A customer views a vehicle at a BMW dealership in Mountain View, California, on December 14, 2022.
David Paul Morris | Bloomberg | Getty Images
DETROIT – Wall Street and industry analysts remain on high alert for signs of a “demand-destroying” scenario for the U.S. auto industry this year as interest rates rise and consumers grapple with vehicle affordability issues and recession fears.
Since the outbreak of the coronavirus pandemic in early 2020, automakers have seen unprecedented pricing power and per-vehicle profits amid robust demand and low inventories due to supply chain and parts disruptions impacting vehicle production.
These factors have created a supply problem for the auto industry that Cox Automotive and others believe could become a demand problem — just as automakers are slowly improving 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, along with reasons why investors should pay attention to them.
10. Government incentives will encourage more fleet buyers to consider electrified solutions
While the EV tax credits under the Inflation Reduction Act are ongoing, incentives for commercial vehicles and fleet owners promise a major benefit.
Unlike consumer vehicles, which are eligible for loans up to $7,500, fleet and commercial vehicles are not required to meet stringent US requirements for household parts and batteries.
“That’s actually where we think the bulk of the ’23 growth will be in new vehicle sales,” Smoke said.
Cox forecasts US new vehicle sales of 14.1 million in 2023, up slightly from nearly 13.9 million last year.
9. Half of vehicle buyers will engage with digital retail tools
The coronavirus pandemic has forced franchise car dealerships to embrace online retailing more than automakers ever have, as consumers demanded it and many physical dealerships were closed due to the global health crisis.
This trend is expected to continue in the coming years as many automakers have promised to better align production with consumer demand.
8. Volume and revenue of merchant service operations increase
Due to a lack of available new cars and higher costs, consumers are keeping their vehicles longer. This is said to increase merchants’ back-end service business and revenue compared to their sales. Dealers make notable profits from servicing vehicles. The increase is intended to help offset potential declines in sales and financing options.
“We see this as one of the silver linings for retailers,” Smoke said. “The service department usually does well [and] is somewhat counter-cyclical in economic downturns.”
7. All-cash deals will soar to levels not seen in decades
High interest rates make buying a vehicle far more challenging for ordinary buyers and less economical for wealthier consumers. Such conditions are expected to urge 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 more than 8%. For used cars it is almost 13%.
6. Vehicle affordability will be the biggest challenge for buyers
Vehicle affordability was already an issue when interest rates were low. This issue is of growing concern as the Federal Reserve hikes interest rates to fight inflation. Cox reports that vehicle affordability is at record lows.
The increases have resulted in a rise in average monthly payments of $785 for new vehicles and $661 for leases, Cox said. The average new vehicle list price remains above $27,000, while average new vehicle transaction prices last year were approximately $49,500.
“The longer-term concern is that this will result in production skewing even more toward luxury and away from affordable prices, meaning even the US vehicle market has a long-term affordability problem,” Smoke said.
5. Used car values will exceed normal depreciation for the second year in a row
Used car prices have skyrocketed in the first two years of the corona 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% increase in index prices from April 2020 to January 2022.
The stock of used vehicles is stabilizing at almost 50 days — almost at 2019 levels before the coronavirus pandemic exhausted supply.
4. US electric vehicle sales will surpass 1 million units for the first time
Cox reports that sales of all-electric vehicles in the U.S. grew 66% last year to more than 808,000 units, so hitting 1 million amid dozens of new models hitting the market isn’t too much of a leap must. Electric vehicles accounted for about 5.8% of new vehicles sold in the US
Add in hybrid and plug-in hybrid electric vehicles paired with a conventional engine, Smoke said about 25% of those New cars sold as ‘electrified’ vehicles this year. That would be an increase from 15% to 16% in 2022.
3. Total retail vehicle sales will decline in 2023 as new vehicle sales increase and used vehicle sales decrease
Automakers are expected to rely more than in recent years on sales to commercial and fleet customers, such as rental cars and government agencies, to boost overall sales.
Automakers have prioritized more profitable sales to consumers given low inventories in recent years. However, with consumer demand expected to fall, companies are expected to turn to fleet sales to fill this demand gap.
2. The stock of new vehicles will continue to increase
The expectation of lower demand comes as the auto industry slowly ramps up vehicle production, leading to higher inventories.
Inventory levels have been at record lows for the past two years due to supply chain and parts issues impacting production.
Cox reports that inventory levels vary widely by brand, with Detroit automakers — Stellantis in particular — having an extensive range of vehicles. According to Cox, Toyota has the lowest delivery days for vehicles.
1. A slowly growing economy will put pressure on the automobile market
Combine all of the previous predictions on top of the economic concerns and that puts a lot of pressure on the US auto industry in the coming year.
This also comes 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 an economic soft landing, but we definitely believe the auto market will be held back in the coming year,” Smoke said.