Greek auto sales have been racing ahead in recent weeks. They are up 16% so far this year, as people seek ways to protect their money in the event of Greece leaving the euro. April saw the strongest rise, with sales up an astonishing 47% versus 2014. As The Telegraph noted:
“People living in a country gripped by financial turmoil often worry about the security of their money. If it’s in a bank, it can be caught up in capital controls or lost through insolvency. Better, then, to spend it. And the purchase of choice is often a car.”
Ironically, the main winners from this are German car makers, as Greeks buy more German cars than any other brand.
Across the reset of the continent, the picture is more mixed. As ACEA comment:
- France (‐3.5%) and Germany (‐6.7%) faced a downturn, whilst Spain (+14.0%), Italy (+10.8%) and the UK (+2.4%) saw positive growth
- But demand was largely supported by the EU’s new members, especially Poland (+11.0%) and the Czech Republic (+17.6%)
In terms of the top 5 major manufacturers, only Renault showed an increase over the month, up 5%. And this was despite increased discounts by majors such as Ford (14%) and Fiat (16%) in key markets such as Germany.
Overall growth is also slowing, as the chart above confirms. Sales so far in 2015 are up 6.8%, but May was only up 1.3%. And the market continues to highlight the change underway in consumer preferences. Thus the biggest gainer has been sales of the Mercedes Smart car. Designed for cities, its sales were up 84% in May, and 56% so far this year after an updated 2-seater version, and a new 4-seater model went on the market.
Meanwhile, my own London borough has joined Paris’ fight against diesel engines, charging a £96 ($150) premium for its street parking permit. And an even bigger campaign is about to get underway, as London seeks to boost electric vehicles and car-sharing across the city:
- The city plans to spend £100m to boost the use of electric vehicles and car sharing across the capital
- The model is Paris,where 220k drivers now use its Autolib scheme – taking 31k private cars off the road
- Cost, and the need to reduce air pollution are the key drivers
This is a big win for French company Bollore, which has pioneered this experiment in Paris and has now won the London contract. It highlights how markets are moving towards a more service-led mentality, and away from a simple product focus. As Bollore note:
”Lots of people aged 18 to 25 are using the cars to go out for the evening with their friends. They might use them to go to a nightclub, dinner or the theatre…. We expect London to be bigger than Paris. It won’t be quite the same as Paris as English people are different but we have four years’ experience in Paris and that will help us.”
Their success highlights the opportunities now being created as we move slowly but steadily into the New Normal.
Companies and investors who seize these opportunities will do very well – unfortunately, at the expense of those who cling to the supply-driven and product-based strategies of the past.
As promised yesterday, the blog today looks at the wider impact of the major changes underway in housing markets. Driven by the ageing BabyBoomers these changes are, in effect, like throwing a series of large stones into the middle of a pool of water – the ripples spread wider and wider as the impact grows.
One key change, as the Pew Institute continues to report, is that the US is steadily moving back to high levels of multi-generational homes:
- As many as 1 in 4 young adults were living at home in 1950.
- But by 1980, only 1 in 10 young Boomers were still living at home with parents.
- Today we are ‘going back to the future’, with 1 in 5 young adults living at home with parents
- And their numbers are rising all the time.
This has wider implications as housing is also a motor for other parts of the economy. Multi-family units require only half the number of people to build them – 1.8 people are employed to build each multi-family, versus 3.7 for a single family home. They also use less material when being built – bad news for the chemical industry, for example, when each new single home uses $15k of chemicals, according to American Chemistry Council data.
Unsurprisingly, US house prices are beginning to weaken again as the impact of stimulus policies disappears. Last week’s S&P Case-Shiller Index showed average prices in the 10 largest cities back at September 2013 levels. And the outlook is not good, with affordability being hit with mortgage rates now at 4.5% versus 3.6% last May.
Thus mortgage lending fell in Q1 to a 14-year low, leading to talk of a shakeout getting underway in the mortgage finance industry. As the CEO of the Mortgage Bankers Association warned:
“This change is much more structural and will be longer lasting. It’s a classic supply-and-demand scenario. We have an excess supply of lenders and a lack of demand.”
Equally important, as the chart shows, is that the changes taking place in housing markets (red line) are likely to impact new auto sales (blue line). These markets have moved in parallel over the past 40 years, and it is already possible to see what is likely to happen:
- One obvious point of connection is that “as we age, we driver fewer miles“, as the US Dept of Transport notes
- Their data shows those aged 74+ drive 60% fewer miles than those aged 34 – 43
- Not only do the kids no longer need a taxi service, but retired people no longer need to drive to work
It is also becoming clear that we are only in the very early innings of these changes. One key trend, as the blog will discuss tomorrow, is that older Boomers are now choosing to move back into cities in large numbers.
Companies that missed the first wave of these changes are already on the back foot. They need to catch up quickly, before they are completely left behind.
THURSDAY EVENING UPDATE: 43% of US homes were bought with cash in Q1, according to RealtyTrac. This was more than twice the 2013 level, and confirms not only the shakeout now underway in mortgage lending, but also the weak outlook for housing itself. First-time buyers are being priced out of the market, and can’t easily get mortgages as they are more likely to belong to lower-earning minority communities.
Q1 saw record global auto sales volumes, as the chart above shows:
- US and EU manufacturers cut prices and offered great financing deals to boost sales
- Chinese buyers raced to beat new quota restrictions on the main cities
- Japanese consumers brought forward purchases ahead of April’s sales tax increase
- Only India disappointed of the 5 major markets, with sales continuing to slip as the economy slows
- Overall, 2014 sales at 14m (red square) were up 8% versus 2013 (green line)
This may well mark not only a temporary peak, but also an absolute peak, however. US and EU sales should continue to be supported by major incentives in Q2. But China will probably slow as quotas and credit tighten, whilst Indian manufacturers are cutting 200k jobs as the auto sales slump continues.
Japan sales are forecast to fall 15% due to the sales tax, and will clearly continue to decline. 1 in 4 of its population is now over the age of 65, and there are almost as many people aged 75+ as there are children aged under 14. Equally important is that the working age population continues to hit new lows each year as the overall population declines.
WORLD NOW REACHING ‘PEAK CAR’ MOMENT
More important for the long-term, as Bloomberg report, is the fact that the world is reaching its “peak car” moment. As the blog has noted before, the average car is only driven for 1 hour a day. Car sharing, as argued by BMW and Mercedes, is clearly a far more affordable business model for cities in the future, as it operates on a ‘pay to use’ basis.
The key issue is that cars are only a mechanism for going from one place to another for most people. Only a minority of people actually like owning and driving them. So the need that will be filled in the future will be for ‘mobility’, not car-ownership. This has major implications for anyone supplying the car industry, of course, as we describe in chapter 9 of Boom, Gloom and the New Normal.
The arguments against further increases in car volumes speak for themselves:
- Each vehicle in a car-sharing fleet replaces 32 new car sales, according to Alix Partners
- Even the current level of car-sharing has reduced total US sales by 500k
- Self-driving cars such as Google’s offer greatly improved journey times, if they can operate safely
- Younger people no longer see car ownership as part of growing up, and prefer to live in walking neighbourhoods
- Gridlock and pollution make the practicalities of more cars in towns impossible
Of course, it is always hard to accept that major change is inevitable. As Bloomberg report, the world’s first urban planning conference in 1898 spent its time worrying that an inevitable rise in the use of horse-drawn vehicles would lead to manure levels reaching 3rd-storey windows in New York.
As General Casey argued recently, leaders need to learn to “see around corners“. They must resist the wishful thinking that says things will never change. The coming decline in global car sales will be a good example of his message coming true.
Major change seems underway in the auto industry, as BMW joins the list of those entering the car-sharing market with its DriveNow electric vehicles. As BMW’s Tony Douglas noted at their launch:
“Our core business in the ’70s was selling cars; in the ’80s, late ’70s came the great innovation of leasing and financing. Now you can pay per use of a car. It’s like the music industry. You used to have to buy an album, now you can pay per play.”
We all know what has happened to profitability in the music industry supply chain as a result of iTunes and other disruptive business models. Mass markets such as cassettes and other packaging simply disappeared.
Now the auto market is facing similar challenges as demand grows for cheap, convenient mobility. With Mercedes and BMW arriving on the scene, it would be a brave supplier who decided to ignore the potential for rapid change. As the Wall Street Journal notes, many investors are now losing money on toll road contracts, having imagined that:
“Tolls provided a reliable income stream and that toll revenue would only increase as Americans drove more miles losing money…. U.S. driving peaked at 3 trillion miles in 2007, then started on its largest decline since World War II. The housing bust crimped development plans along new roads, helping render traffic forecasts inaccurate.
One key driver for change is the fact that young people are less able to afford car ownership. Only four out of five (81%) young male Americans held a driving licence in 2010, compared with 93% in 1995, according to BMW’s Institute for Mobility Research.
Affordability, as we have argued in Boom, Gloom and the New Normal, is thus becoming a critical factor in auto and other markets. The SuperCycle concept of ‘value-added’ increasingly now only applies to luxury segments.
Another response to the affordability issue has come from Chrysler. They have borrowed an idea from venture capitalists called crowd-funding, as a way of helping potential owners to buy a car (Chrysler’s site is pictured above). As the New York Times describes :
“Chrysler’s Dodge brand introduced the industry’s first crowdfunding program in January. Friends and family can contribute to a potential buyer’s Dart fund by sponsoring different parts of the vehicle, like the engine, the heated seats or even the antenna. Users are encouraged to customize their vehicles and then use Facebook and Twitter to announce their goal and solicit donations and gifts.”
Other companies such as Hyundai have followed – offering a $500 credit towards an eventual purchase. Whilst Toyota have just announced a partnership with Google called Collaborator – a social networking site that allows friends and family to swap ideas about the car of their dreams.
It is clearly too early to be sure which of the new business models will turn out to be winners. But current suppliers to the industry should beware of complacency in the face of the potential changes ahead:
- US new car sales have done well this year, given a temporary boost by the availability of cheap financing deals and the high cost of used cars
- But inventories are building, and at 76 days (3m cars) were the highest November figure since 2005
- Without a constant flow of new, younger drivers, the current boom will prove short-lived
- The idea of young people having to crowd-fund for a car only emphasises the challenges that the industry faces
At the moment, the blog would certainly put its money on car-sharing models such as Mercedes Car2Go. This now operates across Europe, and has over 3000 cars in 10 US cities. For example, it offers one-way rentals in Washington DC and elsewhere for just 0.38c per minute, with parking and fuel costs included
Its value proposition, given that the average car is used for just 1 hour a day, is very clear. And it is already seeing major and rapid growth as a result. But just think what impact this might have on auto production and sales in 5 and 10 years time.