new vehicles or bought second-hand vehicles. This is indicated by the fact that the average age of a vehicle in the U.S. peaked to 11 years in 2012. Thus, the brisk growth rates that the auto industry witnessed in the last couple of years is nothing but a recovery from the after-effects of the economic collapse.
Although the general improvements in the quality of vehicles and safety features have resulted in cars lasting longer, an average age of 11 years suggests that customers delayed buying new vehicles due to high unemployment and an uncertain future. This scenario is likely to change if macro-economic fundamentals continue to improve, albeit gradually. To see the history of the average age of U.S. vehicles, click here .
The unemployment rate seems to be slowly but steadily heading southwards and the housing market too rebounded in 2012. As more unemployed find jobs and/or buy new houses, demand for vehicles will pick up again. This definitely works in favor of the U.S. auto market.
There was never a greater focus on fuel efficiency and with the introductions of new models with better mileages, replacing old vehicles makes sense economically. Topping all of this is the low interest environment created by the actions by the Fed. The low loan and lease rates will certainly help attract buyers looking to replace old vehicles.
Long Term Challenges in US Auto Market
However, in the long run, the growth rate is likely to slow down as there are demographic factors that act as natural barriers to the growth of the auto market and older vehicles are replaced in the coming years. Historically, the total number of passenger vehicles (i.e. cars and light trucks) in the U.S. has remained in the region of 2-2.1 vehicles per household. (Right now, there are about 120 million households and 245 million passenger vehicles.) Note that there isn't too much of upside to the figure of 2.1 since, in general, you'll typically find two working members in an average household.
The historical average growth rate for the number of households has been more or less equal to adult population growth (~1.2% annually). Therefore, you can expect the total number of vehicles in the U.S. to rise by a similar rate in the long term. To sustain a higher annual growth rate than this figure, the automakers need to convince the public to replace their vehicles more frequently.