Automakers may be following the money as they focus their attention on sport-utilities and crossovers, but market saturation is sending them toward the edge of a steep cliff, with dwindling profit margins and a 30 per cent decline in auto sales expected by 2022.
That's according to the recently-released 'Car Wars' report from Bank of America Merrill Lynch.
The annual report looks four years into the future of profitability and market share. The new report looks at the 2020 to 2023 model years.
During this period, automakers are expected to launch 246 new or significantly updated vehicles—an average of 62 per year, versus the average 40 per year released annually in the 2004 to 2019 model years. Traditionally, automakers grab a larger piece of the market with new models.
Seventy per cent of those will be crossovers, sport utilities or light trucks, compared to 24 per cent of cars. The report suggests that with so many flooding the market, these traditionally high-profit vehicles will drop to the much-lower profitability level of cars. Crossovers run the highest risk, with 149 nameplates by the 2023 model year, 25 per cent more than for cars and trucks.
The Korean automakers' rate for replacing its models over the next five years is above the industry average, but will continue to place more emphasis on passenger cars. Along with Hyundai and Kia, Ford will replace the most number of models for 2020 to 2023, while Fiat Chrysler, General Motors and Volkswagen
will have the lowest replacement rates.
The study said that alternative-fuel vehicles, including electric and hybrid vehicles, will remain limited as their development costs continue to keep their prices higher than conventional vehicles.
U.S. auto sales softened in 2016 and will continue to drop, the study said, reaching a decrease of nearly 30 per cent by 2022—although it expects a recovery after that.
Speaking to the Automotive Press Association in Detroit, John Murphy, research analyst for Bank of America Merrill Lynch said, warned that automakers shouldn't lower their prices to tempt customers, as they did from 2007 to 2009 in response to the economic crisis. They'll only be able to invest in new technologies if they keep their vehicles profitable—and if they don't, they risk falling behind new competitors, such as Silicon Valley tech companies.
Murphy also said private car ownership will continue. Although vehicles are expensive, the cost-per-mile to operate a new one is about US$1.00 per mile, versus $4.00 to $6.00 per mile for taxicabs or ride-hailing services such as Uber or Lyft, and that 'it's a very difficult thing to believe there will be that mass substitution.'