Transportation Disruption

Updated: Oct 16

Why global car ownership is falling


For more than a century, transportation in the United States and across the industrialized world has been dependent on manually operated internal combustion engine (ICE) cars and trucks. But disruptive technologies like electric vehicles (EVs), mobility platforms like Uber Lyft & Turo, autonomous self-driving technology, demographic trends like aging and urbanization, and cultural trends like environmentalism and the services economy are threatening entrenched industries including oil companies, ICE manufacturers, car and truck dealerships, gas stations, auto mechanics, railroads, car insurance companies, and brick & mortar car rental companies.


Update: This article was originally published in the summer of 2019. We updated it on October 16, 2020 to assess the sustainability of the recovery in auto sales. COVID19 hit manufacturing hard as is evident in the chart below, but demand for cars bounced quickly in part because many depending on public transportation were forced to buy a car while taxi services, trains, and planes were largely closed. We evaluated our thesis and determined that after opening we still expect global auto sales to continue falling post re-opening.



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Falling demand for vehicles


Global ICE car and commercial vehicle production peaked in 2016 and has been falling ever since. Cars (which includes light trucks) were flat in 2017 and fell last year. The last time that happened was during the 2008 Global Financial Crisis. Two years of falling production is not definitive proof that production will continue to fall, but it does beg an explanation. Global economic growth actually accelerated in 2017 and oil prices remained low. One might blame the 2018 drop in part on the USA China trade "war", but we have not come close to a recession and that would not explain 2017. So why did production fall?

Analysts generally view the two year decline in global auto demand as temporary. Statista views from 2016 (below) are roughly representative of consensus with forecast with some like JPM (2018) pointing to slower growth and Exxon (not surprisingly) pointing to faster growth (also 2018).

None of the major investment banks or mainstream global energy agencies that make these types of forecasts (ex. Internal Energy Administration) saw the flatlining of car sales (not including commercial vehciles) below.


Mainstream explanations for the flatlining of car sales and drop in overall automotive sales globally center on the "Trade War". But the Trade War with China didn't really start until July 2018. USA vehicle sales peaked in 2015Q3 (dark blue below), nearly three years before the Trade War started. GDP growth in China (green below), USA, and Europe (purple below) in 2017 wasn't enough to stop global vehicle sales from dropping from 2016 to 2017. 

Source: https://fred.stlouisfed.org/graph/?g=o4ps


Global economic growth in 2016-2017 was also insufficient to drive up gasoline demand. Gasoline consumption has essentially been flat since the financial crisis. That's relevant because it is strongly correlated with demand for automobiles. Only about 0.5% of global automobiles are fully electric, so flat gasoline consumption in the world's largest economy should at the very least be raising eyebrows.


The Trade War has certainly had some effect on auto demand ... especially in China where GDP growth is down considerably since 2017. But other statistics point to the drop in recent auto sales as being part of a longer term trend. Total vehicle miles driven in the United States is rising, but only because of slowing population growth. After adjusting for population growth, miles driven per capita is also falling since late 2017 and still below its peak in 2015Q2. People in the United States are driving less...and so is the rest of the industrialized world.

Source: https://fred.stlouisfed.org/graph/?g=o4pP


Don't count on emerging markets (EM) to pick up the slack. China is a harbinger of things to come for other EMs. Total car sales in 2017 were nearly flat despite the Trade War starting in mid 2018. The Baker Institute is forecasting peak demand in China for gasoline around 2021-2022. Car sales could pick up in China, but only because of electric vehicles (EVs). Other EMs will follow because the infrastructure costs required for building out gasoline supply chains are cost prohibitive now that EV total cost of ownership is already cost competitive with ICE vehicles.

Why is global auto demand falling?


We identify eight forces driving the fall in auto demand. These forces have been growing and new forces are poised to accelerate this growth. We believe that these forces are the only realistic explanation for why auto demand peaked during synchronous economic expansion in in 2016-2017...at least 6 months before the Trade War had any material effect on organic auto demand.


Factor #1: Mobility as a service (MAAS)


MAAS is the trend toward renting transportation. Leaders in this trend include ride-sharing platforms like Uber and Lyft, car rental services including traditional players like Hertz and Avis plus new peer-to-peer (P2) platforms like Turo. Many other companies are accelerating the trend toward MAAS including better integration of traditional mass transportation options on mobile apps and Micromobility technology like electrified scooters and bike sharing. MAAS is making it easier to not own a car. While some aspects of MAAS still require cars (ex. Uber drivers need something to drive) the taxi model increases car pooling and decreases demand for "bells and whistles". People are increasingly just looking for a cheap way to get from A to B ... and MAAS is delivering.


Factor #2: Micromobility


Micromobility is a rapidly growing component of MAAS that includes electrified scooters and bike sharing. Micromobility was made possible by the mobile smartphone, but has accelerated in recent years because of improved battery technology. Last year, this segment grew at 140% to 84 Million rides thanks in large part to an explosion of scooter companies. The median scooter trip is only 1.5 miles, but many go much longer than the 6 mile average Uber ride. As Cities adapt to accommodate more micromobility services they are likely to become even more competitive with car taxis. Total car taxi trips per day were about 900,000 by the end of 2018. Falling traditional taxis are putting a drag on Uber and Lyft growth so by 2020 total car taxi rides per day might be only 22% higher or 1.1 Million. Micromobility, in contrast is growing much more rapidly. At its current growth rate of 140%, micromobility will account for around (201/365=) 552,000 trips per day or about half that of car taxis by 2020. By 2021 micromobility would equal that of car taxis.


Not all cities have reacted favorably to this explosion in micromobility because of safety concerns, but many find the scooters to be an improvement, and no governments are pushing back on expanding bike lanes. If trends in China and Europe are any indicator, US cities will also make room for electrified bikes and scooters.


Factor #3: Urbanization and the Aging Population


Cities in the United States are different than most of the world in that they were built around the car. In Europe and China, cities have separated infrastructure for cars and bikes. US urbanization coincided with the rise in the Automobile. In contrast, European and Chinese cities existed long before cars existed. The USA has a long way to go before its cities are safe and easy to traverse for pedestrians cyclists and electric scooters. This suggests that a lot of car owners in cities may be able to "cut the car cord" in coming years. Additionally, an increasing percentage of the population is too old to drive. There is also increasing awareness that Great Grandpa probably shouldn't have the keys at 85. This is leading more families to either send their aging parents to nursing homes (which don't require cars) or have them move in (which leads to more car pooling).


Factor #4: Cars are getting expensive and complex


Cars technology like electric vehicle (EV) batteries, autonomous cars, new safety features are making it harder to shop. Buying a new car is a long term commitment. Rapidly improving technology could be making some consumers wait a bit longer to see what's next. These new technologies are also contributing to higher sticker prices. Only about 35% of new cars are now priced under $30,000, compared with 54% in 2012. Many US auto makers like Ford are increasingly pushing for more expensive SUVs and hatchbacks because of the higher margins.


At the other extreme, Chinese auto maker "Build Your Dreams" (BYD) is a best seller with taxi drivers. BYD sells an EVs for under $15,000 (after incentives). Passengers don't care what they are driving in so cheap EVs with their lower cost of fuel and maintenance are ideal for taxi service. If anything can turn the total car sales trend up it's super cheap EVs.


Factor #5: Regulatory uncertainty


Governments in Europe and China are aggressively moving away from ICE cars and trucks. Denmark just decided last weekend to ban all ICE sales by 2030. This effectively makes the resale value of any ICE vehicle bought today equal to scrap metal in ten years. Shanghai residents have to pay a $10,000 for a license to purchase an ICE automobile. In contrast, China is rapidly growing charging stations and incentivizing EV sales. It won't take many countries doing this before impacts on ICE resale values start to flow into neighboring countries. As of 2018 only 2% of total vehicle sales were EVs. It's no wonder consumers are taking a pause on purchasing a new vehicle given the rapid price declines in EVs relative to ICE and global push away from fossil fuel dependent transportation.


Factor #6: Income Inequality


Income inequality has been growing across the world since around 1980. The chart below shows this trend for the USA but is essentially the same trends can be seen in Europe, Asia and across emerging markets. That's a problem because, as already mentioned, auto prices are rising. Adding new capabilities to cars is a great way to cater to top income earning households, but it not great news for may families. Low and moderate income households across the world are looking for ways to cut costs and automobiles are the second largest expense.


Factor #7: Cultural shift toward services


Americans have been shifting toward services across many markets. Homeownership is a great example. In 2005 the homeownership rate peaked at 69.2% before falling to a low of 62.9%. It remains to be seen if homeownership rates will fall below pre-housing bubble levels, but the shift toward services can be seen across multiple markets. People are far less likely to buy movies and music today, preferring instead to rent from online platforms like Netflix, Hulu and Youtube. The USA clothing rental market grew by 23% last year. Renting clothes? Really? Yes, consumers are getting more comfortable with renting even if it involves driving with strangers and wearing someone else's prom dress.


Will these trends in housing, music, movies, and clothing spill over to car ownership? We think so. Digital is taking over the physical. People used to rely more on "stuff" to signal their social status. Today, people are far more likely to use social media and other digital channels to show off than fancy houses and expensive cars. Where you live and what you drive matters less in a world connected instantly through the internet. The result? People will increasingly view transportation as a service rather than a tool for self-expression and social signaling.


Factor #8: Environmentalism


Pollution in China is now a national security issue for the Communist Party. That is why they are incentivizing EV purchases and building out charging stations across the country at an unprecedented rate. Environmentalism is increasingly a priority for voters across the industrialized world as well. Despite the French protests against taxing carbon, USA democrats are demanding a "Green New Deal". No one seems to know what this deal will involve specifically. But the front runners in the Democratic primary (ex. Joe Biden) are lambasting oil and automotive companies for their failures to protect the environment.


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Taken together, it's not surprising that miles driven per person is actually down in the United States since peaking in 2005. The immediate fall in 2008 was clearly caused by the financial crisis, but even with the 10 year bull market in stocks, steady rise in economic growth, and longest ever uninterrupted increase in jobs...vehicle miles has been flat and even barely falling over the past two years.


Winners and Losers


The consumer is the clear winner. Households around the globe are beginning to reap the benefits of a new model for transportation ... a model based on transportation as a service. The music industry was once build around selling records and CDs. Today, music is sold as a service; either individually or as a subscription. People still buy CDs ... for the same reason as people buy records. It's a luxury. The same will soon be true for cars. The result will be a major reduction in the second largest expense in the typical industrialized household budget.


The lifecycle of car ownership is ripe for disruption. The trend away from car ownership will give households more cash to spend on things more enjoyable than haggling over prices with car dealers, losing 30% of your new purchase value the moment you drive off the lot, paying car sales taxes, frequenting gas stations, calling road side assistance, getting an oil change, and trying to get a fair price on a trade-in...in other words...anything but owning a car. The whole process of buying, owning, and selling a car is a miserable experience that we go through because we had to...until now.


Losers


A long list of entrenched industries including brick & mortar car rental companies (BMCR), oil companies, ICE parts manufacturers, ICE car dealerships, ICE mechanics, and ICE auto manufacturers could be disrupted. Transportation is changing rapidly. It's hard to see who will end up on top, but it is clear that transportation is getting more competitive and a lot cheaper.


Conclusion


The eight factors discussed are not new...they are here and they are growing. Global cars sales are down and so are miles driven per person because of:

  1. Mobility as a service (MAAS)

  2. Micromobility

  3. Urbanization and the Aging Population

  4. Cars are getting expensive and complex

  5. Regulatory uncertainty

  6. Income Inequality

  7. Cultural shift toward services

  8. Environmentalism

These factors are making transportation cheaper. That's great for consumers, but could make things tougher for oil companies, ICE parts manufacturers, ICE car dealerships, ICE mechanics, and ICE auto manufacturers. By the time we get autonomous (self-driving) cars the transition to electrified transportation as a service will already be well under way.


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