As ride-sharing, longer-lasting electric vehicles cut into demand for new cars, haulers specializing in auto freight could see a decline
When the U.S. auto industry came roaring back to life, it was a boon for carriers who made their business hauling autos and related products. But as sliding sales in 2017 show, nothing lasts forever. And it’s possible that the future is even murkier for carriers who rely on the auto business for their livelihoods.
With fewer young people driving, an increasing fascination with electric vehicles and their longer lifespans, declining car ownership trends and the potential for more car-sharing services, the business of moving auto freight may be shrinking.
June represented the fourth straight month of declining auto sales. According to Autodata, sales were 2% below June 2016 at a seasonally adjusted annualized rate of 16.51 million units. That is the lowest rate since February 2015. The industry sold 17.55 million new cars in 2016.
Reuters noted that automakers were hurt by lower sales to rental agencies, which have been hurt by Uber and Lyft. GM, though, said that it expects the second half of 2017 to remain solid.
“U.S. total sales are moderating due to an industry-wide pullback in daily rental sales, but key U.S. economic fundamentals clearly remain positive,” said GM chief economist Mustafa Mohatarem. “Under the current economic conditions, we anticipate U.S. retail vehicle sales will remain strong for the foreseeable future.”
There is some concern, though, that the high sales volumes, particularly the large number of cars on leases, will dampen sales in future years due to a glut of used and off-lease vehicles hitting the market. And that may be just the start of the problems.
Where is the freight market?
The visible portion of the auto freight market is the thousands of auto haulers seen on the roadways moving new vehicles to dealerships. But that is only part of the market. All the components and parts that are part of the manufacturing process of new vehicles also need moving. In all, it’s believed that about 8% of the truckload market can be attributed to the auto industry.
Many of those parts are part of automakers just-in-time inventory systems and move as part of an expedited automotive market, which is worth some $2 billion in the U.S. and Canada, says Bob Poulos, CEO of V3 Transportation, an expedited freight solutions firm. Poulos says between 40% and 50% of V3’s business is tied to automotive.
“There is intra-year cyclicality and it follows production,” he says. “January and February are our slowest months. The only thing that may change that is when we see inclement weather that affects the supply chain. Our business spikes when you see supply chain volatility, either new models or production problems.”
Poulos says that business began picking up in May and has remained steady, but that demand is not as robust as recent years.
“We believe it is the amount of inventory being held by suppliers,” he notes. “I read publications and they all say that inventories across all industries are drawing down, but I don’t think that is the case in the auto industry in terms of components.”
Despite the declining sales in recent months, Poulos attributes current freight volumes to several new model changes set for the fall.
“There are model changes projected for this year and we are in the pre-production phase, which I think is one of the reasons our business has been picking up and we think it will continue,” he says, adding that V3 remains “cautiously optimistic” about the industry.
“I’ve been through so many of these cycles and the auto industry loves to throw out these numbers – we produced 17 million vehicles – and then we flood the market with vehicles,” Poulos says.
Once firms like V3 move all the components, finished automobiles roll off the assembly lines and it is the more visible auto haulers who take center stage. With so many new cars selling in recent years, it’s obviously been a good time for these carriers. Bill Schroeder, general manager of the Auto Haulers Association of America, an industry trade group, says that while things are good, inventory buildups are impacting the number of cars moved.
“There has been a significant buildup of finished but not sold vehicles in inventory between the factory and the dealers,” he tells FreightWaves. “You will see continued discounting of new vehicles over the next 3-6 months, with the hope that plant vacation shutdowns during the summer will help somewhat.”
Schroeder says that carriers are watching their balance sheet. Due to the specialized equipment used, when auto sales decline, there isn’t much an auto hauler can do to recoup lost revenue, so a keen focus on the bottom line is important.
“In any given moment an auto hauler has a fixed capacity while the car business is very seasonal as well as macro cyclical,” Schroeder explains. “They don’t build capacity to handle 100% of their contracts, but maybe 85%, just for conversation, and they utilize other smaller or friendly carriers to handle the overage. As volumes drop they are okay until they drop significantly below their real capacity levels.”
Declining ownership trends
While the auto freight industry may be cyclical, it is not immune to trends. One of those is the myth of declining car ownership and younger drivers, which in some ways is fueling uncertainty.
A J.D. Power Power Information Network survey found that the share of millennials in the new car market in 2016 jumped to 28%. That is up from just 17% in 2010. So, if millennials really are buying cars, why the concern?
It turns out the myth of younger people not buying cars may be growing from the fact that they are buying cars later in life as they move away from home.
“The cost of housing and just the need for space will drive people out to places that are less dense,” said Jeremy Acevedo, pricing and industry analyst for Edmunds.com, told the Los Angeles Times. “And less density means you need a vehicle to get around.”
One reason that we may begin seeing declining ownership, though, starts with the current crop of teenagers. According to a University of Michigan study, only about 60% of 18-year-olds hold a driver’s license. That compares to 80% in the 1980s.
With the increase in ride-sharing services such as Uber and Lyft, which are extremely popular with younger generations, the desire to own a car is waning.
According to the Boston Consulting Group, nearly 25% of all miles driven in the U.S. will be through shared or self-driving vehicles by 2030. Another model being looked at is vehicle subscriptions. These would allow people who need a car for a certain period of time on a regular basis, say each morning for two hours to run errands, to reserve a car through a subscription plan.
“By 2022, 2023, the majority of transportation in urban cities with temperate weather will be on demand, shared and likely autonomous,” Aarjav Trivedi, chief executive of Ridecell, a San Francisco company that provides the software for car sharing, told the Wall Street Journal.
As these services develop, carmakers’ sales are likely to take a hit.
“It may become more like the airline business where we see jets that have been in service for 50 years,” Chris Ballinger, CFO and head of mobility services at the Toyota Research Institute, told the Journal. “Now I don’t think a car will be in service for 50 years but I’m saying it may move in that direction…with tens of millions of miles and decades of service.”
The electric impact
All of that brings us to the most likely factor that will influence automotive freight: electric vehicles.
Futurist and technology disrupter expert Tony Seba is one who has been pushing the “Transportation-as-a-Service” (TaaS) concept. TaaS is described as a shift away from personally owned modes of transportation and towards mobility solutions that are consumed as a service. In short, people won’t need to own cars and instead will utilize ride-sharing and self-driving vehicles.
“I believe the auto industry will change more in the next five to 10 years than it has in the last 50, and this gives us the opportunity to make cars more capable, more sustainable and more exciting than ever before,” Mary Barra, GM CEO, noted earlier this year at the World Economic Forum.
But as cars become more sustainable, fewer of them will be needed. Experian reports that the average car is replaced every 60 months. The average automobile, according to the National Highway Traffic Safety Administration, is designed to travel 150,000 miles. With electric cars, that could not only double, but perhaps triple. Tesla is reportedly working on an electric powertrain designed to travel 1 million miles.
Seba explained this in economic terms.
“Today, we pay a lot of money to own and maintain our cars,” he said. “In America, it’s $10,000 a family to own a car, 10,000 miles, 10,000 dollars a year more or less, but we only use it for a small percent of the time - 96% of the time our cars are parked, which is such a waste of money. Let’s converge electric, self-driving and shared transportation and what do we get? What we get is the efficiency of the vehicles goes up from 4 to 40%, maybe more. The car, the truck, the bus, instead of 10,000 miles a year, can go 100,000 miles a year, maybe 200,000 miles a year. When that happens, this is what the numbers say, and this is pure economics; no subsidies, just pure economics. Assume autonomous vehicles will be approved in 2021, essentially that day, the cost per mile of Transport-as-a-Service will be 10 times cheaper than the cost of car ownership. Every time there has been a 10X difference in cost, there has been a disruption. Every single time in history.
“In 2021, the day autonomous vehicles are approved, it won’t make any sense to buy a car,” he adds. “Essentially it won’t make any sense to buy a car because you can get the same service 10 times cheaper. And TAAS will be 4 times cheaper than running a car you already own.”
A paper published by Seba by the RethinkX think tank, of which Seba is co-founder, and James Arbib, a tech investor, predicts that private car ownership will drop 80% by 2030 and the number of passenger vehicles on American roads – due to ride-sharing and other disruptions – will drop from 247 million in 2020 to 44 million by 2030.
That’s 203 million fewer vehicles, which means that much less freight – not just in terms of new cars and components, but also components used for car repairs. The electric car will also hurt in this way. Seba notes that a current car has 2,000 moving parts while an electric vehicle has only about 20 – 99% fewer parts. That makes maintenance easier, but it also reduces the number of replacement parts that must be shipped and stocked at dealerships and garages.
It’s possible that 10 years from now, U.S. automakers will be looking back at 2015-2017 as the Golden Years of auto sales. If the reality of electric vehicles even comes close to the predictions and if Americans accept autonomous vehicles and ride-sharing services, the days of owning a car may be short-lived.
Fewer new cars plus fewer new parts plus fewer replacement parts all adds up to one thing: a lot less freight. If about 8% of all truckload freight today is automotive, that number could drop significantly, perhaps as low as 1-2%. And that is the real freight impact of the electric car movement.