Earlier today Bloomberg posted the following chart comparing new vehicle sales in the United States to scrappage rates of old clunkers. Now, what should immediately catch your eye (even without the huge red circle we felt compelled to add), is the fact that new car sales have been massively outstripping scrappage rates for the past 5 years.
Of course, as many of you will undoubtedly note, there are plenty of legitimate reasons why new car sales may outstrip scrappage rates in certain markets. We completely agree...but, unfortunately, none of them apply to the U.S. automotive market.
One reason could be that the market is simply under-penetrated. That said, with a fleet of ~265mm light vehicles on the road today vs. a driving age population of only ~255mm people, or just over 1 car per person, we would say the market is fairly penetrated.
Another possible explanation for this phenomenon could be population growth. Taking a look, we find that new car sales outstripped scrappage by about 5 million units in 2016 which, on a base of 265 million vehicles, implies population growth of 1.9%. Unfortunately, the U.S. population is growing at exactly one-half that rate...
Which leaves us with one remaining explanation: a massive debt and lease-fueled auto bubble that has been sparked by a ridiculous buying spree courtesy of everyone with a pulse suddenly rushing out to trade in their 10-year-old Maxima for a brand new BMW....because you can 'afford' it so long as you can get approved for a 0% interest, 8-year loan which pegs your monthly payment at that magical $400 mark...
So what is a more 'normalized' auto SAAR for the US market?
Well, as we mentioned above there are roughly 265mm light vehicles registered in the U.S. today compared to only 255mm driving age people, or just over 1 car per driver...which seems somewhat reasonable.
Now, putting aside population growth and other metrics for a moment, if only 13 million cars are getting scrapped each year, that implies a 20-year average useful life and a 'normalized' annual SAAR of 13 million...not that complicated but somewhat inconvenient for the auto OEMs.
The problem is that the useful life of cars has actually improved dramatically over the past 20 years which only makes the 'normalized' number even worse. Per data from the Bureau of Transportation, the average age of vehicles has increased at a CAGR of 1.6% per year over the past two decades...more than enough to offset population growth.
Just to illustrate why that is a problem, the following table shows the implied U.S. auto SAAR based on varying useful life assumptions....each 1 year expansion in a vehcle's useful life cuts about 1mm out of required annual sales.
Said another way, in order to maintain the 18mm annual selling rate of vehicles that the US obtained in 2016, each driving age person would have to own 1.4 vehicles. Now, while we fully understand there are a minority of 'super users' of almost any product, we're pretty sure the average user only needs 1 car at a time.
In conclusion, with full penetration rates, increasing vehicle useful lives and the threat of autonomous vehicles increasing utilization rates, it's difficult to see how "normalized" auto sales aren't substantially lower than the current run-rate. Moreover, with interest rates starting to rise and auto buyers extremely sensitive to monthly payments, we suspect the auto SAAR game is reaching the end of it's useful life.