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Automakers and Gen Y: Missing the point

Posted by Craig Fitzgerald  January 21, 2011 05:04 PM

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(Ford)

Ford offers a virtual Fiesta as an add-on pack for "The Sims 3" computer game.

Toyota USA president Jim Lentz was at the 2011 Automotive News World Congress last Sunday, discussing his improved outlook for Toyota's fortunes in 2011. But during the course of his speech, he brought up a challenge Toyota faces in the years to come.

"We have to face the growing reality that today young people don't seem to be as interested in cars as previous generations," said Lentz. "Many young people care more about buying the latest smart phone or gaming console than getting their driver's license."

But Lentz, along with the media, is completely missing the point. As an example, MSNBC ran a story in November that suggests a lot of the same ideas that Lentz's speech parroted: Kids aren't interested in cars. "A confluence of events," reads the article, "is pushing some teens and twentysomethings to opt out of what has traditionally been considered an American rite of passage: Owning a car."

It cites a lot of statistics that have been thrown around in similar articles in recent years, from automotive research firms such as AutoPacific and CNW. The percentage of new cars sold to 21- to 34-year-olds hit a high of 38 percent in 1985, but is down to around 27 percent today. In 2008, 82 percent of 20- to 24-year-olds had their driver's license. In 1994, that figure was at 87 percent. Percent of total miles driven by 21- to 30-year-olds sits at 14 percent, down from 21 percent in 1995.

So clearly, there's something causing that potentially massive purchasing block known as Gen Y — with an expected annual income of $3.4 trillion by 2018, according to a 2009 Javelin Strategy Research study — to either not drive as much, or not drive at all. But all of the research firms and auto manufacturers have completely missed the point: It's the economy, stupid.

Gen Y has credit card debt unlike any generation that precedes it. In 2010, Fidelity Investments said that on average, Gen Y'ers each have more than three credit cards, and 20 percent carry a balance of more than $10,000. But their credit card debt is surpassed by student debt load, now at the highest levels in history. According to a study in April by the Project on Student Debt, the average student leaves college $23,200 in the hole, a 24 percent increase from just 2004.

In years past, former students entering the workforce were confident that they could make a decent buck and start paying back the loans that come due the day they leave the dorm. But according to a study by Pew Research in February, 37 percent of adults 18 to 29 are significantly underemployed, a higher percentage in that age group in more than three decades. Compounding the problem, only 58 percent of Gen Y pays its bills on time, according to a survey by the National Foundation for Credit Counseling. And when they changed or lost jobs, a staggering 60 percent of workers 20 to 29 cashed out what little savings they had in their 401(k) retirement plan, an October study by Hewitt Associates reported.

What has the automotive industry done to respond? It has raised the average price of a new car by more than a thousand dollars between 2009 and 2010, according to a study by the Detroit Free Press. In 2009, the average cost of a new car was $28,160. In 2010, that number jumped to $29,217, an increase of more than three percent.

Even on the low end of the price spectrum, new cars are prohibitively expensive. Ford has won praise for its Fiesta, a small, very fuel-efficient car that packs in connectivity equipment and convenience features that Gen Y responds to. But it comes at a price. Fiestas start at more than $13,000, but most of the cars on dealer lots are going to be equipped at a level that brings the price somewhere between $15,000 and $17,000. Even with a 10 percent down payment and an ultra-long 72-month payment plan, a new Fiesta buyer can expect a payment between $235 and $265 a month, which may be an insurmountable amount when rent, school loan, and cell phone bills come due.

Manufacturers like Nissan have responded with the Versa sedan, base-priced at just $9,990. But unlike the Fiesta with its enticing list of features, the cheapest Versa has manually cranked windows and a big blanking plate where the radio should be.

Do the math, auto industry. It's no wonder that for many younger people, taking the bus for a few years may be a much more feasible option. For some, it may not be an option at all, given not only the cost of purchasing a new car, but the cost of insuring it. Surprisingly, Massachusetts ranks near the bottom of insurance premiums across the country, according to Insure.com's 2010 national survey of premiums. But it's still going to cost, on average, over $1,000 per year to insure a car, and that number goes up if you're in the segment of Gen Y that's still under the age of 25.

It remains to be seen whether younger people will continue to eschew driving when the economy improves, or jump behind the wheel once a more expensive payment makes sense. But for the moment, automakers shouldn't confuse interest with the hard financial facts facing this segment of the car-buying public.

Craig Fitzgerald is a Boston-based auto journalist and former editor for Hemmings Sport & Exotic Car. His latest car musings can be found at The Yankee Driver.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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