A huge jump in May US auto sales has both carmakers and investors feeling upbeat.
Citigroup analyst Itay Michaeli says that the biggest reason for the surge is younger drivers getting their first cars. And he believes US automakers can capitalise on this trend.
Michaeli’s analysis is based off Citigroup’s density survey. Basically, density is the measure of how many cars one household owns. Michaeli focuses on survey data that asks people if they are likely to increase their density (from buying a new car) in the next two years. Over the past five years, the only age group consistently saying they are planning to increase density is 18-34 year olds. In addition, the other substantial gain in predicted density is among 45-55 year old parents of children under 18, parents buying cars for new drivers in the house.
Between new drivers wanting the latest technology and parents worried about their kids, Michaeli emphasises the attractiveness of advanced driver assistance systems, or ADAS. He says by focusing on putting these technologies, such as land assist and collision warning, into small cars and crossovers, automakers can capture these demographics.
Looking at US carmakers entry-level cars, General Motors already offers both lane assist and collision warning in its Sonic and the new Spark will too. Ford, however, only offers such technologies as a package in its Focus but not Fiesta. Additionally, ADAS suppliers stand to reap the benefits if automakers try and attract young people.
This trend matches up with the growing percentage of the population that are Millennials, those born after 1980, and their ever-increasing influence on spending. A report on Millennials from analysts at Bank of America Merrill Lynch seems to agree with Michaeli, saying that despite slow income growth since the recession, millennials are steadily finding jobs and beginning to spend more.
The Merrill Lynch report does offer some warning regarding Millennials and cars. Says the report:
“Millennials are less car-centric than previous generations. Obtaining a driver’s licence was once a rite of passage for teenagers, but Millennials are in no hurry to get behind the wheel. Vehicle miles driven by Millennials have declined throughout the recession, and the rate of licensed drivers in the Millennial age range is at its lowest point.”
For instance, in 1975 Baby Boomers age 20-24 made up nearly 14% of all licensed drivers. Today, Millennials of the same age make up just 8%. The Merrill Lynch analysts also highlight higher levels of Millennials using public transportation and bikes.
Despite the seemingly bad news, Merrill Lynch notes that the recession did stunt the financial growth of millennials. With stronger job markets and increased wages, home and car ownership should follow soon.
The value of millennials to a business is no surprise as they are coming into their prime spending years and should have massive buying power growth in the next five years. Both Michaeli and Merrill Lynch’s analysis point to them continuing to drive car sales and provide significant value to an automaker that can capture them.