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Used-Car Market Could Hold Back Changes in Automotive Industry

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【Summary】A flood of used cars could hurt the new-car market, and thus, research and development could see reduced capital.

Original Timothy Healey    Jul 24, 2017 9:05 AM PT
Used-Car Market Could Hold Back Changes in Automotive Industry

The automotive market is changing rapidly, but some of that change may be slowed by what's being called a "used-car time bomb."

That's what one consulting firm, AlixPartners, is calling it.

Report Suggests a Flood of Used Cars is On the Way

The company recently issued a report detailing challenges facing the industry – especially the traditional, so-called "legacy automakers" as the future looms. The near-term future is widely expected to be bring about major change, thanks to self-driving cars, increased availability of electric and other alternative-fuel cars, and increased ride sharing. How much change will occur, and when it will occur, is anyone's guess, of course.

AlixPartners says that vehicle sales will fall 13 percent from 2016 levels by 2019. The company says the predicted downturn is cyclical in nature, which dovetails with the idea that sales were bound to fall as pent-up demand from the recession wore off and sales plateaued after peaking. It also suggests that the downturn is ill-timed, especially as a whole bunch of vehicles will come off lease and enter the used-car market. The glut of available used vehicles could cut into new-car sales.

"That increased used car supply reduces used car prices and pulls sales from new to used," Mark Wakefield, who leads the automotive division at AlixPartners, told Top Tech News. Around a third of new cars are leased, not sold, and leases typically last about three years. Since many cars were leased in the 2014 to now time period as the economy continued to recover from the Great Recession, that means those cars will be coming off lease soon.

New Cars Could Be Cannibalized 

That could eat into new-car sales, and if that impacts research and development funding, it could result in slower development of technology going forward. Impending industry change will require lots of capital, along with changes in partnerships and strategy, while automakers also maintain traditional approaches. A downturn could set back capital investments and some of those changes.

"They're moving toward something that doesn't connect with 99.9 percent of the business that's generating good cash flow now," Wakefield said.

That's going to lead to difficult decisions for automakers as they contemplate what to invest in.

There's also uncertainty in what will and won't work. Car-sharing, for example, once looked like the wave of the future before being upended by ride-sharing.

Electric cars, too, face an uncertain future. Despite impressive technological developments that are leading to increased range, faster charge times, and lower prices, and despite federal and state incentives, EVs still only make up about one percent of the American market. The EV market is much stronger and growing much faster overseas in China and Europe, however.

It's also unclear what direction self-driving cars will take and how soon they'll get here, although the price of key components will also certainly drop.

Navigating this uncertain future will take time and money, and a dropping new-car market will take some of both to handle, leaving automakers' focus potentially split.

Top Tech News

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