A customer looks at a vehicle at a BMW dealership in Mountain View, California, on Dec. 14, 2022.
David Paul Morris | Bloomberg | Getty Images
DETROIT — Wall Street and industry analysts remain on high alert for signs of a “demand destruction” scenario for the U.S. automotive industry this year as interest rates rise and consumers grapple with vehicle-affordability issues and fears of a recession.
Since the onset of the coronavirus pandemic in early 2020, automakers have experienced unprecedented pricing power and profits per vehicle amid resilient demand and low inventory levels due to supply chain and parts disruptions affecting vehicle production.
Those factors created a supply problem for the auto industry, which Cox Automotive and others believe may switch to a demand problem — just as automakers are slowly improving production.
“We’re swapping a supply problem for a demand problem,” Cox Automotive chief economist Jonathan Smoke said Thursday.
Cox has 10 predictions for the U.S. auto industry this year that point to such an outcome. Here they are along with reasons why investors should be mindful of them.
10. Federal incentives will encourage more fleet buyers to consider electrified solutions
While electric vehicle tax credits under the Inflation Reduction Act have not been finalized, incentives for commercial vehicles and fleet owners promise to be a major benefit.
Unlike consumer vehicles that qualify for credits of up to $7,500, fleet and commercial vehicles do not need to meet stringent U.S. requirements for domestic parts and batteries.
“This is actually where we think the majority of growth will be in new vehicle sales in ’23,” Smoke said.
Cox forecasts U.S. new vehicle sales will be 14.1 million in 2023, a slight increase from nearly 13.9 million last year.
9. Half of vehicle buyers will engage with digital retailing tools
The coronavirus pandemic forced franchise auto dealers to embrace online retailing more than automakers ever could, as consumers demanded it and many physical dealerships were shuttered due to the global health crisis.
That trend is expected to continue for years to come, as many automakers have vowed to better align production with consumer demand.
8. Dealership-service operations volume and revenue climb
Due to a lack of available new vehicles and higher costs, consumers are keeping their vehicles longer. This is expected to increase back-end service business and revenue for dealers compared to their sales. Dealers make notable profits from servicing vehicles. The increase is expected to assist in offsetting potential declines in sales and financing options.
“We see this as one of the silver linings for dealers,” Smoke said. “The service department usually does well [and] is somewhat counter-cyclical during economic downturns.”
High interest rates are making vehicle purchasing far more challenging for mainstream buyers and less economical for more wealthy consumers. Such conditions are expected to push those who have the cash to purchase a vehicle to buy it without financing it.
Smoke said the average loan rate for a new vehicle is more than 8%. For used vehicles, it’s close to 13%.
6. Vehicle affordability will be the greatest challenge facing buyers
Vehicle affordability was already a concern when interest rates were low. This issue has grown to be more concerning as the Federal Reserve pumps up interest rates to battle inflation. Cox reports vehicle affordability is at record lows.
The increases have led to upticks in average monthly payments of $785 for new cars and $661 for leases, Cox said. The average list price of a new vehicle remains above $27,000, while average transaction prices for new vehicles ended last year at about $49,500.
“The longer-term concern is that this causes what is produced to skew even more towards luxury and away from affordable price points, which means even the U.S. vehicle market has a long-term affordability issue,” Smoke said.
5. Used-vehicle values will see above normal depreciation for a second straight year
Used vehicle prices skyrocketed during the first two years of the coronavirus pandemic due to the low availability of new cars and trucks. The wholesale pricing peaked in January 2022. It declined 14.9% last year and is expected to fall another 4.3% by year-end.
The declines are still not enough to offset the 88% rise in index pricing from April 2020 to January 2022.
Inventory of used vehicles is stabilizing at nearly 50 days — close to 2019 levels before the coronavirus pandemic depleted supply.
4. Sales of electric vehicles in the U.S. will surpass 1 million units for the first time
Cox reports all-electric vehicle sales increased by 66% to more than 808,000 units last year in the U.S., so it’s not too much of a leap to hit 1 million amid dozens of new models scheduled to hit the market. EVs represented about 5.8% of new vehicles sold in the U.S.
Add in 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. That would be up from 15% to 16% in 2022.
Automakers are expected to rely more heavily on sales to commercial and fleet customers such as rental car and government agencies than they have in recent years to increase total sales.
Carmakers prioritized the more profitable sales to consumers amid the low inventories in recent years. But with consumer demand anticipated to fall, companies are expected to turn to fleet sales to fill that demand gap.
Expectations for lower demand come as the automotive industry is slowly increasing its production of vehicles, leading to higher inventory levels.
Inventory levels the past two years were at record lows due to supply chain and parts problems affecting production.
Cox reports inventory levels greatly differ based by brand, with the Detroit automakers — specifically Stellantis — having an ample supply of vehicles. Toyota has the lowest days of supply of vehicles, according to Cox.
1. A slow-growing economy will place pressure on the automotive market
Combine all of the prior predictions in addition to the economic concerns and that’s a lot of pressure on the U.S. automotive industry in the year ahead.
This is also happening during a time when automakers are investing billions in electric vehicles and new technologies such as advanced driver-assistance systems and autonomous vehicles.
“We hope for an economic soft landing but ether way we believe the auto market is going to be held back in the year ahead,” Smoke said.
Denial of responsibility! Planetconcerns is an automatic aggregator around the global media. All the content are available free on Internet. We have just arranged it in one platform for educational purpose only. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials on our website, please contact us by email – [email protected]. The content will be deleted within 24 hours.