Falling V ehicle Sales May Impact Aft er mar ket in t he Year s Ahead

As global economic conditions continue to deteriorate, many are watching closely the major economic indicators like personal income,
consumer spending, new jobless claims and housing starts with hopes of spotting signs of a turnaround.
For the U.S. economy, there is some promising news as residential construction, factory orders and retail sales all declined at somewhat
slower rates than in recent months. This could indicate that, even though the U.S. economy will continue to contract, the drop will be less
than the last quarter of 2008.
Unfortunately, even if the turnaround were to come in the second half of 2009, the damage that has already been done to some aspects of
the automotive industry will not be readily apparent, and when it does it will take years for the industry to fully recover.
Aftermarket Sweet Spot Reflects Demand
The primary factor that drives demand for aftermarket parts and services is the accumulation of wear and tear on each vehicle in operation.
The reason this is the primary factor, and not the only factor, is the considerable market for items to personalize, customize and enhance
the performance of a vehicle. Although both time and use cause wear, vehicle usage is by far the greater contributor of the two.
Although vehicles in the United States have averaged about 13,000 miles of travel in a year, in 2008 the average was only 12,000. As a
vehicle ages the miles accumulate, after five years of use the average light vehicle can be expected to have about 60,000 miles on the
odometer and requires a corresponding level of maintenance expense.
Maintenance costs continue to increase as the vehicle ages, up to the point that the cost of maintenance is greater than the value of the
vehicle, and it is scrapped. Over time, the vehicle is also subject to other factors, such as accidents, theft and acts of nature, which can
remove it from the total vehicle population. So vehicles of a particular age class are constantly being removed from the population, but the
per vehicle contribution to aftermarket demand for that class increases.
A very easy, but simplistic, way to access changes in aftermarket demand potential is to track the median age of the vehicle population.

According to R. L. Polk & Co., in 2008 the median age of passenger cars in the United States grew to 9.4 years, while the median age of
light trucks jumped to 7.5 years. Because the 2008 data is a snapshot as of June 30, the median vehicle age reflects some of the impact of
high gasoline prices, but the weakening economy and its impact on vehicle sales had not yet been felt.
Using the count of light vehicles in each age class provides a far more detailed picture of the age structure of vehicles in use than median

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age or even mean age. When the vehicle count by age is shown graphically it displays a complete profile rather than a cross section.
The range of vehicle age classes in which the population has not yet fallen significantly and maintenance costs have grown to favorable
levels is known as the aftermarket sweet spot. The sweet spot changes over time, and there is a unique sweet spot for any specific product
line. However, in 2008 the sweet spot contained the vehicles five to 10 years old, and these vehicles accounted for more than 40 percent of
aftermarket demand. The total number of vehicles within the sweet spot was slightly more than 84 million in 2008.

Tracking the number of vehicles in the sweet spot is an excellent way to gauge trends in the aftermarket. Furthermore, because vehicles
sold in a given year will enter the sweet spot five years later, it is one of the best ways to forecast overall aftermarket demand.
The Road Ahead
With much of the news emphasizing the recession and the crisis in the automotive industry, it would be easy to overlook the impact these
events will have on the aftermarket. Dismal vehicle sales now are setting the stage for stagnant aftermarket demand around the corner.
Rolling the short term sales outlook into the existing age profile of vehicles in use shows the expected impact current conditions will have on
the aftermarket sweet spot over the next decade. With little information about the expected course of current economic conditions, the
potential exists for a 25 percent reduction in the number of light vehicles in the sweet spot by 2017.

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This will not be a one shot hit to the aftermarket, but a gradual erosion that wont begin until 2011, following a few years of slight growth due
to vehicle sales in the years preceding the crunch.
The following shows the expected evolution of vehicles in the sweet spot. However, it is important to recognize that tracking the number of
vehicles in the sweet spot is just a method of estimating aftermarket demand. Other factors such as increased residual value of used
vehicles will play an increasingly more important role in determining the size of the aftermarket.

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Much of the negative impact to the aftermarket that is described above can be avoided if new vehicle sales return to more normal levels.
Many see the crisis in the automotive industry as a problem for a few big companies in a few big cities. In reality, the impact for the
automotive aftermarket will be more widespread and will hit manufacturers, distributors and small businesses in every city and town in the
United States. A strong new vehicle sector now is necessary for the continued health of the aftermarket in the coming years.
A Flash slideshow that steps through the profile of vehicles by age from 2008 through 2018 can be viewed by clicking here.
The PowerPoint slideshow also is available by e-mailing a request to res@mema.org.

Contact
Frank Hampshire, Senior Director of Market Research
919-406-8812
res@mema.org
Copyright 2009 MEMA - All Rights Reserved

March 19, 2009

The articles above do not reflect the opinions of MEMA, its market segment associations, or boards of directors.

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