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Ford Motor Company (F), General Motors Company (GM), Toyota Motor Corporation (ADR) (TM):The Driving Boom is Over

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Why are Americans driving less?

Between 2004 and 2012, the total number of miles driven in the United States has flat-lined, while the number of miles driven per person has declined 2% annually. This presents a big challenge for automakers.

The Bust

The driving boom was a six decade period marked by steadily rising driving rates. Between 1970 and 2004, miles driven per capita grew 85% from 5,400 to over 13,000, credited to sprawling suburbs and longer commutes.

Then, at the turn of the century, this trend suddenly reversed.

Total miles driven in the U.S. peaked in 2007 after exceeding 3 trillion a year. Since then, total miles driven has fallen to 2.95 trillion annually. When accounting for population growth, total miles driven per person peaked in 2005 and has since declined 8%.

This isn’t the first time we’ve seen falling driving rates. Declines have followed oil price spikes and economic recessions before. But this recent drop is the longest and most severe on record, and may represent a permanent change in consumer driving habits.  And this trend isn’t limited to just America–several other studies have demonstrated that driving rates are declining other developed nations.

Reasons for the decline

Initially, the obvious culprits were given as reasons for falling driving rates:

Gas Prices: Between 2002 to 2011, inflation adjusted gasoline prices doubled. This has a two fold impact. In the short term, drivers will skip the opportunity to take multiple trips. Over the long term, consumers will change their lifestyles. They may choose to live closer to work, use public transportation, or purchase a fuel efficient vehicle.

Ford Motor CompanyRecession: Workers drive more than non-workers. During the boom years between 1970 and 2000, labor force participation increased from 60% to 67.3%. Since 2000, labor force participation has declined to 63.6%. While much of this is due to the recession, falling rates will continue as the baby boomer demographic begins to retire.

New explanations

But even as the economy recovered and gas prices stabilized, driving usage has continued to decline. This has caused analysts to look for new explanations:

Public Transportation: Drivers are increasingly turning to mass transit as populations become more urban and infrastructure improves. Between 2005 and 2009, commutes by bicycle and walking also increased 39% and 20%, respectively.

Baby Boomers: Baby boomers are passing from their peak child rearing and working years, which corresponds with higher driving rates. As this demographic enters retirement, per capita driving rates will decline significantly.

Generation Y: Millennials are driving 20% less than their parent’s generation were at the same age. While marketers believe this group will eventually start buying cars like previous generations, growing evidence suggests that this is a permanent shift in spending behavior.

Technology: Smartphones and social networks have reduced the need for face-to-face interactions. This has become a substitute for many car trips.

Implications for manufacturers

This trend presents two major implications for automakers.

First, manufacturers like Ford Motor Company (NYSE:F)General Motors Company (NYSE:GM), and Toyota Motor Corporation (ADR) (NYSE:TM) will have to revamp their product lines. Today, consumers will choose vehicles based on gas mileage and dependability rather than headroom and horsepower.

Toyota Motor Corporation (ADR) (NYSE:TM) has always been well-positioned to exploit this trend. The company was one of the first to introduce an electric hybrid vehicle in the United States. According to J.D. Power and Associates, the company is consistently ranked near the highest in terms of fuel efficiency and dependability.

But according to the same report, Detroit automakers are quickly closing the gap in terms of dependability and fuel economy.

Ford Motor Company (NYSE:F) has been the most aggressive on the front. Today, small vehicles now account for 48% of Ford’s unit sales versus 29% in 2000. The company has been aggressive in increasing fuel efficiency throughout its entire fleet through its innovative Ecoboost engine and beefing up its hybrid product line-up.

General Motors Company (NYSE:GM) has also changing its product mix to reflect new consumer tastes. Cars accounted for 38.6% of total sales during the first quarter. Small vehicles, like the Chevrolet Cruze, Sonic, and Spark posted the strongest gains of any segment with sales increasing 36%.

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