When it comes to forecasting the future I like to think of two quotes from one of the smartest people I’ve ever worked with (the quote may not be precise but hopefully you’ll get the idea).
1. Forecasts are always wrong.
2. Forecasts with longer time horizons are always worse.
David Simchi-Levi brilliant MIT Professor and my former boss at LogicTools (now part of IBM), told me this in person and I’m pretty sure he’s expressed the same idea in one or more of his many now-famous supply chain related publications.
I thought of these quotes immediately when I read a special report published in November by the Automotive Aftermarket Supply Association titled, “Don’t Discount Miles Driven in Long Term Forecasts”.
In the article author Paul McCarthy argues that miles driven is a critical driver of demand for parts in the automotive aftermarket. And, while he acknowledges that miles driven has been flat or declining for the past several years, he points to the US Energy Information Administration (EIA) forecast for increased miles traveled as reason to look forward to positive future growth in the aftermarket.
Well, I hate to burst anyone’s bubble but I have to point out that no one should hang their hat on this growth projection. If I was running a manufacturing or distribution company supplying parts to the automotive aftermarket I certainly wouldn’t put any stock in this forecast and I definitely wouldn’t make any capital investments based on these numbers. Let’s take a closer look at the EIA projections.
According to the first chart (above) in the AASA report miles driven peaked around 2006-2007 (which makes sense) around 2700 billion miles and has been more or less flat since (also makes sense). But, the “good news” in the second chart is that miles driven will increase sharply adding about 1 trillion miles annually in the coming years. Well, when exactly will those additional miles start hitting the pavement? According to the second chart in the report (below) it looks like it will be real soon, like next year or the year after.
Great news! Let’s get ready for big sales numbers! Better ramp up production and stock more inventory!
Uhhh…in the immortal words of Lee Corso, “not so fast, my friend”.
When I looked closely at the EIA numbers I noticed a few things that might be a problem if you’re banking on total miles driven to be a growth driver for the aftermarket. If you look at the graphic below (click on it for a larger, easier to read version) you’ll see the EIA’s 2012 forecast on top and their 2010 forecast on bottom. I’ve shaded the forecast “Total VMT” for the next 5 years (2013-2017) in both charts for easier comparison. You’ll notice that in the 2012 numbers we aren’t expected to return to the peak VMT levels reached in 2007 (orange highlight) until 2017. You’ll also notice that between 2010 and 2012 the EIA moved their forecast date for reaching 3,000 billion miles from 2017 all the way back to 2023 (red highlight). No big deal – just an extra 6 years! That’s a lifetime in business.
The Federal Highway Administration also publishes a traffic volume report. Here’s a The chart below is on page 9 of the report and shows that miles driven has decreased since 2007 and is still in a downward trend. If you were a stock-trading chart reader I think you’d say that the upward trend that started as late as 1987 has clearly been broken. Miles driven could certainly go up from here but, as they say, “the trend is your friend” and it appears just as likely to me that they may be headed further south.
I don’t know why anyone would want to predict something like total miles traveled in 2035. What if we aren’t even driving cars in 20 years? Think about all the change we’ve seen just in the past 5 years. Do you think that Research in Motion may have been predicting growth in smart phones but failed to foresee the emergence of the iPhone and iPad? I’ve read that Google is working on a self-driving cars. How will that change the way we transport ourselves? Will improvements in navigational efficiency thanks to ubiquitous mobile devices with GPS technology lead to a large reduction in miles driven? Will personal airplanes become economically viable in the next 15 years? Will communication technology continue to advance at such an amazing pace that virtual meetings become a far more reliable means of interaction allowing far more people to work from a home office? Or might it allow more people to shop or visit service providers (e.g., doctors, lawyers, psychologists, teachers, etc) in a virtual environment?
It’s way too difficult to predict that far out into the future. That’s why I prefer to look no further than 1-2 years out for business forecasting. Will miles driven increase in the next year or two? Perhaps but probably not by much. Will miles driven decrease in the next year or two? Perhaps but probably not by much. Will cars still be the primary mode of transport in 2 years? Yes. There you go. Three forecasts you can hang your hat on. Obviously those forecasts aren’t worth much. But, I would consider paying good money for a forecast of miles driven in Q1 and Q2 2013, especially if it were available by region.
So don’t worry about how many miles will be driven in 2015, let alone 2025 or 2035. No one really knows for sure. I can only safely guarantee two things:
- The forecasts will be wrong.
- The forecasts with the longer time horizons will be worse.