Demographic ‘time bomb' awaits automakers

General Motors' plan to idle or close five North American plants points to industrywide turmoil ahead. Electric vehicles, autonomous cars and new mobility services will radically reshape the auto industry in the coming decade. But as executive boards debate their future business model, they are overlooking another looming threat: the demographic time bomb.

Our analysis shows that by 2025, demographic trends, absent other changes, will reduce U.S. vehicle demand more than 20 percent to about 11.5 million — the same level as in the 2008-09 recession. A decline in immigration rates could push down structural demand to about 10 million vehicles by 2025.

Add in the risk of recession, which is likely in the next 12 to 18 months, and the scenario becomes a perfect storm for the U.S. auto industry. In six to eight years — one product cycle away — a shift to EVs, autonomous cars and mobility services could leave automakers saddled with plants and other vital assets unable to earn expected returns, a shock that many may not survive.

The double punch of a recession and shifting demographics on the eve of that transition could cripple automakers before new technologies even take off.

By the start of the 2020s, the population growth of 15- to 64-year-olds will decline to nearly zero. That demographic turning point has been masked by the boom in U.S. auto demand after the 2008-09 recession. Our research shows that the underlying structural demand for U.S. light vehicles already has declined sharply. Absent the impact of the Great Recession, structural demand would have been 16 million in 2009 and 13.5 million in 2018.

The collapse in U.S. auto sales in the coming recession could be as severe as in 2008-09. But this time, the sharply lower demand will be permanent. The number of U.S. vehicles in circulation includes 10.5 million in excess of structural demand, a result of overexuberant purchases during the 2010-17 economic expansion.

The surplus is likely to deepen the sales drop-off in a recession. By the time the economy starts to recover, changing demographics will have significantly reduced the pool of potential car buyers.

As if that weren't bad enough, a third shock will hit the industry in the mid-2020s, as EVs reach a tipping point. The magnitude and speed of the coming disruption to internal combustion engines could match that which Nokia and BlackBerry faced when Apple launched the iPhone.

The one-two punch of electric and autonomous vehicles will wreak havoc on the global automotive value chain. Traditional auto dealers will suffer a steady structural decline in every profit source, including new-vehicle sales, financing, repair and maintenance. Once distinguished by powerful brands, autos increasingly will become commodities, particularly to the next generation of consumers.

Most companies are investing and forging partnerships to position themselves for a new era. But no one can predict when or how fast these events will happen. In times of enormous uncertainty, companies face two primary risks: One is to commit to a single course of action that ends up being the wrong one, and the other is waiting too long to see how things play out while putting a bet on every possible outcome.

Managing through periods of great uncertainty is extremely difficult, but not impossible. Companies that survive disruption build flexibility into their decision-making process. They focus on the few risks that matter most, define future scenarios and identify the critical trigger points that signal a swing from one outcome to another. As long as the future is unclear, they concentrate on making no-regret moves such as reducing costs and eliminating risks from the balance sheet, while developing strategic options. They watch for key signposts to see the tipping points coming before the competition so they're prepared to make big bets on new, fast-moving trends.

Companies that create a clear portfolio of options are more nimble in periods of uncertainty. They decide whether to bet on a given option by calculating whether its value is greater than its cost under a variety of likely scenarios.

For example, when Ford Motor Co. was building an assembly plant in Wayne, Mich., and the associated tooling for its engine plants, it was unsure which powertrain type would dominate the next generation of vehicles — internal combustion, hybrid, plug-in hybrid, battery-electric, fuel cell or diesel. The leadership team calculated the costs of building a flexible plant vs. a dedicated plant that had to be retooled, and decided the option value of the flexible plant was greater than the extra cost.

One result of all the turbulence is that automakers' core business — we might call this Engine 1 — will decline. To grow and thrive in the future, they'll need new businesses and new business models. Identifying an Engine 2 early on can help companies pave the way for a smooth transition.

One example is GM's purchase of Cruise, which positions it for future growth in the autonomous vehicle market. This Engine 1-Engine 2 approach helped Netflix, for example, continue developing its then-core DVD business while it progressively invested in the rapid growth of the streaming business.

How companies cope with the coming decade of uncertainty will determine who is still in business in 2030, and who is not. There is no sure path forward. But automakers can do much to increase their resilience before a recession, demographics and technological disruption cut into demand.