The Present and Future Automotive Industry Conditions: A Commentary

The tangible data behind the auto industry has been decidedly mixed: year-to-date sales volume data and forecasted oil prices are supporting the industry while auto financing and used vehicle metrics show cracks in the armor. These things are the “lower” story, the one that many analysts are telling because forecasting things that don’t change is an easier task. If you buy a car in the next year or two, it will look, feel and perform much like your last car, and you will think of it like a newer version of your last car. That next car will not change how you spend your time, where you spend your time and with whom you spend your time. However, there is an “upper” story to this industry, the one that is about what happens when a car 10 years (or less) from now can change the who, what, when and where of how you live your life. It’s the story about how an industry will be radically transformed because it provides a product and service that is radically transforming lives.

The Lower Story: Here and Now
Auto vehicle sales data for the first quarter of this year suggests it is going to be another strong year with more than 17 million units sold. However, the composition of those total figures is changing as car sales are slowing down and light truck sales are picking up. This pattern, however, should benefit the industry, given the higher profit margins in trucks. As we look to what may happen in the remainder of 2017, there are several long-term trends in the economy that may suggest the industry will see continued strength. (See chart below.)

Consumer Confidence and Unemployment
Consumer confidence and auto sales—and especially in light truck sales—have long moved together as the confidence index essentially gauges the desire to purchase the light truck. Furthermore, two factors which are essential to vehicle sales—wages and employment—have been showing gains over the last several years and continue to show improvement. With the current unemployment rate of 4.5 percent and businesses reporting that it is becoming harder to find workers, we can expect to see more potential workers coming back into the employment picture and wages to increase. These factors should support healthy auto sales this year. 

Oil Prices
The cost of fuel cannot be understated when it comes to the strength of the auto and truck market. The oil market in the U.S. has been greatly transformed by the significant investments made in oil exploration and production in the U.S. The seven most prolific regions of oil and gas production in the continental U.S. produced 4.8 million barrels of oil a day at the end of the first quarter of 2017, or one-fourth all of U.S. oil consumption. Collectively, these seven regions have increased their output by 329 percent between March 2010 and 2017, providing a compounded production growth rate of almost 19 percent annually. 

The cost of extracting this oil has decreased significantly in the last decade.  According to Dallas Fed Energy Survey, new wells can be profitably drilled, and existing wells can produce at break-even oil prices of $45 and $24, respectively.  This “soft cap” on U.S. oil prices should incentivize light-truck sales for the foreseeable future. In 2016, OPEC supplied 40 percent of the U.S.’s oil imports. This share in 2016 is reported by the U.S. Energy Information Administration (EIA) to be “lower than any year between 1973 and 2014.” 

The Upper Story: Evolving Consumer Preferences
The dramatic entry of autonomous vehicles will vastly change consumer preferences and expectations, necessitating a complete rethink of vehicle pricing. The ability for autonomous vehicles to liberate the “what, where and when” of consumer’s lives will fundamentally change the “how” of how we live. How much this freedom is worth to those with physical limitations, exhausted parents and others should give a clue to its value. Treating autonomous driving as a $40,000 option might seem excessive, but consider the following. By the numbers, the average American annually spends 293 hours behind the wheel (about two months’ worth of eight-hour workdays) and on average pays $125 per month for car insurance. 

Under the restricting assumption that an autonomous vehicle will last only 11 years—the average car life today—it will save more than 3,200 hours of driving time, which converts to a $12 per hour cost, or about half the median U.S. hourly wage. Financing this option using an extended 10-year loan—made possible because of low autonomous vehicle accident rates—at 7 percent interest would cost about $460 per month. Furthermore, reducing the financing cost by the insurance premium savings could reduce the hourly autonomous driving cost to between $14 and $19 per hour.  

We project that this year will be another year in which sales stay on their high plateau of recent years. The goal of selling 17 million vehicles in a given year will only lead to the question of “can it be done again next year?” The questions that truly need answering are first how must the industry educate or re-educate buyers and influence their willingness to pay for autonomous capability? What will have to be done to convince consumers to pay double for a revolutionary new vehicle, which perhaps unfortunately looks similar to their last one. Also, how will the auto industry have to reshape the thinking of the finance and insurance industries to make autonomous vehicle financing attractive? Industry leaders who can answer these questions will be the critical players in shaping an increasingly lucrative industry.