*After* Effects

The Relationship of New Vehicle Sales

to Automotive Aftermarket Parts Sales
(And Why the Conventional Wisdom is No Longer True)
by Steve Asvitt

“In Tough Times, Auto-Parts Firms Receive a ‘Countercyclical Boost’”

So reads the headline in a February 20, 2009 article in the Wall Street Journal. The conventional wisdom, held by
the man-on-the street to auto-parts executives to Wall Street analysts has the following logic:

“When new car sales decline, people hold on to their cars longer, which results in increased parts sales.”

This report presents key data to show that while the conventional wisdom may have been valid for most of the
20th Century, since the early 1990s record-setting vehicle sales (especially compared to the number of drivers),
coupled with the increasing lifespan of vehicles, have created a large pool of vehicles in operation that has greatly
diminished the link between new vehicle sales and parts sales in the 21st Century.

Parts Sales Model

A university professor
drilled into me the following
definition: “A model is a
selective representation of
reality.” Recognizing the
basic truth in that statement
(that by definition a model
doesn’t include every aspect
of reality), we’ll use the
simplified model in Figure 1
as an outline to examine the
data relative to the
relationship between new
vehicle sales and automotive
parts sales. We’ll look briefly
at Economic Factors
(recessions specifically) and their relationship with New Vehicle Sales. We’ll also examine changes in Vehicle
Lifespan and in the number of Licensed Drivers. Next, we’ll look at Vehicles in Operation (VIO—also commonly
known as the Vehicle Parc), and then correlate VIO and Gas Price to Vehicle-Miles Traveled (VMT), and finally
relate VMT to Automotive Parts Sales.

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Economic Factors
and Vehicle Sales
Declines in new vehicle sales
accompany recessions in the
United States (see Figure 2).
Of particular interest are the
“peak-periods” during the
sales-history cycles. A peak-
period includes the years
leading up to a sales record
and the years immediately
after, until sales fall below
85% of the peak.

In the 1970s, there was a

peak-period of about three
years (1971–1973) followed
by a peak-period of about four years (1976-1979). In the mid- to late-’80s there was a peak-period of almost eight
years (1983-1990), double the prior peak-period. The most-recent peak-period, at sixteen years (1992–2007), again
doubled its predecessor. These expanding, new-vehicle sales-growth periods represent one of the key factors
driving growth in the total number of vehicles in operation. We also note that new vehicle sales in the “down”
year of 2008 are only 1.1 million units below sales in the earlier “peak” year of 1973.

Vehicle Lifespan
Frequent reference is made
to the average age of all U.S.
passenger cars1 on the road
(i.e., the mix of all cars, from
brand-new to decades-old),
now at a record 9.4 years. In
1960, the comparable age
was 5.4 years (see Figure 3).
The current record-high
value is cited as an indication
that there should be great
opportunities for selling car
parts, given the large
number of older vehicles on
the road.

1 We will focus primarily on cars in this report.

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Average vehicle lifespan is a more-important measure than average fleet age for our purpose. During the recent
peak-period of record sales, vehicle lifespan increased greatly (and lifespan is a key factor in average vehicle age).
Using vehicle registration information that included the model year of the vehicle, life-cycle curves were created
to determine a vehicle’s lifespan based on when it was produced. In Figure 4, we see the life-cycle curves for cars
produced in ten-model-year increments.

The median lifespan (when

50% of the vehicles are still
on the road) of a 1960 model-
year car was 8.7 years (see
Figure 4). From the 1960
model year to the 1980
model year, we see steady
improvement in car
longevity, then a large jump
to the 1990 model year at
13.5 years, and a marginal
increase from there to the
2000 model year.

A 2000 model-year car has an

expected median lifespan of
13.7 years—an increase of
almost 60% in longevity
compared to the 1960 model-
year car.

In Figure 5 we plot only the

median lifespan from the
curves above and add a
conservative estimate for the
2008 model year at 14 years.

One of the key insights to be

gained from knowing that
the average car lifespan has
increased is that the longer
service life creates the
potential for more vehicle-
ownership cycles.

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From data in the Federal
Reserve’s Survey of
Consumer Finances, we’re
able to calculate how long
people retain their vehicles:
4.4 years on average for
vehicles purchased new, and
3.2 years for vehicles bought
used (see Figure 6). 2 The data
can be further stratified
allowing vehicle retention
length to be determined for
the first, second, and third
vehicles in a household
(where applicable), as well as
the age when purchased for
used vehicles, and the
resulting total average age
for all vehicles.

We can now map ownership

cycles against vehicle
longevity. We’ll use the
average new- and used-car
retention periods for this
purpose (though we
recognize other constructs
could be made). For a 1960
model-year car with a
lifespan of 8.7 years, 2.3
ownership cycles can be
achieved (see Figure 7). For a
2008 model-year car, it’s
possible to have four full
ownership cycles because of
the 5.3 additional years of vehicle life. This has important implications as we consider the type of owner driving a
vehicle over its useful life, and owner behavior regarding parts purchases.

2 Results from the 1992 and later triennial surveys were averaged as no clear trend emerged. R.L. Polk conducts a similar survey and reported increasing retention periods,
from 4.1 years in 2002 to 4.7 years in 2008 for new vehicles, and 2.7 years in 2002 to 3.4 years in 2008 for used vehicles.

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The percentage of
households having at least
one vehicle has approached a
saturation level for all
income classes since the
1970s, and growth is
especially pronounced for
those in the lower income
brackets (see Figure 8)3 . The
20% of households in each of
the three highest income
brackets have been at or
above 90% in this measure
for thirty years or more.
However, the lowest and
second-lowest quintiles have
grown by 21 and 26
percentage points since 1970,
showing that vehicle
ownership is expanding in
lower-income households.

Not surprisingly, those with

lower household incomes
tend to have older vehicles
on average (see Figure 9).
Considering the data from
Figures 7, 8, and 9, we might
expect that today’s
households with incomes of
$50,000 per year or more
would tend to have vehicles
in their first or second
ownership cycle. Households
with less than $50,000 in
income per year would tend to have vehicles that are in their third, or even fourth ownership cycle. Vehicles in
that part of the cycle will likely be older and of lower value than those in the first or second ownership cycle.

3 The saturation level for lower income levels may be below that for higher income levels due to other costs (insurance, licensing, etc.) beyond the vehicle purchase price.

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Data from Edmunds.com
confirm that as a vehicle
ages, its value declines.
Figure 10 shows the price of
a new Dodge Grand Caravan
SE and its used value by age,
and similar data for a Honda
Accord EX.

A vehicle’s price at the end of

its useful life is important as
this is a key factor in
deciding whether to repair or
scrap a vehicle. We would
expect that a $2000 engine or
transmission repair is more
likely to be done at year five
in a vehicle’s life than the
same repair at year fifteen.

A final aspect examined

relative to vehicle lifespan
was the average mileage
traveled by a car as it ages.
Newer vehicles accumulate
higher mileages than older
vehicles (see Figure 11).
Generally, we expect fewer
miles to equal fewer parts.

Given the above data, we can

make some reasonable
predictions regarding owner
behavior and parts purchases
during a vehicle’s life-cycle.
For example, older vehicles
are more likely to be found in
lower-income households and we would expect that those owners are less likely to have comprehensive
insurance coverage and to be more tolerant of cosmetic damage and minor operating problems. We would expect
owners of “end-of-life” vehicles to be less likely to have the financial resources to keep a vehicle in pristine
condition; we might expect that they would commit only the minimum needed to keep the vehicle functional.

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With the above data relative
to vehicle lifespan, we can
illustrate what might happen
during a vehicle ownership
cycle during “normal” times,
and when “people hold on to
their cars longer.” The top
half of Figure 12 shows a
“Normal” ownership profile.
Owner 1 buys “New” Car A
and has it for 4.4 years, at
which time it’s sold to
Owner 2. Owner 2 now
drives “Used” Car A it for 3.2
years, selling it to Owner 3,
who drives it another 3.2
years, finally selling it to
Owner 4 drives Car A another 3.2 years to the end of its life.

The bottom half of Figure 12 shows a “Recession” ownership profile, where people hold on to their vehicles
longer. Here, Owner 1 keeps “New” Car A for six years, or 1.4 years longer than in the “Normal” case. Owner 2
holds on to “Used” Car A for five years instead of the normal 3.2, and then Owner 3 has Car A for the remaining
three years of useful life, even managing to get an extra year of life out of it.

The primary insight we gain from the above is that although each owner holds on to the vehicle “longer,” there is no change
in the parts needs for Car A over its normal service life—the inherent parts need doesn’t change because of who owns the
vehicle. The only change would be at end-of-life, where, as discussed above, parts spending may be very minimal
to just keep the vehicle on the road.

Consider a real-life example: My wife drives a 2001 Dodge Dakota. She loves her truck and after getting a Recall
notice for a minor fix, she took it in to the dealer for the repair. The dealer performed a 44-Point Inspection and
reviewed a list of recommended services with her, including replacement of brakes, rotors, and burned-out light
bulbs, and new fluids in the transmission, transfer case, differentials, and cooling system, for a total of $1350.

The Dakota has been trouble free for 85,000 miles, with only routine maintenance, tires, and shocks purchased so
far. Given the great deals currently available, it might be worth trading in the 2001 for a 2009. If she keeps the
2001, she will get the brakes and bulbs replaced, and as well as the other services. If she trades in the truck, she
won’t incur those expenses. So this shows that holding on to the Dakota is good for parts sales, right?

Now suppose she gets a new 2009 Dakota. The 2001 Dakota will end up in someone else’s driveway and the services
outlined above are still needed—the decision to buy or not buy a new vehicle doesn’t change the need for repairs on the old
vehicle. Granted, the next owner may be less likely to get all the work done that my wife would, but this is

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probably not an “order-of-magnitude” difference that would justify an expectation that part sales will increase if
she keeps her 2001 Dakota longer.

Similarly, the owner of the vehicle at the tail end of its life may extend that life somewhat, but these are 15–20
year-old vehicles where the owner may do the minimum necessary to keep the vehicle on the road.

Now suppose my wife keeps the 2001 Dakota. She incurs the cost of the needed service and parts bills, instead of
the would-be next owner, so that’s a net zero-sum in the parts sales equation. But, what about the service and parts
that would have been required on the new Dakota that she would have purchased?

We’ve added a “Replacement”

cycle in the model shown in
Figure 13. In a Normal cycle,
Owner 1 holds Car A for 4.4
years and trades it in for Car
B, which he then holds for
another 4.4 years.

The bottom half of Figure 13

shows a Recession cycle. Here,
Owner 1 holds on to Car A for
an additional 1.6 years,
meaning Owner 2 doesn’t
purchase it until it’s six years
old. Now, Owner 1 doesn’t
buy new Car B until year six
instead of year 4.4.

Again, Car A has the same inherent parts requirements between year 4.4 and year six whether owned by Owner 1
or Owner 2—when new vehicle sales are down and people hold on to existing vehicles longer, there is no significant effect on
the parts requirement over the useful life of today’s vehicles.

The point that’s missed in the conventional wisdom, however, is that the parts that would have gone to “New”
Car B between year 4.4 and year six have been eliminated. Instead of causing an increase in parts sales, a decline in
new car sales may actually cause a decline in parts sales as well!

The key take-aways from this section on vehicle lifespan are:

• Vehicle lifespan has increased greatly in recent years.

• Increased vehicle lifespan has created additional ownership cycles.
• The only inherent parts increase from “holding onto a vehicle longer” comes at the end of a vehicle’s life,
when the alternative to buying parts is scrapping the vehicle.
• End-of-life vehicles are likely to be driven fewer miles, by lower-income drivers, who may do only the
minimum to keep the vehicle on the road.

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Licensed Drivers
In 2007, there were almost
206 million drivers on the
road—2.35 times the number
in 1960. With this increase in
the number of drivers, we
would expect similar growth
in the number of vehicles.
However, growth in vehicles
is much greater, at 3.66 times
the 1960 level (see Figure 14).

In 1960, there were 0.78

vehicles in operation per
driver (see Figure 15). The
faster growth rate in vehicles
versus drivers has resulted in
1.21 VIOs per driver in 2007.
It’s easy to understand that
in 1960, with a relative
vehicle scarcity compared to
today, that the new-car-
versus-parts tradeoff was
very relevant.

Imagine 50 households from

the 1960s, each with a
married couple and all are
licensed drivers. Thirty
households have two cars,
and twenty have a single car,
totaling 80 cars and 100
drivers, or 0.8 VIOs per
driver in this scenario. A ten-
year-old car in one of the single-car households has a major transmission problem, and the owners would like a
new car. However, the economy is in bad shape and both husband and wife are working, barely making ends
meet. In this scenario, it’s easy to see that if the owners don’t buy a new car, they will have to fix the old one, so
the conventional wisdom holds true; not buying a new car forces a parts purchase. Fast forward now to 2007, and
of our 50 couples, 30 have two vehicles, while 20 have two daily commuters and a Jeep® Wrangler for weekend
rock climbing. Here, the broken transmission on the ten-year-old daily commuter doesn’t force the new-car-
versus-parts tradeoff with the immediacy that it did in 1960.

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Vehicles in Operation
Figure 16 shows the
composition of the total
vehicle parc by age of
vehicle. Besides the absolute
growth from 98 million
vehicles in 1970 to almost 249
million vehicles in 2007, the
effect of the boom years of
sales of long-lasting vehicles
has created a shift from 11%
of vehicles over ten-years
old, to 37% of vehicles over
ten-years old currently.

Vehicle-Miles
Traveled
Taking vehicles in operation
for each year since 1990, we
construct the correlation
scatter-plot in Figure 17. The
X-axis plots the vehicle parc,
while the total vehicle-miles
traveled is plotted on the Y-
axis. A correlation between
just the vehicle parc and
VMT results in a good
answer (see the dark-gray
line at right), but the
multiple correlation adding
gas price fits even better (see
the orange line at right),
notably picking up the drop
in VMT from high gas prices
in 2006 and 2007 that the
single-variable correlation
does not capture.

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Parts Sales
For the same time period of
1990 to 2007, we also
correlated total U.S. parts
sales from U.S. Bureau of
Economic Analysis data and
find a good fit between total
VMT and total parts sales
(see Figure 18).

This result gives us

confidence in the
relationships defined at the
beginning of this report—
that record New Vehicle
Sales, increasing Vehicle
Lifespan, and increased
Licensed Drivers have
resulted in increased Vehicles
in Operation, which, coupled
with gas prices, correlate to
Vehicle-Miles Traveled,
which then correlates to
Automotive Parts Sales

Given the strong correlations

between VIO and VMT, and
VMT and Parts Sales, we can
take a shortcut and look at
Parts Sales per VIO as a
quick measure of where the
industry is at.

Figure 19 shows that since

2001, parts sales per VIO have
averaged about $270 per vehicle per year (in constant 2008 economics), with very little variation.

A key message here is that if parts sales per vehicle are constant, the only way for a company to increase its sales
is to take them from another player in the market. With that being the case, we would expect that auto parts
companies would have sales that follow the trend of vehicles in operation.

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Confirmation of this comes from the annual reports and SEC filings of the Big Three aftermarket parts companies
—AutoZone, Advance Auto, and O’Reilly. Statements in these documents show that the companies believe their
sales are dependent on the total number of vehicles on the road (especially older vehicles), miles driven, and the
general economy. Most telling is the cautionary tone in some of the statements, implying we should not expect
material sales growth in the current environment.

2008 Chairman’s Letter

“Today, there are more seven year old and older vehicles on the roads than ever before, vehicles we
call OKVs (our kind of vehicles) … The second very important macro indicator of the health of our
industry, miles driven, is currently providing a headwind.… So, while all these older vehicles offer
great opportunities for us, the lower levels of miles driven and the more difficult
economic environment have presented challenges.”

2008 10-K Executive Summary

“We believe the two statistics that have the closest correlation to our market growth are miles driven
and the number of seven year old and older vehicles on the road. Miles driven declined for the ninth
straight month in July 2008…. Conversely, the number of older vehicles (seven years old or older) on
the road has continued to increase annually. We currently do not believe the combined impact of
these trends to be material to our business….

“We continue to see our customers being more cautions with their buying habits in the midst of a
challenging environment;”

2009 Q2 10-Q Executive Summary

“In this challenging environment, we continue to see certain discretionary categories being
negatively impacted,”

2008 10-K Management Overview

“Although our fiscal 2008 results were positive, our outlook is cautious for fiscal 2009 given the
current economic environment.”

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2008 10-K Management Overview
“…according to estimates compiled by the Automotive Aftermarket Industry Association, the annual amount
of unperformed or underperformed maintenance in the United States totaled $60 billion for 2007. This metric
represents the degree to which routine vehicle maintenance recommended by the manufacturer is not being
performed. Consumer decisions to avoid or defer maintenance affect demand for our products and the total
amount of unperformed maintenance represents potential future demand. We believe that challenging
macroeconomic conditions in 2007 and 2008 contributed to the amount of unperformed maintenance.

“…we provide our customers with an assortment of products that are differentiated by quality and price for
most of the product lines we offer. For many of our product offerings, this quality differentiation reflects
“good”, “better”, and “best” alternatives. …Consumers’ willingness to select products at a higher point on
the value spectrum is a driver of sales and profitability in our industry. We believe that the average
consumer’s tendency has been to “trade-down” to lower quality products during the recent challenging
economic conditions.”

Big Three Sales Growth

In addition to the
management statements
above, the reports show a
history of the change in
same-store sales versus the
prior year. For AutoZone,
there has been less than one-
half percent growth in each
of the last three years (see
Figure 20). Of note is that
there is no material
improvement in 2008, while
new car sales were
plummeting.

The pattern for the last three

years is similar for Advance
Auto, where growth ranges from 0.7% to 1.6%. Again, there is no “bump” in 2008. However, the growth of the
latest three years is less than the growth of the two preceding years. O’Reilly’s same-store sales pattern is similar
to Advance Auto—with 2008 showing the lowest growth in the last five years. (O-Reilly’s 2008 result excludes the
effect of the CSK acquisition, which would reduce same-store sales growth further to 1.5%.)

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With people holding on to
vehicles longer and tough
economic times, we would
expect to see a shift from
perceived higher-cost outlets
to lower-cost outlets: from
Dealers to Do-It-For-Me
shops, and from DIFM to Do-
It-Yourself stores.

Figures 21, 22, and 23 at right

show the historical
distribution of maintenance
work (e.g., tires, wipers,
filters, brakes, etc.) by outlet.

The data are further

segmented by three vehicle-
age groups and are sourced
from Industrial Marketing
Research, Inc. (IMR).

As expected, looking at the

charts from top to bottom, we
see that the older the vehicle,
the greater the proportion of
DIFM and DIY usage.

If people are holding on to

their vehicles longer, and
with a tough economic
climate, however, we might
expect to see recent shifts
within the vehicle-age
segments also. The data,
however, do not show this to
be the case—dealers have
been holding steady or
increasing in recent years.

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The three charts at right
(Figures 24, 25, and 26) show
similar data segmented by
repair work (e.g., engine,
transmission, electrical, etc.),
and the results are similar to
what was seen for the
maintenance category.

The DIFM and DIY share

increases as vehicles age, but
there is no meaningful shift
within the segments.

Summary and
Conclusion
In this report, we have
reviewed key data related to
new vehicle sales and
automotive parts sales. We
have introduced some new
concepts (peak-periods,
ownership profile) and
produced new reference data
(vehicle lifespan, correlations
of VIO to VMT and VMT to
parts sales) that have helped
us recognize the changes that
have weakened the link
between new vehicle sales
and parts sales. We can
understand that the link was
stronger when new vehicle
sales were roughly ten
percent of all vehicles in
operation, lifespan was
comparatively shorter at 8.7
years, and there were only
0.78 vehicles available per
licensed driver.

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Today, however, new vehicle
sales are a smaller fraction of
total VIO, lifespan has
increased to fourteen or more
years, and there are 1.2
vehicles per licensed driver,
all contributing to the
weakening of the
“conventional-wisdom” link
between new vehicle sales
and parts sales (see Figure
27). The empirical data on
parts sales shows that over
the last seven years, parts
sales per vehicle has
remained flat at $270 per
vehicle in operation. This
plateau is confirmed by close examination of data from the auto parts companies themselves (once we get past the
“marketing hyperbole” in some of their press releases and aggregate the data for all participants). One surprising
finding is that the conventional wisdom completely ignored the lost parts sales on the lost new vehicle sales.

Maybe the best summary is

the chart at right, which
correlates vehicles per driver
(on the Y-axis) to car lifespan
(on the X-axis). Starting with
the 1960 model year, we can
see the improvement in car
lifespan for each successive
five-year period, and
vehicles per driver is
approaching one-to-one at
declining growth rates. After
achieving a one-to-one ratio
in 1985, vehicles per driver
accelerates! Vehicle lifespan
also improves, resulting in
the current situation where
we have a surplus of long-lasting vehicles on the road, and the conventional wisdom of “reduced new car sales
equals increased parts sales” is no longer true.

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