Sometimes certain types of cars become popular not because they're practical, efficient, perform well, or even make sense. Sometimes it's pure demographics. That's the conclusion of Erich Merkle, head U.S. sales analyst at Ford Motor Company. We caught up with Merkle on a recent visit to New York City to get his take on what's ahead for the auto industry.
What are the biggest factors driving purchasing trends in the car industry these days? The boomers and the millennials... [are] kind of like the double humps on a camel [on a demographic graph]. These two segments... will continue to change the automotive landscape. There are about 80 million baby boomers; it's such a massive number of people that they have the ability to expand and collapse entire [vehicle] segments as they move through their various life stages.
Boomers have the ability to buy new vehicles, [so] they pay the bills in this industry. You've got a massive number of them now that are moving into retirement—about 10,000 a day. That will continue for the next 18 to 19 years. Those that aren't retired are starting to think about it.
The millenials, that's the investment piece of it. Because even though they only represent about 13 or 14 percent of new-car purchases today, the millenials have not yet fully exerted themselves into the marketplace. Some of it's just because of their station in life right now and the poor economy. But they will. They have a lot of time in front of them to purchase vehicles.
And toward the end of this decade, the boomers and the millenials... 80 million and 80 million, that's 160 million people. People don't realize how big that age demographic of our population just is.
What is your evidence for the impact of boomers on the car market? If you track [boomers] when they were in their late 20s and early 30s, back in the 1970s, they wanted small, with great value: the Datsun B210, Honda Civic, Volkswagen Bug. Cost of ownership was very important to them. They didn't have a lot of money to spend. Fuel economy was important. They were young and single... space wasn't a real issue... because of their station in life at that time.
Now when they moved forward, things like minivans became very popular, because in the 1980s, they started to have children, and it provided them this lower cost of ownership. The fuel efficiency was still there, but it also provided them the utility that they needed.
Now as they got older yet, as you started going into the '90s, and into the 2000s, many of these 80 million people were passing through their peak income and spending years. Is cost of ownership important? Not really. The kids are getting bigger; they're teenagers, and they need space. Their kids have friends. And because cost of ownership wasn't important, it really gave rise to the SUV.
Now, the kids are starting to leave the house in big numbers; [baby boomers] are becoming empty nesters.
So they don't need quite the size anymore. But what they do need is that lower cost of ownership. They're starting to think, "How am I going to save for retirement?" [So] $120 for a fill-up is just not in the equation right now.
What types of cars or vehicle attributes will these two groups of people demand? Cost of ownership, just like it was 40 years ago, has become important to these folks again. But they still like their utility. So many, many of them are looking at small utility vehicles.
Back in 2000, the small utility segment represented 800,000 vehicles a year. Today that number is over 1.7 million. It's more than doubled, and it's the only segment that has fully recovered to its pre-recessionary highs. I think small utilities will continue to grow.
The millenials aren't quite there, yet. The youngest of them are in their early 30s. We believe that as they move toward the end of this decade, they will have more need for utility for the same reasons their parents did back in the day. They'll have kids and car seats. For boomers, it will become important for ingress and egress.
We are very bullish about this is one of the things that we see—the convergence of needs.
What other types of demographic trends are driving the changing mix of vehicles on the road? It's our strategy as we diversify our product portfolio, also to diversify our geographic reach. That is incredibly important to us. We need to go coastal.
California is by far the king of small cars. Over 30 percent of their sales are small cars. When we look at small cars, midsized [cars,] and small utilities, that's over 50 percent of the market.
Fiesta and Focus are global, and they have much more of a European design. That's one of the reasons though that they're resonating so well on the coasts.
We'll be looking at the coasts for midsized with the Fusion, particularly for California. It is our initiative to conquest from [Toyota] Camry and [Honda] Accord with Fusion on the coasts.
The C-Max also allows us to take advantage of a global product platform and still differentiate it, particularly in California, [by having] a hybrid and a plug-in hybrid.
With the Escape, we're looking to again push that on the coasts. The New York area is biggest utility market in the country; [it] marks about 11 percent of all utilities sold. Nothing else even comes close to that and that mix has really started to lean toward small utilities. That's probably because of the congestion. You've got such tight quarters here, and higher gas prices than other places. So it's critical that that new Escape performs here in the Northeast.
Will millenials and baby boomers also see eye-to-eye on alternative powertrains, such as electric cars? Right now the green vehicles are pretty much a boomer phenomenon, because it's very expensive. I mean, they both want fuel economy. But if you look at electric vehicle, you've got to have some disposable income to make those things happen.
I think the millenials are very environmentally-conscious; I do think they will adopt some of these things. And over time one would expect as volume continues to increase, the costs will come down. Will we see more diesel engines coming to the U.S. to boost fuel efficiency? The diesel for us has a big place for us in [the] Super Duty [pickup]. We'll be doing more with Ecoboost [turbocharged, direct-injection gasoline engines]. From a customer perspective, clean diesel isn't cheap. We think we can capture a lot of what people are looking for with a diesel, in terms of efficiency and torque, with Ecoboost, while leaving the things that aren't so great about diesel, like the price, in Europe.