Impact of safer-driver tech on used car values
The recent spike in road accidents and deaths has spurred growth in new safety features — good news for drivers, but not for the used-car industry
In the battle against distracted driving, the most potent weapon may be more technology. Semiautonomous driving safety features — everything from auto-braking to avoid sudden collisions to lane-departure alerts that snap the driver's attention back to the road — could prevent thousands of deaths and injuries each year, says Adam Jonas, head of auto and shared mobility research at Morgan Stanley.
In a recent collaborative report, Jonas and other sector analysts and market strategists looked at the many implications for consumers, the auto industry and beyond. "These affordable advanced driver assistance system (ADAS) technologies cost less than 1% of the price of a car and can significantly reduce crash rates," Jonas notes.
With safety in focus, these features could quickly become standard in new cars, a shift that bodes well for road safety, but could also cause collateral damage in the used-car market, which carries a value of up to $2 trillion in the U.S. and as much as $7 trillion globally, according to Morgan Stanley's report. In the bear-case scenario, current-market used cars could lose half their value by 2021, affecting secondhand car dealerships, auto financing, and insurance, among other sectors.
For decades, U.S. traffic fatalities had been falling by an average of 1.3% a year — in no small part due to improving safety features. In the past two years, however, deaths in traffic accidents have jumped by nearly 9% annually, with far greater casualties among young people, pedestrians, and cyclists.
The leading culprit: Drivers who pay more attention to their mobile devices than the road. Younger drivers are especially susceptible, with traffic fatalities accounting for 24% of the 15-24-year-old age group in the U.S. "We fear this problem may get worse before it gets better," Jonas says.
New laws banning people from using their devices while driving haven't noticeably cut down the number of traffic fatalities. But ADAS technology is designed in effect to save drivers from themselves — and other unexpected bumps on the road. Automakers have developed a range of semiautonomous safety features — not to mention fully autonomous cars — that can help make driving safer.
For example, research from the Insurance Institute of Highway Safety, an independent nonprofit U.S. organization, reveals that forward-collision warning systems used alone and with automatic emergency braking can reduce rear-end crash rates by 23% and 39%, respectively. ADAS features also reduced injuries and insurance claims from accidents, according to separate research by the Highway Loss Data Institute.
From Exception to Norm
Right now, most automakers either don't offer semiautonomous safety features or only offer them as expensive upgrades. For example, only 12% of vehicles sold in the U.S. come with automatic emergency braking, and two-thirds of those are from the same Japanese manufacturer, according to the Morgan Stanley report.
This may soon change. First, 80% of consumers say that they would pay more for accident-proofing technology, according to Morgan Stanley's survey, and another 70% would support government policies that make such driving features mandatory. Insurance companies, facing a growing number of auto claims, could offer lower premiums for cars with safety features to incentivize consumers. On the manufacturers' side, adding ADAS is relatively inexpensive. For example, installing automatic emergency braking systems only costs manufacturers around $300 per car.
For these reasons, Jonas predicts that semiautonomous safety features will be standard on 85% of new cars sold in the U.S. by 2020. "This penetration of ADAS to near 100% could progress twice as fast as the market anticipates, due mainly to competitive reasons," he adds.
Used Cars Take the Hit
The push for better safety on the road may inadvertently hurt used-car owners and investors in companies or other instruments tied to used-car sales and financing. The average age of used cars in the U.S., for example, is 11 years. Few if any of those cars are equipped with the latest ADAS features.
As safety features become the norm, "the average used car may be seen as a substantially inferior mode of transportation, an unacceptable safety risk, difficult to insure and worth less at auction," Jonas says. Indeed, in a typical economic downturn, used-car prices might drop 15% to 20%, but their accelerated obsolescence could see prices fall by up to 50% over the next few years.
This drop in value for used cars could ripple through the entire industry. "The used car is the consumer's currency," Jonas says. Falling prices could make it harder for car owners to trade up when they want something new. Given that 90% of new car purchases include a trade-in, manufacturers could also face challenges. If consumers get less for their older models, dealers might have to offer deeper discounts to make sales, and automakers could start to the feel the pressure to their bottom lines, too.
Banks with exposure to the auto sector would also be affected, says Betsy Graseck, who covers U.S. Large Cap Banks. The biggest impact would be in the auto lease portfolios where residual values could decline. Auto loan portfolios would be hit, too, as the severity of losses tied to car loans rise. Auto loan growth could also slow, as owners looking to upgrade find disappointment with the trade-in value of their vehicles.
Meanwhile, the fallout could eventually reach the fixed income market for auto asset-backed securities, essentially car loans that are bundled as bonds and sold to investors. "Current outstanding auto ABS debt tranches have sufficient protection," says Vishwanath Tirupattur, head of U.S. fixed income strategy, "but future deals may be at risk, requiring greater enhancements and/or higher coupons, thus potentially raising the cost of auto finance."
But if ADAS technology can cut down on road accidents and fatalities, then in a few years from now, all of this may feel like a bad stretch of highway fading in the rearview mirror.
For more Morgan Stanley Research on the auto industry and shared mobility, ask your Morgan Stanley representative or Financial Advisor for the full report ""Exploring the Bear Case: Distracted Driving + ADAS = $7 Trillion of Used Values at Risk" (Feb 1, 2017). Plus, more Ideas.