A customer looks at a vehicle at a BMW dealership in Mountain View, Calif., Dec. 21, 2018. 14, 2022.
David Paul Morris | Bloomberg | Getty Images
DETROIT — Wall Street and industry analysts remain keenly alert to signs of a “demand destruction” scenario for the U.S. auto industry this year as interest rates rise and consumers grapple with vehicle affordability issues and fear a recession.
Since the onset of the coronavirus pandemic in early 2020, automakers have experienced unprecedented pricing power and earnings per vehicle amid resilient demand and low inventory levels due to supply chain disruptions. supply and parts affecting vehicle production.
These factors have created a supply problem for the auto industry, which Cox Automotive and others say could turn into a demand problem, just as automakers slowly improve production.
“We’re trading a supply problem for a demand problem,” Cox Automotive chief economist Jonathan Smoke said Thursday.
Cox has 10 predictions for the US auto industry this year that point to such an outcome. Here they are and why investors should consider them.
10. Federal incentives will encourage more fleet buyers to consider electrified solutions
Although tax credits for electric vehicles under the Cut Inflation Act have not been finalized, the incentives for commercial vehicles and fleet owners promise to be a major benefit.
Unlike consumer vehicles that are eligible for credits of up to $7,500, fleet vehicles and utility vehicles do not need to meet strict US domestic parts and battery requirements.
“That’s actually where we think the majority of the growth will be in new vehicle sales in 23,” Smoke said.
Cox predicts new vehicle sales in the United States will be 14.1 million in 2023, a slight increase from nearly 13.9 million last year.
9. Half of vehicle buyers will use digital retail tools
The coronavirus pandemic has forced franchise car dealerships to embrace online retail more than automakers ever could, as consumers demanded it and many brick-and-mortar dealerships were closed due to the global health crisis.
This trend is expected to continue in the coming years, as many automakers have pledged to better align production with consumer demand.
8. Increase in dealership volume and revenue
Due to the lack of new vehicles available and higher costs, consumers are keeping their vehicles longer. This should increase back-end service business and dealer revenue relative to their sales. Dealerships make notable profits from the maintenance of vehicles. The increase should help offset potential declines in sales and financing options.
“We see that as one of the upsides for dealerships,” Smoke said. “The after-sales service generally works well [and] is somewhat countercyclical during an economic downturn. »
7. Cash transactions will increase to levels not seen in decades
High interest rates make vehicle purchases much more difficult for traditional buyers and less economical for more affluent consumers. Such conditions should encourage those who have the money to buy a vehicle to buy it without financing it.
Smoke said the average loan rate for a new vehicle is over 8%. For used vehicles, it is almost 13%.
6. Vehicle affordability will be the biggest challenge facing buyers
Vehicle affordability was already a concern when interest rates were low. This issue has become more of a concern as the Federal Reserve raises interest rates to fight inflation. Cox reports that vehicle affordability is at an all-time high.
The increases resulted in higher average monthly payments of $785 for new cars and $661 for leases, Cox said. The average list price for a new vehicle remains above $27,000, while average transaction prices for new vehicles ended last year at around $49,500.
“The longer-term concern is that it causes what’s being produced to move even more towards luxury and away from affordability, which means that even the US vehicle market has a long-term affordability problem. term,” Smoke said.
5. Used vehicle values will see higher than normal depreciation for a second straight year
Used vehicle prices soared in the first two years of the coronavirus pandemic due to the low availability of new cars and trucks. Wholesale prices peaked in January 2022. They fell 14.9% last year and are expected to fall another 4.3% by the end of the year.
The declines are still not enough to offset the 88% rise in index prices from April 2020 to January 2022.
Used vehicle inventory is stabilizing at nearly 50 days – near 2019 levels before the coronavirus pandemic depleted supply.
4. Sales of electric vehicles in the United States will exceed one million units for the first time
Cox reports that sales of all-electric vehicles rose 66% to more than 808,000 units last year in the United States, so it’s not too difficult to hit 1 million among dozens of new models that should hit the market. Electric vehicles accounted for about 5.8% of new vehicles sold in the United States
Add hybrid and plug-in hybrid electric vehicles that pair with a traditional engine, Smoke said, about 25% of new vehicles sold this year to be “electrified” vehicles. This would increase from 15% to 16% in 2022.
3. Total retail vehicle sales will fall in 2023 as new vehicle sales increase and used sales decline
Automakers are expected to rely more on sales to commercial customers and fleets such as rental cars and government agencies than they have in recent years to boost total sales.
Automakers have prioritized the most profitable sales to consumers amid low inventories in recent years. But with the expected decline in consumer demand, companies should turn to fleet sales to fill this demand gap.
2. New vehicle inventories will continue to rise
Expectations of weaker demand come as the auto industry slowly ramps up production of vehicles, leading to rising inventory levels.
Inventory levels for the past two years were at record highs due to supply chain and parts issues affecting production.
Cox reports that inventory levels differ significantly by brand, with automakers in Detroit – particularly Stellar — have an adequate supply of vehicles. Toyota has the lowest vehicle supply days, according to Cox.
1. A slow growing economy will put pressure on the automotive market
Combine all the previous predictions plus economic concerns and that’s a lot of pressure on the US auto industry in the year ahead.
This is also happening at a time when automakers are investing billions in electric vehicles and new technologies such as advanced driver assistance systems and autonomous vehicles.
“We’re hoping for a soft landing in the economy, but either way, we think the auto market will be held back in the coming year,” Smoke said.