There is an interesting side story to the surprisingly deep and rapid drop in demand for new cars. Part of the blame for the drop can be attributed to the impressively successful marketing work within the auto industry over the past thirty years.
You will often hear analysts or commentators note that cars are necessities given that our entire way of living (where we live, how we buy, etc.) is based on a car culture. It is true that most of us in the United States depend upon our car to get through our daily lives. However, that fact no longer translates into car purchase decisions being approached as necessities.
For a large portion of the population, a new car is a luxury not a neccesity. There are two primary reasons for this shift.
1. Increase in cars per family. In 1970, there was an average of 1.25 cars per family. By 2005, the average was 2.3. During this time we’ve seen a significant shift towards two income families so we would expect the need for cars to increase along with the two income trend. However, the shift to two cars has increased family flexibility. If a car breaks down in a one car family, options to get to work are limited and the family will likely be forced to purchase a car. In a two car family, even with two working adults, family members can shift schedules to manage on one car for an extended time. I speak from recent experience here, thanks to the actions of an over-eager deer on a local highway,
2. Misalignment of marketing demand and product lifespan. This is the primary reason new cars are now luxuries. According to a study by R.L. Polk, the median age of passenger cars in 2006 was 9.2 years.
Over the past 30 years, auto manufacturers have poured marketing efforts into getting Americans to trade in their cars every 2-3 years. The average car age at trade in in the US is aproximately 6 years (I’ve found different statistics on this but the range is from 5.8-6.6 years). It is deceptive to focus on the average though. A significant minority of new car buyers routinely trade in their automobiles every three years. For these consumers, a new car purchase is a luxury and a big one at that.
This story is one of an incredible marketing success. Savy marketing increased demand for new cars. In good economic times, this has driven demand well above “car as neccessity” demand. Now we can see the dark side of this success. Because product marketing is not aligned with product lifespan, few people actually need to purchase a new car at any given time. Add in the glut of available used cars, due to supply based on the luxury product model, and you have the current situation of a deep and shockingly rapid plummet in new car demand.
The interesting question rattling around my head is what other industries have been successful in creating this misalignment of marketing demand and product lifespan? Housing comes to mind immediately. Anyone have others?
