The industry is on pace to sell more than 16 million cars this year ... but don't break out the party hats and champagne just yet.

June was a terrific month for the auto industry. Americans made it the busiest month of sales in nearly eight years, buying more than 1.4 million vehicles, according to Autodata Corp. It was the strongest month of sales since July 2006, combining with robust sales in May to send expectations soaring.

Despite a brutal winter that hampered sales earlier in the year, the industry is on pace to sell more than 16 million cars this year. If that pace holds, it will be the first time since before the Great Recession that milestone has been eclipsed.

But don't break out the party hats and champagne just yet.

Amid the rampant enthusiasm, AlixPartners, a global business advisory firm based in New York, has released a study that douses some of the budding hope the industry could soon return to the halcyon days of 17-million in annual sales. Instead, the study suggests sales could soon peak and then retreat.

"The good news is the global auto industry made it through the financial crisis, recession and a whole lot of pain," said John Hoffecker, co-president of the Americas at AlixPartners. "The bad news is what's ahead is uncertain and unprecedented, and could be painful as well."
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Rising interest rates, longer-term trends of younger Americans showing indifference toward driving and a decline in vehicle usage rates could equal diminishing sales.

While the firm projects sales of about 16.3 million vehicles this year, it projects that interest rates will begin to rise next year and sap consumers' purchasing power. Combined with longer-term trends of younger Americans showing indifference toward driving and a decline in vehicle usage rates, sales could begin to diminish.

The findings are detailed in the firm's report "Blind Curves Ahead for Auto Industry." AlixPartners has dubbed the next generation of drivers "Generation N" for their neutral opinions about driving, their growing use of car-sharing services and increasing reliance on Uber and Lyft. Those factors may indeed have a longer-term impact on sales, but in the near term, the primary factor will be interest rates.

"The biggest factor would be this credit bubble, and without making an exact projection of when that will happen, that, to use is the window when you'll see an impact on car sales," said Dan Hearsch, a director in the automotive practice at AlixPartners. "The other side of it is cyclical and predictable. ... We're a little more pessimistic because of these other factors."

Cheap credit is one reason there has been remarkable growth in the industry. By the end of 2013, the industry posted year-over-year sales growth for five consecutive years. It's only the third time since the end of World War II that growth has been recorded in five straight years.

Auto Sales

A three-percent rise in rates – about the historical average – would mean a consumer would have about $2,500 less to spend on a new car.

Yet a three-percent rise in rates – about the historical average – would mean a consumer would have about $2,500 less to spend on a new car. Such a rise could pinch consumers who are already extending the lengths of their loans to record highs. A recent study from Experian Automotive showed the average term of a car loan has reached 66 months, the highest since the company started tracking the number in 2006. The report said nearly a quarter of all new loans issued in the first quarter of 2014 were 73 to 84 months in duration.

IHS Automotive, another global market-analysis firm, sees small growth over the next two or three years in the auto industry, with demand inching from 16.2 million vehicles this year to 16.5 million next year. Beyond that, they also see interest rates tempering demand.

"We think the explosive growth in the market is probably over," said George Magliano, a senior economist with IHS Automotive.

Like AlixPartners, IHS sees a gradual hike in interest rates on the horizon over the next two or three years. Magliano said he also believes rising oil prices will play a role in diminishing demand, as will tapering interest in new cars from an aging population.

Rising oil prices could present a new opportunity for automakers to boost sales of hybrid and electric vehicles. But a combination of improvements in internal combustion engines plus the higher upfront costs of an electric vehicle still make consumers reluctant to buy them, a trend both firms believe will continue.

New Automobiles As European Car Sales Rise For Ninth Consecutive Month

By 2017 AlixPartners predicts connected cars will account for 80 percent of sales in North America.

"Ultimately, the payback on an electric vehicle just takes too long," Magliano said. "Something will have to change."

The challenges for selling EVs aren't only on the consumer end. Hearsch said battery packs, which comprise about 35 to 40 percent of an electric car's cost will either need to become cheaper or their range will need to be extended for the cars to become viable options for more Americans. Demand for lithum and nickel, which are used in creating the batteries, is currently outpacing supply, Hearsch said.

More so than electric cars, the X-factor for the long-term health of the industry lies in connected cars, autonomous cars and self-driving cars. It's not a question of when they'll be ready for the road – it's when will the road be ready for them?

Internet-connected cars are already a regular part of traffic, and by 2017 AlixPartners predicts connected cars will account for 80 percent of sales in North America. Beyond that, the government and OEMs alike need to prepare for more car-to-car and car-to-infrastructure communication that will allow autonomous driving and self-driving cars to proliferate.

It may be too early to assess precisely when such roadway and legislative overhauls will occur, but they will be key to the future sales.

"The next big wave will be autonomous cars," Magliano said. "A few years ago, who would have thought we'd be talking about that today? This industry has gone completely haywire, from a dead industry to something that's very high tech. We are close."


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  • 33 Comments
      david.bergman1
      • 5 Months Ago
      "They" have been saying such things for decades yet reality always disproves such predictions. The auto industry in nowhere near its peak, much of the world is still developing and data has been inconclusive on whether younger generations desire to own an automobile.
      Technoir
      • 5 Months Ago
      That's 16 million oil burning machines spewing poison into our air, simultaneously, every day. We need to put an end to the car madness, it's no longer fun to drive with packed roads, high gas prices, scarce parking places, etc... Building more roads only pushes the issue further into the future, but eventually we need another solution.
      express2day
      • 5 Months Ago
      A lot of the so-called indifference to new car ownership among young people is actually directly related to the economy which has been and still is especially tough on that demographic. Perhaps the worst in over eighty years. Record percentages of them have also been forced to be living (back) with their parents. These are not indifferences to cars, living on their own but rather economic/job stability issues. Once the economy turns around, the picture should change. I also think more people need to be realistic about the cars they buy. Cheap lease deals, long-term finance terms, etc. doesn't mean everyone should be out trying to buy loaded up cars or luxury cars. Too many try to keep up with Joneses and want more and more. The same sort of thing happened in the housing industry and resulted in houses getting larger and larger unnecessarily.
        knightrider_6
        • 5 Months Ago
        @express2day
        Most of the people currently unemployed are the ones without any college degree. If only there was a way to fix that.
          Gator
          • 5 Months Ago
          @knightrider_6
          You should come to the bay area.
          mikemaj82
          • 5 Months Ago
          @knightrider_6
          Not really.
        TooManyCars
        • 5 Months Ago
        @express2day
        I'm sorry. I don't mean to sound insensitive. But what recession? It's been the best 7 years so far for buying dirt cheap assets.
      TooManyCars
      • 5 Months Ago
      Automakers, if you're worried about american buying peaking and leveling off. Don't worry...... Relax lending standards and offer americans 84-96+ month subprime new car loans or $200/month leases to people who really can't afford a cash..And they will come and "buy", paycheck to paycheck (while simultaneously wrecking their financial future)..And if those subprime loans blow up. No worries, I'm sure you can ask our government for a bailout (or another one in case you already got one).
        dohc73
        • 5 Months Ago
        @TooManyCars
        What you just described is already happening, but worse. It's called student loan debt and it's the highest debt in the country. There's your next bubble.
        Phil
        • 5 Months Ago
        @TooManyCars
        LOL. I have nothing to add here but a thumbs up.
          TooManyCars
          • 5 Months Ago
          @Phil
          America is great... See. Only in this country....can you. ...Buy a home you really can't afford.... ...By taking out a home loan with terms you don't understand... ...With income you stated that your really didn't earn... ...With loan payment terms you really can't afford.... ...And cash out/refinance equity in the home you really don't have... ...To buy bling and things you really don't need... ....That you really can't afford ....Only to fall behind on your debt obligations... ....Then ask for the government to bail you out with a principal reduction or loan mod... ....Only to spend more money you really don't have... ....Until you fall behind on payments again.... ....At which point the banks start to foreclose on you... ....For which you can than squat and live rent free for up to 2 years in a home that really isn't yours anymore.... ....Only to receive maybe $5000-$15k for promising not to trash the home that is not yours.... ...And yet, it's still all the bank's fault..and personal responsibility had nothing to do with it... Isn't America great or what!!!!
      razorpit
      • 5 Months Ago
      The road to socialism... No vehicles needed when there are no jobs to drive to and the trains run on time. Move over Europe, here we come!
        mikeybyte1
        • 5 Months Ago
        @razorpit
        Right, because there are no cars in Europe.
          razorpit
          • 5 Months Ago
          @mikeybyte1
          Fools, did I say there were NO cars in Europe? Tin foil hat? Aw that's so cute. Nice try at changing the subject. Read the posts here from the people celebrating the decline. Don't take my word for it take theirs. I'll take what's considered the standard car here to what's considered the standard in Europe any day of the week. The average little turd box on wheels found in Europe is hardly a comparison.
      churchmotor
      • 5 Months Ago
      With hundreds of thousands pouring over the boarders ILLEGALLY every month, they need cars.
      knightrider_6
      • 5 Months Ago
      We are doomed if GOPtards win in 2014 and 2016.
        razorpit
        • 5 Months Ago
        @knightrider_6
        Have you been paying attention at all over the last few years?
          stonehunte
          • 5 Months Ago
          @razorpit
          What do you expect them to do? Help this shitty President drive the country further into the ground. If you really believe what the Dems are doing is good for the country, then you should get your head checked. Anyone who can handle middle school math can see that democratic policies are unsustainable for the future.
      NY EVO X MR GUY
      • 5 Months Ago
      This happened in 2005-2007. What recession? Then, *snap*, reality. The only thing that's holding up the economy is QE. Some blue collar jobs are solid. Some white collar jobs are stable. New jobs have been government created. Other "new" jobs are tons of restaurant, mall and host jobs. There are still jobs closing quietly. Which is the new trend. There are companies going bankrupt or downsizing/merging. The housing market is not recovering. I got an awesome deal on a foreclosure. You know what people are doing on foreclosures again? Flipping. Companies are claiming record profits. But not from sales, but from QE purchases. Of course companies won't tell you that a good deal of their profits are from a QE-backed stock market. The dollar is worse off than before against the euro and the British pound. Canadian dollars are still worth more than American dollars. I'm just sitting back and getting ready for crap to hit the fan. Again.
        Hello, Brian
        • 5 Months Ago
        @NY EVO X MR GUY
        Check your facts. The USD is not worth less than the CAD. It is stronger than 4 years ago against the Euro and Pound...though still weak, admittedly. QE is the purchasing of government and mortgage bonds by the GOVERNMENT, not industries or individuals. While many of the jobs created during the recession were government jobs, the number of government and government contracting jobs have been decreasing for the last three years. The housing market has recovered in most areas. Housing numbers are not keeping up with demand in most markets and prices are up about 8.8% on average from a year ago. More importantly, foreign investment in US housing is way up. That means that they see opportunities for price growth in the future. So, keep sitting back and waiting. You'll be one of those who gets left behind.
          NY EVO X MR GUY
          • 5 Months Ago
          @Hello, Brian
          You're half right. Your euro fact(along with the pound)is iinaccurate. You can fix and fudge facts, but you can't hide reality. QE DOES also support companies and individuals via the stock market. Demand you're basing on is half baked data based on applications. I do not see anything other than foreign money in housing that supports your "facts". Contract jobs are still being produced by the government. Jobs are still meager at best. If you call Mall, Host, and Retail jobs a recovery, you go dive in and drink the cool aide. You're the same person who forgets history and runs into the sane brick wall.
      lne937s
      • 5 Months Ago
      "Hearsch said battery packs, which comprise about 35 to 40 percent of an electric car's cost" Well, now that we know that Nissan's pack costs $6500 retail (-$1000 core exchange for $5500 net) and likely less at the OEM level, if it makes up "35-40 percent of an electric car's cost" then that would mean the LEAF would costs $16,250- $18,571. And that is before a $7500 tax credit that would push the net purchase price to the ~$10k range. Either Nissan is making a killing on the LEAF or Hearsch's numbers are off.
        • 5 Months Ago
        @lne937s
        It is good to note that Nissan subsidizes these prices. You cannot buy new 24 kWh battery-pack at that price from Nissan and use it for storing the electricity of your neighborhood's solar microgrid. The pack level cost of $270 per kWh would be super competitive in grid storage markets!
      law3dog
      • 5 Months Ago
      It might not be now, but one constant is inevitable and unwavering.....change. What form it takes in the end is up to debate, but the country will change (staying on transportation) and you drag your bloody knuckles all day for no reason. I've even done it myself. Make the best of it, don't overly complain, and love life.
      Technoir
      • 5 Months Ago
      That's 16 million oil burning machines spewing poison into our air, simultaneously, every day. We need to put an end to the car madness, it's no longer fun to drive with packed roads, high gas prices, scarce parking places, etc... Building more roads only pushes the issue further into the future, but eventually we need another solution.
      chasegarcia
      • 5 Months Ago
      I see lots of used cars with many miles selling for ridiculous amounts. -Maybe this helps new car sales.
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