Ed Wallace

Another forecast …


KPMG, one of the Big Four auditors, is frequently in trouble. This year it was for failing to notice massive corruption at FIFA, the international soccer association, while serving as its auditor. Last year one of their executives gave a customer’s inside information to another investor; back in 2005, they were hit with tax shelter fraud and fined $456 million.

However, this unique audit and advisory firm also likes to make predictions about the future. This time it’s claiming that the future of the automotive industry holds far fewer cars sold and many more miles driven by those vehicles that remain on our highways.

Trouble is, it seems to be based on data that is already at least partially discredited.

Not “all that”?

Here’s how KPMG sees it. The Millennials, defined as being between the ages 18 to 34, don’t think that personally owning vehicles is all that great a thing. And according to KPMG’s head of automotive research, the generation behind the Millennials will care even less about ever owning a vehicle.

This conclusion seems to ignore a fact or two. One is that right after the financial meltdown of 2008, the percentage of new car purchasers under 30 was around half what it was when the Baby Boomers came of age in the Sixties and Seventies. But, as pointed out in this column, Baby Boomers were then purchasing substantially more new cars than their parents did at the same age. Meaning, parents were still buying their kids cars, long after they graduated college.

I based that interpretation of the data partially on my own family’s experience and that of every other Boomer family I know. Sure enough, as the downturn’s effects faded and more Millennials found decent-paying jobs, new car sales to their demographic improved dramatically as a percentage and fell for the Boomers’ age bracket.

It doesn’t help this theory that, for the past 40 years that I know of, every forecast anyone has made about the future of the auto industry notoriously has been wrong. Then again, sometimes so-called “visions of our economic future” are nothing but sales aids with which to push investment money into predetermined corporations.

No, KPMG believes that as the young adults of today and tomorrow come of age and reject the whole idea of car ownership, they will turn more to the unregulated taxi operations known as Uber, Lyft and Car2go. The company is not alone in making that prediction; many other self-styled futurists have said the same. Yet, while that forecast may well prove true in countries that are in decline economically, real personal wealth almost dictates our automotive freedom. That’s right, nothing makes freedom a reality more than owning your own vehicle and being able to blow this pop stand any time you choose.

To be fair, that mindset could change in the future; it just hasn’t done so yet. KPMG’s Gary Silberg was quoted at Fortune as saying, “I’m not sure people understand the enormity [sic] of the change, nor are we ready for it.”

Great quote. Could be used for the FIFA scandal, too.

Wonky Logic

But here’s the second part of that forecast: Because more people will be relying on these taxi services, including the very young and the very old, the grand total number of miles driven in America will skyrocket to one trillion more miles annually by 2050. That’s around 35 percent more miles, driven by far fewer vehicles on the road. That’s because of the distance the driver has to go just to pick you up.

To clinch his conjecture, Silberg pointed out that no one would have thought, a decade ago, that 10-year-olds would ever be walking around with cell phones — as if the two issues were in any way connected. For what it’s worth, cell phones’ proliferation was predicted as service prices fell and the phones developed more capabilities. Likewise, given how increasingly protective parents have become over the past 30 years, giving a cell phone to a 4th-grader isn’t a stretch.

And who knows, KPMG may be right — but I doubt it sincerely, and for reasons that really are logical. First, as already stated, as the Millennials have put more distance between coming of age and the meltdown, they have better jobs and earn more, and the percentage of them buying cars is much higher than it was just a few years ago. We have three working Millennials in our family, and all have found new and much better paying jobs in just the past two years.

Second, though, why do they think the Baby Boomers will travel more miles annually as they age? When my wife retired, she went from driving 18,000 miles a year to barely making it 6,000 miles. And people e-mail me that exact same experience all the time.

Costly codependence

The real issue is what happens to pricing when these new unregulated taxi companies realize that their customers are completely dependent on them for their transportation. Typically, when a particular service gains exclusive status as a consumer product, its price tends to jump.

Already someone who lives a decent distance from their job and uses a taxi service would end up spending far more per month than the amount of a car payment. As Uber driver Aya Valilar told KCAL in Los Angeles, “I’ve experienced four cuts since I started. It was $2.50 a mile when I started a year and a half ago, and now we are at $1.10.” That’s right; to build critical volumes, Uber slashed its real taxi rates. If more people were more dependent on the service to go places, its prices would go up accordingly.

But consider this: Even at the $1.10 per mile Valilar claims Uber has dropped the price to, someone who needed to travel 15,000 miles in a year — which is the typical mileage driven in large metropolitan areas — would spend $16,500 with these app enabled taxi services. That’s $1,375 per month. And that amount will get you a lease on a new BMW 320i sedan, pay for your auto insurance and gasoline, and still leave you somewhere around $775 a month to spend on other things.

At what point does anyone think going car free for a taxi you can summon on your iPhone is really smart?

By the way, if you do the numbers for someone needing to travel 15,000 miles a year at Uber’s original $2.50 a mile, it comes out to $3,125 a month. For that amount one can lease a new Mercedes SL convertible, buy insurance and gas and still pocket around $1,799 a month in mad money.

It’s always been true that people vote with their pocketbook. And it’s always been true that people budget around their living space and transportation costs. If one doubts that, look at how sudden jumps in the price of gasoline have preceded every recession since the mid-Fifties.

In the end, if owning a car costs less than being totally dependent on a taxi service, as KPMG is suggesting, people will buy cars. That’s regardless of their generation — and unless they don’t remember 4th-grade math or can’t find the calculator on their phone to do it.

Then again, in this semi-distant future we’re discussing, having fewer cars on the road but driving them many more miles per year should put the energy equation into serious question. After all, if cable TV has taught us one thing, the cost has gone through the roof, while sometimes it feels like there’s less to watch on the 888 channels than there used to be when there were only four stations and it was free.

© Ed Wallace 2015

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Association. He hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: wheels570@sbcglobal.net, and read all of Ed’s work at www.insideautomotive.com