New York – Dec. 18, 2018 – While auto leadership teams prepare for technological disruption, few are focused on the possible double punch of a recession and shifting demographics that is likely to slash automotive sales before new technologies take off. That scenario could leave many companies weakened and some unable to survive the transition.

New research from Bain & Company, Automakers’ Triple Threat: Recession, a Demographic Time Bomb and Disruption, reveals that by 2025, demographic trends, absent other changes, will reduce total U.S. vehicle demand to about 11.5 million. Demand could drop even further in this time if immigration rates decline. Compare that to the demand for light vehicles in the U.S., absent the impact of the great recession, which was roughly 16 million in 2009 and 13.5 million in 2018.

“Sometime in the next 12 to 18 months, a recession is likely. Soon after that, a demographic time bomb will go off, permanently reducing the number of new car buyers,” said Mark Gottfredson, who leads Bain & Company’s Automotive & Transportation Vehicles practice in the Americas.  “By the start of the 2020s, the population growth of 15- to 64-year-olds will decline to nearly zero, which will have huge repercussions for the automotive industry.  Our research shows that by the mid- 2020s, U.S. unit sales could fall to the same level as in 2008-2009, when GM and Chrysler declared bankruptcy and Ford reported a record $14.6 billion loss.” 

Additionally, Bain & Company identifies a third shock that will hit the industry in the mid-2020s:  in six to eight years – one product cycle away – a rapid shift to electric and autonomous vehicles and shared mobility services could leave companies with billions of dollars in stranded assets—a shock that many may not survive.

The analysis suggests that the next recession and an aging population are likely to hit the U.S. auto market first and hardest. These forces will affect global markets as well, with some variation in timing. By contrast, the shift to electric vehicles and new mobility services may come sooner to Europe and Asia and spread faster. While the report focuses primarily on U.S. data, Bain & Company expects the same set of factors to transform auto markets in Europe and Asia by the mid-2020s.

This coming era of disruption poses two major risks for automakers:  committing to a single course of action that ends up being the wrong one, and waiting too long to see how things will play out while putting a bet on every possible outcome.

“Once distinguished by powerful brands, autos increasingly will become commodities, particularly to the next generation of consumers,” said Mr. Gottfredson.  “As new automotive services continue to multiply, based on changing customer demand, OEMs will have less and less control over the market.”

Leadership teams can develop a strategy in uncertainty by taking three key actions:

1)      Invest in no-regret moves:  These are actions that improve a company’s resilience and generate benefits under any scenario. For example, one major automotive supplier cut $600 million in annual costs as it prepares to invest in electric vehicle partnerships and acquisitions. The leadership team aims to use the cash it generates to pay down debt and strengthen the company’s balance sheet. Preparing the balance sheet for adversity is one of the most important no-regret moves because if cash flow turns negative under any scenario, the ability to act strategically is often crippled.

2)      Develop options and hedges:  Successful companies avoid betting on every square because it risks underinvesting in all options. Instead, they develop strategic options aimed at specific scenarios, such as joint ventures that provide lower-cost market entry or changes to projects that add cost but provide additional flexibility.

3)      Prepare for big bets:  Timing is critical when making large-scale investments since different scenarios are likely to impact the payoff of these big bets. Companies may wait to pull the trigger until it’s clear which scenario is most likely to play out. But advance planning gives them the critical flexibility to move quickly once they have it. Identifying the right signposts before competitors do can give companies a valuable 6-12 month lead.

“Companies that create a clear portfolio of options are more nimble in periods of uncertainty because they balance commitment and flexibility,” said Dr. Klaus Stricker, who co-leads Bain & Company’s global Automotive & Transportation Vehicles practice. “Instead of basing a strategy on conditions at a discrete point in time, leaders engage in a continuous cycle of execute, monitor and adapt, redirecting the company toward the best opportunities over time.” 

Editor's Note: To arrange an interview, contact Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102

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