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 yr as rates of interest rise and consumers grapple with vehicle-affordability issues and fears of a recession.
For the reason that 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 resulting from supply chain and parts disruptions affecting vehicle production.
Those aspects created a supply problem for the auto industry, which Cox Automotive and others consider may switch to a requirement problem — just as automakers are slowly improving production.
“We’re swapping a supply problem for a requirement problem,” Cox Automotive chief economist Jonathan Smoke said Thursday.
Cox has 10 predictions for the U.S. auto industry this yr that time to such an end result. Here they’re together with the explanation why investors must be mindful of them.
10. Federal incentives will encourage more fleet buyers to think about electrified solutions
While electric vehicle tax credits under the Inflation Reduction Act haven’t been finalized, incentives for industrial vehicles and fleet owners promise to be a significant profit.
Unlike consumer vehicles that qualify for credits of as much as $7,500, fleet and industrial vehicles don’t need to fulfill stringent U.S. requirements for domestic parts and batteries.
“This is definitely where we expect nearly all of growth might be in latest vehicle sales in ’23,” Smoke said.
Cox forecasts U.S. latest vehicle sales might be 14.1 million in 2023, a slight increase from nearly 13.9 million last yr.
9. Half of car buyers will engage with digital retailing tools
The coronavirus pandemic forced franchise auto dealers to embrace online retailing greater than automakers ever could, as consumers demanded it and many physical dealerships were shuttered resulting from the worldwide health crisis.
That trend is anticipated to proceed for years to return, as many automakers have vowed to raised align production with consumer demand.
8. Dealership-service operations volume and revenue climb
As a consequence of an absence of obtainable latest vehicles and better costs, consumers are keeping their vehicles longer. This is anticipated to extend back-end service business and revenue for dealers in comparison with their sales. Dealers make notable profits from servicing vehicles. The rise is anticipated to help in offsetting potential declines in sales and financing options.
“We see this as one among the silver linings for dealers,” Smoke said. “The service department often does well [and] is somewhat counter-cyclical during economic downturns.”
7. All-cash deals will increase to levels not seen in a long time
High rates of interest are making vehicle purchasing far tougher for mainstream buyers and fewer economical for more wealthy consumers. Such conditions are expected to push those that have the money to buy a vehicle to purchase it without financing it.
Smoke said the common loan rate for a latest vehicle is greater than 8%. For used vehicles, it’s near 13%.
6. Vehicle affordability might be the best challenge facing buyers
Vehicle affordability was already a priority when rates of interest were low. This issue has grown to be more concerning because the Federal Reserve pumps up rates of interest to battle inflation. Cox reports vehicle affordability is at record lows.
The increases have led to upticks in average monthly payments of $785 for brand new cars and $661 for leases, Cox said. The typical list price of a latest vehicle stays above $27,000, while average transaction prices for brand new vehicles ended last yr at about $49,500.
“The longer-term concern is that this causes what’s produced to skew much more towards luxury and away from inexpensive price points, which suggests 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 yr
Used vehicle prices skyrocketed in the course of the first two years of the coronavirus pandemic resulting from the low availability of latest cars and trucks. The wholesale pricing peaked in January 2022. It declined 14.9% last yr and is anticipated to fall one other 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 — near 2019 levels before the coronavirus pandemic depleted supply.
4. Sales of electrical vehicles within the U.S. will surpass 1 million units for the primary time
Cox reports all-electric vehicle sales increased by 66% to greater than 808,000 units last yr within the U.S., so it is not an excessive amount of of a leap to hit 1 million amid dozens of latest models scheduled to hit the market. EVs represented about 5.8% of latest vehicles sold within the U.S.
Add in hybrid and plug-in hybrid electric vehicles that pair with a conventional engine, Smoke said about 25% of latest vehicles sold this yr to be “electrified” vehicles. That might be up from 15% to 16% in 2022.
3. Total retail vehicle sales will fall in 2023, as latest vehicle sales grow, used sales decline
Automakers are expected to rely more heavily on sales to industrial and fleet customers similar to rental automotive and government agencies than they’ve in recent times to extend total sales.
Carmakers prioritized the more profitable sales to consumers amid the low inventories in recent times. But with consumer demand anticipated to fall, firms are expected to show to fleet sales to fill that demand gap.
2. Latest vehicle inventory levels will proceed to extend
Expectations for lower demand come because the automotive industry is slowly increasing its production of vehicles, resulting in higher inventory levels.
Inventory levels the past two years were at record lows resulting from 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 bottom days of supply of vehicles, in accordance with Cox.
1. A slow-growing economy will place pressure on the automotive market
Mix the entire prior predictions along with the economic concerns and that is a variety of pressure on the U.S. automotive industry within the yr ahead.
This can be happening during a time when automakers are investing billions in electric vehicles and latest technologies similar to advanced driver-assistance systems and autonomous vehicles.
“We hope for an economic soft landing but ether way we consider the auto market goes to be held back within the yr ahead,” Smoke said.
