A New Decade For Automotive Industry Economics

Author

Liberty Advisory Group

In 2022, China was the largest seller of automobiles, increasing year-over-year sales by 10% and outpacing the US by nearly 10 million vehicles. Understanding the regional factors affecting automotive industry economics and how they may impact OEMs is the focus for this installment of Ed McCarter’s automotive industry analysis.

Note: This is part 2 in a series, so read part 1 for further context.

A Snapshot of Automotive Industry Economics

Previously, Liberty Advisor Group’s Ed McCarter studied the evolving preferences of US consumers in terms of vehicle class and powertrains. They also investigated factors encumbering the adoption of electric vehicles (EVs) and what can be done to transcend commercial and technical impediments.

Here, we focus on global economic conditions and their impact on auto markets. We start by examining the world’s largest automotive market – China – and why sales have contracted since 2017, which is in contrast to strong numbers seen in the US and Europe. From there, the effect of increasing car prices on American household debt is analyzed and what the near to mid-term implications may be for original equipment manufacturers (OEMs).

Tail End or a New Tale? Chinese Auto Sales 

The Chinese auto market has an outsized impact on global sales, where it represents nearly 30% of commerce. This impact is illustrated in Figure 1, where six years of global sales along with the three largest markets are depicted.1 However, in 2022, Chinese auto sales skyrocketed by 10% compared to the previous year, hitting a whopping 23 million vehicle sales.

 In the US, sales were strong and stable from 2014-2019 as evidenced by a near-neutral compound annual growth rate (CAGR) of 0.3% and average annual sales of 17.5M vehicles. In the last year or so, however, US car sales have taken an 8% dip in the last year, with sales totalling just over 13 million units. Europe’s CAGR is an impressive 3.3% with a yearly average of 17.2M sales, which aligns well with the region’s year-over-year positive trajectory.

China’s CAGR over the same horizon was 1.5%, but this number is misleading as the market experienced strong growth and then a sudden drop. This is a significant deviation from the US and Europe and necessitates a closer examination of the opposing cycles. Focusing on the growth portion, the CAGR from 2014 to 2017 was 5.3%; an enviable number that any marketplace would like to emulate. From 2017 to 2019, however, the CAGR shifted to 3.7%.  So, what led to this oscillating trend that is in stark contrast to the US and Europe?

Figure 1:  Annual Sales of Passenger and Commercial Vehicles

Total Sales of Commercial Vehicles

Analyzing economic conditions and government programs provides insights into China’s sales pattern, and the following three factors help to clarify what transpired in the Chinese automotive market.

China’s Gross National Income (GNI)

According to The World Bank, China’s gross national income (GNI) per capita has steadily increased, from $13,460 in 2014 to $19,160 in 2021.2 While this is not an exact measure of average and disposable incomes, it does suggest that Chinese consumers had greater means to purchase a vehicle during the positive growth phase. Beyond that segment, however, additional insights are needed as the increasing GNI does not support the auto market contraction from 2017 to 2019.

New Policies Affecting Vehicle Sales

In 2009, the Chinese authorities implemented a tax incentive for vehicles with 1.6L engines (and those with smaller displacements as well) where the rate was cut in half from 10% to 5%.3 This move had a remarkable effect on the auto market as sales more than doubled over the next 8 years – from 13.6M vehicles in 2009 to 28.0M in 2016 – and was a contributing factor to the growth phase shown in Figure 1.4 

This rapid rise in car ownership, coupled with concerns about the environment and excess capacity, led the government to reduce the incentive to 7.5% in 2017 and discontinue it in 2018.5 As expected, this had a cooling effect and helps to explain the negative segment of the cycle. Additionally, the Chinese environment ministry announced in 2023 that they would implement new, stricter emission standards. This incentivized automakers to clear their inventories of vehicles that did not meet new standards, leading to deep discounts on those models.

New Energy Vehicle (NEV) Sales

Although NEV sales comprise a smaller portion of total vehicle purchases in China, they have been on the rise. In fact, in September 2023, overall car sales in China were up significantly on a year-over-year basis, with NEVs accounting for 36% of all vehicles sold that month. NEV sales were also up 22% year-over-year in September, which shows that  their impact is not negligible.6 As noted in Part 1, the Chinese government’s sizable incentives propelled the NEV market through 2018. Once reduced, however, NEV sales dropped 4% in 2019. More recently, these sales have seen booming growth. The establishment and subsequent diminution of NEV subsidies provides an additional insight into the oscillating sales trend.

Taking the above three factors in aggregate, along with decelerating GDP growth and the US-China trade war, which started in mid-2018, help to complete the picture of the growth phase and explain why 2017 became an inflection point for the Chinese auto market.7,8

Implications For the Future

What does this mean for the future? For one, China will still have a pronounced effect on the global automotive industry and it is predicted that the global sales (Figure 1) will continue to run parallel to China’s trajectory. In terms of actual sales, it is estimated that Chinese vehicle purchases will grow by around 3%, which aligns with recent forecasts from the Chinese Association of Automotive Manufacturers.9

US Auto Economics: Consumers Cannot Afford a Ford (or Other Brands)

According to Kelley Blue Book, the average price for new cars hit an all-time high in 2022 at $48,681.  (As a point of comparison, the average price in 2014 was $32,386, which is slightly more than $42,000 when adjusted for inflation.11) This is a substantial outlay for the typical American family where the median household income was $75,580 in 2022 (a 2.3% decline from the previous year.) What makes this price tag even more concerning are the increasing monthly payments and longer duration of car loans. According to Bankrate’s recent analysis, the average monthly car payment in 2023 for a new vehicle was $729 and has consistently grown since 2014.13,14 This has resulted in more buyers undertaking 7-year car loans, and is reflected in the following trend – in 2009 approximately 9% of loans were seven years in duration, a proportion that increased to nearly 25% in 2014 and 31.5% in 2019.15 By contrast, 4 and 5-year loans dropped from 14% and 36%, respectively, in 2009, to slightly more than 7% and 20% in 2019.

Broader Effects on the Economy

These increasing auto prices and corresponding loans have had a broader effect on the economy: American auto debt grew faster than other types of consumer debt from Q3 2014 to Q3 2019. Today, things have unfortunately gotten worse; more than 100 million Americans have a car loan and total debt stands at $1.5 trillion — a record high. It should come as little surprise that this growing liability has had a negative impact; namely, the serious delinquency rate for auto loans now sits at 3.82%.

These micro and macro effects raise two key questions: (1) what is driving higher prices, and (2) what does it mean to the American automotive industry? As discussed in Part 1 of the report, consumers are buying more pickups and crossovers which are, generally, more expensive than sedans. Moreover, they are buying vehicles with premium packages such as advanced driver assistance system (ADAS) technology and enhanced entertainment features. Together, pricier vehicle classes and upscale content explain the increased transaction prices and subsequent outcomes in terms of higher monthly payments, longer repayment periods and the increasing load of household automotive debt.

Broader Implications of Automotive Industry Economics

On the surface, higher transaction prices for products with wider margins appear to be a boon for OEMs. The troubling aspect, however, is what the current level of auto debt means to future vehicle purchases. For instance, buyers with 7-year loans are effectively removed from the market over the same period. This does not prevent them from using their current vehicle to buy a new one, but the average negative-equity trade-in is $5,500. 

This purchasing pattern should worry automakers because consumers are carrying debt forward to purchase another product that will likely place them in greater debt. Another concern for OEMs is interest rates. Currently, average interest rates across all credit scores sit at 6.63% for new vehicles and 11.38% for used ones.  These rates are quite high, which begs the question: will consumers delay future purchases or assume more debt? 

These options, along with the growing level of national auto debt, do not benefit vehicle manufacturers. And it is for these reasons that the outlook for the automotive industry over the next two to five years should be viewed with caution.

Liberty Advisor Group Helps Auto Makers Drive Growth

Liberty Advisor Group is a goal-oriented, client-focused and results-driven consulting firm. We are a lean, handpicked team of strategists, technologists and entrepreneurs – battle-tested experts with a steadfast, start-up attitude. Our team, with an average of 15+ years of experience, has delivered over $1 billion in operating income improvement and over 300 M&A deals for our clients. We collaborate, integrate and ideate in real-time with our clients to deliver situation-specific solutions that work. Liberty Advisor Group has the experience to realize our clients’ highest ambitions. Liberty has been named to the 2019 Best Places to Work in Chicago and to FORTUNE’s list of Best Workplaces in Consulting and Professional Services.

Liberty’s hands-on automotive experience is why we are able to understand and appreciate the challenges that our clients face. The advisors in our Automotive & Mobility Practice do not have generalist backgrounds – they are Engineers and Computer Scientists who are passionate about the auto industry and how it continually evolves. Further, they have worked across the entire vehicle development lifecycle along with the critical organizations that are responsible for bringing sedans, trucks, crossovers and SUVs to market.

About the Author

Ed McCarter is a Principal Consultant at Liberty Advisor Group. He graduated from Washington University in St. Louis with a BS in Systems Engineering and Economics & Strategy. Ed’s focus at Liberty has been on complex enterprise technology systems and highly engineered products, specifically in the automotive space.

Author

Liberty Advisory Group

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