Investing

As Americans Keeps Cars for Over 11 Years, Industry Has Reason to Worry

Douglas A. McIntyre

Published: November 23, 2016 6:10 am

Last Updated: January 12, 2020 5:29 pm

Car and light truck sales have risen from just above 10 million per year in 2009 to 17 million. And earnings among car makers have rebounded from the period when GM (NYSE: GM) and Chrysler were forced into bankruptcy. However, the industry faces a new threat: the average car on the road is 11.6 years old and getting older.

According to research firm IHS Markit, the number of cars owned  has also risen:

The average age of light vehicles in operation (VIO) in the U.S. has once again climbed slightly this year, to 11.6 years.

Registrations for light VIO, including cars and light trucks (SUVs/CUVs as well) in the U.S. also reached a record level of more than 264 million – an increase of more than 6.2 million (2.4 percent) since last year. This represents the highest annual increase the auto industry has seen in the U.S. since it began tracking VIO growth – breaking the record of 2.1 percent growth set in 2015.

And the consumer habit of holding cars longer and longer is getting more pronounced:

The oldest vehicles on the road are growing the fastest – with vehicles 16 years and older expected to grow 30 percent from 62 million units today to 81 million units in 2021. IHS Markit research also indicates more than 20 million vehicles on the road in 2021 will be more than 25 years old.

Many auto industry experts have forecast U.S. sales will peak soon. The reasons given are a lag in consumer spending, which comes as the economy begins to cool. Alternatively, interest rates could rise enough that incentives like “0% financing” might go away. Incentive wars are already listed as among the threats to industry profitability.

Ironically, one of the factors IHS Markit lists as a cause of longer car ownership is car quality. Research into cars defect rates from J.D. Power shows that car quality continues to rise. The industry has become its own worst enemy.

The IHS Markit data show auto manufacturers might face a perfect storm. A combination of quality, rising interest rates, and an economic slowdown would pose a challenge the industry has not faced in years.

U.S. monthly car sales increases have flattened recently. The aging of the American car may well drive the numbers from flat to reverse.