Demographics cloud future of U.S. auto sector

6/26/2012

While U.S. auto sales have rebounded this year, the industry faces a tough road ahead due to lingering high unemployment, increased costs and more people driving less, according to a new study.

The market has five million fewer potential car buyers today than five years ago, consulting firm AlixPartners concluded in an industry report released on Tuesday. It also predicted U.S. new car sales would reach 14.3 million this year, up from 12.8 million in 2011.

“It’s long been a truism that if people don’t have jobs, they don’t buy cars,” said John Hoffecker, AlixPartners managing director and head of the firm’s auto practice.

“Given lingering low employment in this country, plus the fact we estimate that in the last decade incentives (shifted from future sales) more than 18 million units of sales, we see true, underlying demand being a big issue for the industry going forward,” he added.

AlixPartners predicts demographics are expected to be responsible for up to 15 percent of the lower underlying demand in North America — about 13 percent due to reduced vehicle use by baby boomers, and 2 percent from younger consumers driving less.

“The American auto industry is about to see the rise of Generation ’N’ — as in ’neutral about driving,’” said Mark Wakefield, a director in AlixPartners’ automotive practice.

“This cohort, which is as big as the Baby Boomer cohort and which grew up on the Internet and not so much on cars, could well present the industry with an even greater challenge in the area of reduced fundamental demand,” he added.

AlixPartners pointed out if the percentage of total driver licenses was simply constant with 2000 levels, the potential vehicle market today would be an additional 5 million vehicles.

Among other findings in the study: auto parts suppliers have seen flat profitability as overall costs have risen, even with increased production and lower raw-material costs.

Also, bearish valuations in the auto sector may offer strategic buying opportunities — potential mergers and acquisitions — both among North American suppliers and automakers globally, especially in Europe.