The demand for automobiles took a strong hit in 2020 due to the pandemic. Most automobile brands experienced a solid decline in demand in 2020 as most markets experienced a decline in economic activity and prolonged lockdowns due to which people were forced to remain indoors. Apart from that, supply chain disrupt[ion caused by the pandemic also had an impact on the supply and demand of automobiles worldwide. In the meanwhile, Tesla became the largest automobile in the world driven by the growth in popularity and demand for electric cars.
The demand for automobiles across the world is affected by several factors including economic factors, which are among the most prominent factors affecting automobile demand. The pandemic-induced recession was also one of the primary causes that drove automobile demand down in 2020. We will discuss it later on in this article.
There are many more factors, some of which are also related to the supply side like the availability of quality raw materials and labor for the production of cars. During the pandemic, several leading car makers had to shut down operations in various areas because of the unavailability of raw materials and labor force. These factors also affected the sales of automobiles in 2020.
Some other factors that are playing a prominent role in terms of demand and sales of automobiles worldwide include demographic factors, technological factors, marketing, after-sales support, product features, and others, which we are going to discuss in detail in this article.
The pandemic has just given the car makers a reason to approach the whole scenario from a new angle. It has brought some lasting changes to the industrial environment that will have a long-term impact on the demand and sales of automobiles globally. For example, a shift towards digital technology was already underway in the automobile industry which just accelerated following the beginning of the pandemic. Several auto brands had already adopted a partially digital operating model, which now seems to have become a crucial thing for every automobile manufacturer.
In the longer term, the impact of digital technology on the demand and sales of automobiles will have become all the more prominent. However, the pandemic has also accelerated the shift towards environmentally safer mobility. It was evident in the rise of Tesla. The legal and regulatory factors also have a minor role in the demand and sales of automobiles since compliance is a top requirement for automobile companies that will otherwise face severe fines and tarnished image.
In this way, you will see there are multiple factors that have a more or less direct impact on the demand and sales of automobiles worldwide. The level of impact of each of these factors can vary depending upon market conditions.
Economic factors have always played a prominent role in affecting the demand and sales of automobiles around the world. The role of economic factors is not limited to specific markets like the United States or China but affects car demand and sales at a global level. When the level of economic activity is high globally, automobile demand and sales are generally high and on the contrary, if the global economy is through a recessionary period, car sales are low worldwide.
The reason is that car sales are linked directly to the performance of economies small or big, regional or global.
If the level of economic activity in a particular economy such as the United States goes down, it has a direct impact on the unemployment rate there. Unemployment rates are higher when the level of economic activity in a market falls. On the other hand, if economic activity in a market is higher, the unemployment rate is lower and people have the extra money in their hands to spend on automobiles and lifestyle.
In most markets, people buy cars not just to fulfill their transportation needs but also to fulfill their lifestyle needs. So, if they have more discretionary income, they spend more on luxury, including cars. During the pandemic, one important reason that automobile sales plummeted fast was that millions of people lost their jobs worldwide as a recession swept in.
Across several industries including the tourism industry, people lost their jobs in very large numbers and at a very fast rate. People around the world also stopped spending on unnecessary items and started making only the essential purchases.
Apart from the automobile industry, the other industries affected by the pandemic included tourism, retail, manufacturing, and many more industries. Not all were as lucky as the big tech brands like Amazon and Apple whose market caps shot up during the pandemic.
When people lose their jobs, they cut down costs and that results in sales of various items declining. Automobile sales likewise took a heavy hit during the pandemic and most auto brands experienced a sharp drop in sales and revenue.
This was also the situation during the previous economic recession when several automobile brands required being bailed out. Prolonged decline in economic activity in leading markets or globally can also take automobile brands to the verge of bankruptcy.
In this way, you see that the effect of economic factors on car brands, their sales, and demand is heavy. Economic factors play a central role in deciding the fortune of car manufacturers worldwide. The US market was most heavily impacted by the pandemic and it was why the US-based car brands had to bear heavy losses in 2020. However, the companies also try to manage the impact of economic factors on demand and sales using attractive pricing, financing options, product quality, and other methods like marketing. Despite that, car demand and sales are bound to drop during recessionary periods and rise when economic activity returns.
The rise of the middle class is also an important factor affecting the demand and sales of automobiles in various markets. In recent years, middle-class customers have experienced faster growth in monthly income and are spending more on automobiles, leisure activities, and other things. A large number of car brands are now targeting middle-class consumers and releasing new models of sedans, crossovers, and SUVs designed especially for this customer segment.
For a large segment of customers worldwide, automobiles mean a large purchase that they make once or a few times in their lifetime. It is why automobile purchases are made after a lot of consideration and of course for most customers car prices are one of the top considerations when they are planning to make a purchase. Consumers compare the prices of cars before making a purchase. This may not apply evenly in all cases since the customers interested in buying luxury cars and supercars, will consider the other factors too before deciding like the performance and aesthetic appeal of the automobile. However, for a large number of car brands that sell family cars and SUVs, the middle customer is their main target segment and prices are therefore important. In the developing world especially, where the consumers are more price-conscious, companies release lower-priced versions to attract customers.
According to the law of demand, the quantity purchased varies inversely with price. So, as the price of a car model increases, its demand will fall. The higher the price, the lower the quantity demanded.
Generally, households respond to price increases in three ways:
- They will delay the car purchase for a later time.
- They can select to buy another cheaper model.
- They can select to not buy a car and depend on another mode of transportation.
Moreover, the buying decisions related to automobiles are complex and families consider several factors before making a final decision. It also depends on their budget and how much they are willing to invest in buying a car as well as their valuation of the car. Apart from that, there are other factors also at work. For example, if the family is unsure about their future income or if there is substantial uncertainty related to their jobs and sources of income, they might defer a car purchase until they have saved enough money. If they think that car prices are likely to drop in the future, then too they might defer a car purchase. People also consider the resale value of a car when making a purchase.
If a family has other cheaper modes of transportation available and the price of a car is high, which means buying a car would not yield substantial savings, then too the family might feel bound to defer the purchase. Household income, including current and future expected income are also determinants of demand. Most often middle class consumers buy a car using a car loan and if the interest rates are high, they might defer the purchase. On the other hand, if interest rates slide down, it pushes the demand for cars higher.
Car makers therefore, need to consider the possibilities of substitution when setting car prices.
Gasoline is a complementary product when it comes to automobiles. There are other complementary products too like insurance and infrastructure. A complementary product is a product for which the cross-price elasticity of demand is negative. Simply put, if the gasoline prices grow higher, the number of cars purchased will decrease. In some markets, the prices of owning a car can also be driven high by government-related factors. For example, if the government raises the registration fees considerably, it can lead to higher costs of owning a car and therefore retardation in car sales. So, if the prices of gasoline grow, people move towards substitute products or substitute modes of transportation in this case. In the countries where fuel tax is low, this can have a more clear and significant effect on car demand and sales.
Depressed fuel prices make driving a lot cheaper for customers and therefore car ownership becomes much more attractive. As fuel prices have decreased in the United States, car sales have boomed and the change has been more evident on the higher end. When the fuel prices fall and the cost of driving reduces, it also reduces the difference between fuel guzzlers and their more fuel-efficient substitutes since people want to own safer cars with more space and additional features. In this way, lower gasoline prices can drive car demand higher.
Technology has acquired a central role in nearly every industry driving most of the growth in demand and sales of products and services. In the automobile industry too, technology has a significant impact on demand and sales. On the one hand, technology has helped car manufacturers drive their operational costs lower and increase their profit margins, on the other, it has also helped them achieve higher ROI from their marketing expenses.
The automobile industry is one of the biggest advertisers. Digital technology, AI, and autonomous driving have proved to be some of the game-changers in the industry. Tesla has sharply grown to become the largest car brand in the world with the highest market capitalization and its growth is mainly based on technology.
Technology and technological changes have been driving rapid growth of the car industry over the past decade and car brands also recognize its importance and have accordingly changed their product and marketing strategies to achieve business growth. Digital technology has played an important role in shaping the growth of the automobile industry. Consumers’ lifestyles have grown highly influenced by digital technology and people want to remain connected all the time and even on the go. The car brands have accordingly introduced new features so that their products can easily fit into their customers’ lifestyles.
Cars equipped with digital interfaces that make driving more convenient and also cater to the entertainment needs of the drivers and passengers, appeal more to a large base of consumers worldwide. Technology has also become a leading differentiator for car manufacturers and each one is devoting a large sum to research and development each year. The heavy focus on research and development by carmakers is because companies want to provide a superior and safer riding experience to their customers. The level of competition in the automobile industry has grown quite intense and brands are battling to maintain their market share. In an effort to hold their market shares worldwide, they have intensified their focus on technological innovation.
For example, General Motors, one of the largest automobile brands in the United States spent $6.2 billion on research and development in 2020. Its research and development expenditures were lower than 2019 in the latest fiscal because of the pandemic. The company had spent $6.8 billion on R&D efforts in 2019.
Several automobile brands have also formed alliances to jointly carry out technological research and development to beat the competitive pressure in the global market. For example, the Renault, Nissan, Mitsubishi Alliance formed in 1999 is the largest such alliance in the industry. This alliance has sold 10.76 million cars in 2018 and 737,000 EVs from 2009 to 2018. In the 2020s, the competition among auto manufacturers is going to even intensify and technology will remain the leading driver of popularity, demand, and sales for every brand. Several brands have also managed to bring vehicle prices lower through a higher focus on technological efficiency which has enabled them to grow the demand for their popular car and SUV models.
To an extent, the environment is also affecting people’s purchase decisions of automobiles. Whie the shift had already begun towards environment friendly cars, it has only accelerated with the pandemic. Despite the drop in car sales in 2020 due to the pandemic, sales of electric cars picked up. This shows the growing inclination of customers towards EVs worldwide. According to sources, while the passenger car market experienced a decline of 14% during 2020, EV sales worldwide grew by 39% compared to 2019. The number of EVs sold worldwide grew to 3.1 million units in 2020.
It shows that environmental concerns are affecting the purchase decisions of customers worldwide. People are now more concerned about the environment and the environmental impact of the automobiles they use. As a result, their focus has shifted towards more environment-friendly cars including EVs and hybrids. The sales of plugin hybrids have also jumped sharply during the pandemic. It clearly proves the environmental concerns are also having a significant impact on the demand and sales of automobiles worldwide.
Availability of quality raw materials and labor:
To an extent, the availability of good quality raw materials and qualified labor also affects the demand and sales of automobiles. Competition is high in the automobile industry and companies are competing against each other for obtaining good quality raw material and talented human resources. The global automobile brands have large and global supplier networks. They obtain quality raw materials from suppliers located in various corners of the world. The quality of raw materials affects the quality of the final product and in this way the demand and sales of cars. The better the quality of the final product, the higher are its sales expected to be.
Quality of labor also has a direct impact on the demand and sales of cars. Car manufacturing brands compete for talented human resources including engineers and managers that can bring great ideas to the table and drive the organization’s productivity high. After all, human resources are the fundamental driver of a company’s competitive advantage. Hiring talented engineers and designers helps companies produce automobiles that are superior in terms of performance and aesthetic appeal. These factors drive the demand and sales of cars manufactured by a brand higher.
Marketing is a key driver of sales growth across most industries including the automobile industry. The automobile industry is among the leading advertising spenders. The focus of car companies on digital marketing and advertising has grown and they are using mainly digital channels for promotions and customer engagement worldwide. Apart from digital advertising and promotions, they are also using other digital channels like apps and social media websites for customer engagement and to run advertising campaigns. Facebook and YouTube have grown very popular among car brands for promotions and branding.
In 2019, the car brands spent around $13.38 Billion on digital advertising. The level of spending on digital advertising in the US by the automotive industry in 2020 fell because of the pandemic but is expected to bounce back to the level of 2019 according to Statista. The increased marketing spending by the automotive industry is also a result of the growth in competition in this sector. However, irrespective of other factors, marketing has always played a key role in driving the demand and supporting the sales of products and services in the automobile sector. General Motors, one of the leading automobile brands in the United States cut down on its advertising and promotions expenses by a billion during 2020 compared to the previous year due to the lower revenues caused by the pandemic. It spent only $2.7 billion on advertising and promotions in 2020 compared to $3.7 billion, which it spent on the same during 2019.
The level of competition in the automobile industry is very high and therefore companies need to differentiate their products from the rivals to maintain sales and market share. The design of the automobile models also affects the level of demand and sales for a particular model. It is also an important method of differentiating one brand’s products from the others. Not just the aesthetic appeal of a model, but the technological features also play a key role in driving the demand for specific car models higher.
A simple and yet innovative feature can drive the demand of a newly released model higher compared to its rivals in the market. Similarly, the interiors and exteriors of a model and its aesthetic appeal can also drive its demand and sales higher. Companies spent heavy sums on research and development to design cars that are not just superior in terms of performance but appeal to the customers by their looks and design as well.
Performance has always remained one of the leading factors affecting the purchasing decisions of car buyers worldwide. When judging a vehicle’s performance, the key criteria that car buyers use include fuel efficiency, safety, engine, torque, suspension and several more factors. However, mileage has remained one of the key determinants for car buyers globally.
Before spending ona car model, a car buyer judges it from various angles including how it performs against the other models available in the market in terms of fuel efficiency and passenger safety.
Vehicle brands are placing a heavy focus on performance to attract more buyers towards their vehicle models. While advertising their vehicle models too, they maintain the most focus on performance features. People want value for money when buying cars. They want cars that are good in terms of performance, passenger safety and also in terms of fuel efficiency.
For most of them, a car is a once or twice-in-a-lifetime investment. It is why they want cars that are not a wastage of money and so in most cases, performance comes first for the buyer. If a vehicle performs better than its rivals, it gains superior word of mouth and higher media publicity. Overall, focusing on vehicle performance helps the car brands drive the demand for the vehicle models and their sales higher.
After-sales services are also an important factor that buyers consider before buying a car. If servicing of the car is difficult or there is no service center of the brand that the buyer was considering purchasing from, he will defer the purchase or switch to another brand. If it is difficult for the buyer to get his car’s servicing done after the purchase, he will most likely try another brand unless he is a big fan and is willing to adopt some other course of action for vehicle maintenance.
In many cases, a brand may not have a wide distribution network or a network of service centers in a particular market. In that case, that brand may not end up selling too many units in that market since people want to ensure that maintenance will not be difficult for them. It is why companies maintain an extensive presence through a network of dealers, distributors, and service centers in the markets where they want to sell the most cars. It is essential since if the customer is unsure of your presence in his location, he will prefer buying from some other brand. So, the network of service centers a brand has in a specific market, also affects its demand and sales in that market. Without a large and extensive network of service centers, the level of demand in a particular market would falter.
The availability of spare parts is also a critical factor that affects the demand and sales of car brands in specific markets. People like to check for spare parts availability before making a car purchase. Suppose you bought a car and a few months later one significant part of the car developed a defect. Let’s suppose the engine of the car grew a defect and you started having problems with emissions and speed. Now, you desperately need to replace the defective part and there are no spare parts available in your local market. You will need to import the required spare parts from a foreign dealer. You can imagine the level of frustration you might feel if you cannot source spare parts easily.
So, the availability of spare parts also becomes a critical deciding factor when it comes to making a car buying decision. The nonavailability of spare parts in a particular market can drive the demand for car models and their sales lower. In another case, if a company has maintained a nice distribution network and all critical spare parts are available in the market for replacement whenever a customer needs, it becomes a source of advantage for the brand and can drive the demand for its car models and their sales higher.
The total cost of ownership:
The total cost of ownership of a vehicle also determines its demand and sales level. For example, a car model that costs lower but its maintenance costs are high may end up selling fewer units compared to the car model whose price is high but maintenance costs are comparatively lower and fuel efficiency superior compared to the first model. One important reason that the sales of Tesla cars shot up is that their maintenance cost is much lower compared to the regular gasoline cars.
If you own a regular gasoline car, you spend on gasoline, whose costs are much higher compared to the amount you spend charging your Tesla. If you compare the costs of charging a Tesla for a year with the money you would have spent on gasoline if you owned a gasoline car, you will find that there is a big difference. However, not just that, the cost of maintaining a Tesla car is also much lower compared to the gasoline cars. There are a large number of parts in a typical car with an internal combustion engine. Tesla’s drive train has just 17 moving parts whereas a typical ICE (Internal Combustion Engine) vehicle has around 200 moving parts. You can now easily understand which one will cost higher in terms of maintenance.
So, if you own a gasoline car, you will need to visit the mechanic regularly to replace the fluids and other parts. EVs do not have internal combustion engines, a fuel tank or fuel pumps. If you own an EV, you do not need to get an oil change. Apart from that since EVs use regenerative braking, you would not need to get your brakes changed as frequently. Owning an EV helps you save on fuel in the short term and in the long term you save on maintenance.
It is also a reason that people are now more inclined towards electrical vehicles, whose sales surged last year despite the economic impact of the pandemic which pushed sales of automobiles lower. In case of gasoline cars too, people like to make a comparison among these car models to find out which one would cost less to own. So, it is not just about the one time price you are paying but also about the costs of maintenance and fuel that you will pay when you own the car. So, if you already know of a car model to develop defects or issues within months of ownership, you are sure to avoid purchasing that car model, since it will only drive the costs of fuel and maintenance higher for you.
People try to strike a balance when it comes to owning a car. They want cars that are good in terms of performance, are priced competitively and will not burn their pockets afterwards either. Considering these factors helps automobile brands design models that will attract more buyers and sell more. Especially, if you are an automobile brand selling in the developing markets, it must be one of your central concerns since consumers are known to be more price sensitive in this area.
Demographic factors have also affected demand patterns in the automobile industry. Demographic changes in the global population have also brought several changes that affected the automobile industry worldwide. The rise of the millennial generation led to several important changes which made car businesses alter their strategies since the millennials are currently not just the largest but also the most important segment for them.
Millennials differ from the baby boomer generation in several regards. They have grown up with technology and therefore like cars loaded with extra technological features. Their taste also differs from the earlier generations of customers. Millennial customers are more interested in SUVs and it is why car brands have expanded their portfolio of SUVs and crossovers.
In 2020, approximately 1.8 billion people or 23% of the global population could be considered as belonging to the millennial cohort. In size, this cohort is larger than any other adult cohort and therefore the largest target market for the automobile manufacturers. Both education and technology have played key roles in shaping the lives and careers of the millennial generation. Automobile brands have focused on studying and understanding the taste and consumer behavior of this generation so as to cater to its needs and preferences better.
For any large business, it is important to understand its target market and its needs. Since millennials differ a lot from the previous generation, the baby boomers, understanding them in terms of consumer behavior helps understand how they make large purchase decisions and accordingly market to them to achieve higher sales. The millennials are known to place a higher focus on both prices and performance of the automobiles they buy. However, they are a tech-savvy generation and that is also a key consideration for the automobile brands.
Level of competition in the industry and markets:
The level of competition in the automobile sector and respective markets is also a key factor affecting demand and sales of automobiles in various markets worldwide. Overall, the level of competition in the automobile industry has intensified a lot in recent years driven by technological change and other factors. Companies are investing heavily in research and development as well as marketing to stay ahead of others and grow their market share. In this hypercompetitive industry environment, the loss of one brand can become the gain of the other.
In order to stay competitive and strengthen their competitive advantage against the other players, businesses do several things including investing in innovation, marketing, customer relationship management, forming alliances, joint ventures, or regional partnerships, and expanding their product portfolio.
However, the impact of competition on demand and sales of specific brands and models is always significant. If a competitor releases a model that is more fuel-efficient and less costly compared to your model, it will drive your model’s sales down. So, for automobile businesses, it is also important to watch every move by their rivals carefully to avoid experiencing a loss of demand and sales.
The competition also affects car businesses in more ways. It can drive operating expenses higher since companies need to invest more in R&D and marketing as well as in hiring talented people for their business. They need to spend more on acquiring good quality raw materials and growing their market presence. If not for the fierce competition in the automobile sector, the car companies would not be spending billions on digital advertising each year. Each brand in the automobile sector is competing against several to secure the sales of its car models. Due to the intense competition, apart from growing price pressure, companies are also experiencing higher pressure to maintain their competitive edge by investing in innovation. They have to focus more on innovation to maintain the level of demand for their vehicles and their competitive edge against the rivals.