rss icon

Sunday, 21 August 2016 14:08

Held back by lower incomes, millennials put off new car buying as price tags rise

Written by 
Rate this item
(1 Vote)
Automotive industry analysts predict that millennials will enter the new car market slowly over time, particularly as they start to have families. To date, their new vehicles of choice have been compact crossovers like the Chevrolet Trax, upper left, and Jeep Renegade, right. Additionally, automakers have responded to millennials’ demands for more consumer electronics integration by offering systems like CarPlay from Apple, lower left. Automotive industry analysts predict that millennials will enter the new car market slowly over time, particularly as they start to have families. To date, their new vehicles of choice have been compact crossovers like the Chevrolet Trax, upper left, and Jeep Renegade, right. Additionally, automakers have responded to millennials’ demands for more consumer electronics integration by offering systems like CarPlay from Apple, lower left. Photo Courtesy of Fiat Chrysler Automobiles

To move beyond a looming sales plateau, automakers will need to appeal to the generation they’ve long-feared prefers car-sharing services and cycling to owning automobiles. 

That’s according to automotive industry economists, who note that millennials — the generation many thought might shift buying habits for good — have started to enter the new car market, albeit slowly. 

“We do see millennials starting to come in,” said Steven Szakaly, chief economist with the National Automobile Dealers Association (NADA). “They are interested in cars and they’re starting to buy cars. But the question is why are they delaying these purchases?” 

According to Szakaly, the answer comes down to fundamental economics.

“We all know they are getting married later, we all know they have student loan payments, (but) we also should realize that on average they make a lot less money,” Szakaly said during a presentation at the annual Management Briefing Seminars hosted by the Center for Automotive Research in Acme, Mich. 

Vehicle costs have have risen steadily over the last decade in a climate of tepid wage growth, causing consumers’ monthly car payments as a percentage of household income to rise from 9.5 percent in 2005 to 12.5 percent in 2014, according to NADA data. 

Average consumers now pay $503 a month for their vehicles. While that may be doable for some younger buyers with higher incomes, millennials are far from average when it comes to spending power, Szakaly said. 

Millennials earn approximately $31,500 in annual wages on average, far less than the consumers earning $80,000 a year who do the majority of car buying, he said. In addition, only 29 percent of millennials make more than $100,000 per year, compared to the 52 percent of baby boomers and 52 percent of Gen Xers making more than the same amount.  

In short, this income disparity amounts to a pricing problem for the automotive industry, according to Szakaly. 

“A big question is how much bigger these payments can actually go,” he said. “How much more you can stretch the budget of these consumers and get them to continue to purchase these ever more expensive vehicles?” 

It’s likely that those pricing pressures won’t abate anytime soon, as automakers continue to increase costs to compensate for warranty pressures and new technology mandates, sources said. 

Of the millennials who are buying cars, the majority of them are doing so because they’re having children. A recent nationwide survey conducted by NADA found that 52 percent of millennials bought a new vehicle because their family needs changed. 

For Szakaly, the research indicates that millennials are still a few years away from fully entering the car-buying market. 

“(We’re) looking for at least another five, maybe even seven years before the generation really has an impact on this market and can fill the gap from those baby boomers,” he said.

PURCHASING TRENDS 

To attract the limited pool of millennial car buyers, automakers have focused largely on integrating consumer electronics into their vehicles as a selling point. It’s a strategy rooted in consumer demand: Millennials listed updated technological content as their second-most influential reason behind the purchase of a new vehicle, according to the NADA survey. 

“When you look at the infotainment integration and smartphone integration, it’s not for 60- and 70-year-olds that automakers are doing this,” said Mike Wall, director of automotive analysis at IHS Automotive, a market analysis firm.

Millennials also have been one of the driving forces behind the growing popularity of smaller vehicles, including compact crossover utilities, which often come with a corresponding smaller price tag compared to their larger cousins, Wall said. 

Purchasing preferences by millennials, coupled with lower gasoline prices and other consumer desires, have made segments such as crossovers and trucks popular at the expense of other segments, notably sedans, sources said.

Going forward, analysts predict that more than 40 percent of North American production through 2020 will be dedicated to SUVs, according to data from LMC Automotive. Meanwhile, pickup trucks are expected to represent a steady 15 percent of the segment.

“(Crossovers) are the hottest pistol in the market,” said Sean McAlinden, vice president of strategic studies and chief economist at CAR, during a presentation at the Management Briefing Seminars. “If it doesn’t have a hatch or bed, it’s not selling. If it has a trunk, get it out of here — send it to the auction.” 

Read 1879 times
John Wiegand

Staff writer

[email protected]

Breaking News

April 2017
S M T W T F S
26 27 28 29 30 31 1
2 3 4 5 6 7 8
9 10 11 12 13 14 15
16 17 18 19 20 21 22
23 24 25 26 27 28 29
30 1 2 3 4 5 6

Follow MiBiz