High legacy costs for retired workers were a huge burden that didn’t affect foreign competitors. Union workers held onto benefits negotiated during better times as tightly as they could, even as the company’s overall health suffered. Both Ford and GM focused production on expensive gas-guzzuling SUVs and trucks, which lost popularity as oil prices hit record highs.
Fast forward five years, and North America’s auto industry is in much better shape. General Motors is experiencing a bit of a hiccup, with company execs being hauled into Congress to answer questions about a faulty ignition problem that was allegedly known for the better part of a decade, but both it and Ford are healthy and selling plenty of cars.
In fact, car makers around the world are adding capacity aggressively. The economy continues to recover, meaning more people are in a car buying mood. The average car on the road today is more than 11 years old, meaning there are plenty of drivers not driving anything remotely new. Current worldwide auto production is about 85 million units per year. Capacity is being added to up production to 120 million units annually by the end of the decade.
But what if consumption didn’t follow this trend? Sure, plenty of people in the developing world are just getting to the point where they can afford cars, but there are other reasons besides the price of the newest model that might persuade them toward not buying a car.
Is the high average age of current cars on the road an indication that customers are about to replace their cars en masse? Or is it because the average car is safer, built better, and has fewer mechanical issues than previous generations of vehicles? Is the auto industry a victim of its own success? If my 12-year-old car is any indication, the answer is yes.
As more people move to larger cities, driving becomes more of a luxury than a necessity. If parking downtown costs $20 or $30 a day, getting a $100 per month transit pass is a no-brainer. Some people might take that logic a step further and forego the car altogether. Congestion is also an issue, especially in older cities that just don’t have the room to accommodate a large number of vehicles. And wherever congestion becomes an issue, pollution isn’t far behind.
Car sharing programs are starting to become popular in North America. Experts estimate that for every one vehicle in a car sharing fleet, automakers lose the sale of 32 vehicles. It’s obvious car sharing is a trend that will continue to grow in popularity.
In the United States in 1983, more than 87% of 19-year-olds had their drivers’ license. By 2010, that number had shrunk to just 69.5%. Americans just aren’t as interested in driving as previous generations.
Bloomberg predicts that worldwide auto sales could peak at just a little over 100 million units per year, well short of the capacity coming online. It this is the case, it spells weakness for auto makers in general.
It also means weakness for some of Canada’s largest auto parts companies, like Magna International (TSX: MG)(NYSE: MGA), Linamar Corporation (TSX: LNR), and Martinrea (TSX: MRE). Each of these companies have performed well as the auto market has done well, and would be directly affected if global auto sales don’t grow as well as projections indicate.
Is China the answer?
Many auto investors are salivating at markets like China and India finally fulfilling their promise as the next big growth areas. North America is expected to continue to have strong vehicle sales going forward. But the underlying numbers show auto growth might not be as robust as expected. If that’s the case, investors will want to avoid the entire auto sector.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Nelson Smith has no position in any company mentioned in this article. David Gardner owns shares of Ford. The Motley Fool owns shares of Ford.