COVID-19 is getting old, so is your car

vehicles in operation (VIO) getting older

COVID-19 hasn’t been kind to any of us. The average age of light vehicles in operation (VIO) in the US has risen to 11.9 years this year, about one month older than in 2019, says IHS Markit.

Several factors have contributed to pushing the USA average vehicle age higher, according to IHS Markit. While vehicle scrappage rates have increased, the growth in new vehicle sales has plateaued. Having fewer new vehicles added to the US vehicle population has offset the potential drop in average age.

Underlying weakness in several segments of the market, combined with increased vehicle prices, provided pressure on the average age of vehicles upwards. Consumers are weighing their monthly expenditures, and opting for longer-term financing options. Some people are holding onto their vehicles for a more extended time, increasing the average age of vehicles on the road.

The year of COVID-19

“At the start of 2020, all signs were pointing to moderate growth of the average age of vehicles through the first half of the decade, and there was certainly growing pessimism about how long the strong economic fundamentals could last,” said Todd Campau, associate director of Aftermarket Solutions at IHS Markit.

“However, the COVID-19 pandemic has created the perfect storm to accelerate US light vehicle average age in the coming years. This should be a positive side effect for the aftermarket, as the majority of repairs for older vehicles come through the aftermarket channel.”

Prior to the pandemic, sales in the US were already trending downward, representing just 6.1 percent of vehicles in operation in 2019, compared to 6.7 percent in 2016, the last record-setting sales year.

Given the latest IHS Markit forecasts for the further slowdown in light of COVID-19, US new vehicle sales in 2020 are expected to account for 5 percent or less of all vehicles on the road in 2020. Declining new vehicle share in the overall population means fewer younger vehicles to temper average age growth.

Scrappage rates (SR) over the years versus Vehicles in Operation (VIO)

Scrappage is the measure of vehicles exiting the active population. 2020 SR – 5.2% versus 2009 VIO – 4.2% (resulting in a rapid increase in average age, increasing by four months throughout that year)
2019 SR – 5.1% versus 2016 VIO – 4.6%

The affect of COVID-19 work-from-home on the average age of cars

“IHS Markit anticipates significant upward pressure on average age in 2020 and subsequent years as consumers work toward a new normal both economically and in how they use their personal vehicles in a post-COVID-19 era,” said Campau.

“While work from home policies may continue for some time, there also has been increased reluctance in the use of public transit and ride-sharing, and many consumers are opting for road trips instead of air travel for summer vacations.

As a result, vehicle miles traveled (VMT) may not be significantly impacted in the coming years, given the increased personal use to offset everyday commuting.”

While that is the insight of IHS Markit, anecdotal evidence shows that people are traveling less, and many of the people I talk to are not interested in getting back into the rat race. As COVID-19 heats up, more job loss and fewer cars being sold are a possibility, threatening the auto industry’s strides, and increasing the age of vehicles in operation.

According to IHS Markit, in light of COVID-19, dynamics of the changing vehicle fleet are anticipated to result in an increase in average age over the coming years, perhaps of 4-6 months, according to the analysis. In turn, more vehicles will be pushed into the aftermarket sector’s “sweet spot,” – thereby creating good business opportunities.

However, in the near term, with VMT dropping in recent months to levels not seen in years, given the various stay at home orders across the country, some aftermarket businesses have been substantially impacted. This has increased pressure on product supply streams and revenue, which rely on this critical utilization metric.

Are 280 million vehicles on the road still good news for the aftermarket?

The US vehicle population this year exceeded 280 million vehicles, according to IHS Markit, up just 1 percent from 2019. Overall, a growing fleet with increasing vehicle age presents a larger addressable market and opportunity for the aftermarket sector. However, opportunity size and its emergence largely depend on the distribution of the population of vehicles across different age categories.

Based on the analysis, the volume of vehicles 6 to 11 years old is expected to expand, which presents major opportunities for the sector due to dealer service plans and warranties expiring, netting new business opportunities for independent service and repair shops.

Volumes of vehicles 12 to 15 years old are an increasing source of revenue for the aftermarket and are expected to contract as the aftermath of the lower volumes during the 2008-09 recession, which is still working their way through the vehicle population.

The impact of COVID-19 on vehicle average age is not expected to be uniform across the country, as vehicle age in some states will rise more rapidly while other states will stay closer to pre-pandemic norms.

For aftermarket companies to capitalize most effectively on the pandemic’s opportunities, it will be beneficial to understand the nuances from one region to the next and understand how people want to buy cars in the future in order to be successful.