A customer examines a vehicle at a BMW dealership in Mountain View, Calif., on Dec. 14, 2022.
David Paul Morris | Bloomberg | Getty Images
DETROIT — Wall Street and industry analysts remain alert for signs of a “demand-killing” 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 start of the coronavirus pandemic in early 2020, automakers have experienced unprecedented pricing power and profits per vehicle amid sustained demand and low inventory levels due to supply chain and parts disruptions affecting vehicle production.
Those factors have created a supply problem for the auto industry that Cox Automotive and others believe could turn into 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 U.S. auto industry this year that point to that outcome. Here they are, along with reasons 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 Inflation Reduction Act have not been finalized, the incentives for commercial vehicle owners and fleets promise to be a big boon.
Unlike consumer vehicles, which qualify for up to $7,500 in credits, fleet and commercial vehicles do not have to meet the strict US requirements for household parts and batteries.
“Here, we actually think most of the growth will be in new car sales in ’23,” Smoke said.
Cox predicts new vehicle sales in the U.S. will be 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 dealers to embrace online retail more than automakers ever could, as consumers demanded it and many brick-and-mortar dealerships 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. The volume of dealer-service operations and revenue growth
Due to the lack of new vehicles available and higher costs, consumers are holding on to their vehicles longer. This is expected to increase the back-end services business and revenue for dealers compared to their sales. Dealers make significant profits from servicing vehicles. The increase is expected to help offset potential declines in sales and financing options.
“We see that as one of the benefits for dealers,” Smoke said. “The service department usually does a good job [and] is somewhat countercyclical during economic downturns.”
7. All-cash transactions will increase to levels not seen in decades
High interest rates make vehicle purchases much more challenging for mainstream buyers and less economical for wealthier consumers. Such conditions are expected to cause those who have the money to purchase a vehicle to buy it without financing it.
Smoke said the average interest rate on a new vehicle loan is more than 8%. For used cars, it is close to 13%.
6. Affordability of the car will be the biggest challenge for buyers
Vehicle affordability was already an issue when interest rates were low. This issue is becoming more of a concern as the Federal Reserve raises interest rates to fight inflation. Cox reports that car availability is at an all-time low.
The increases have led to jumps 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 around $49,500.
“The long-term concern is that it causes production to skew even more toward luxury and away from affordable price points, meaning that even the U.S. auto market has a long-term affordability problem,” Smoke said.
5. Used vehicle values will be above normal depreciation for the second year in a row
Used car prices have skyrocketed in the first two years of the coronavirus pandemic due to 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 the index’s pricing from April 2020 to January 2022.
Inventories of used vehicles have stabilized at nearly 50 days — close to 2019 levels before the coronavirus pandemic depleted supplies.
4. Electric vehicle sales in the US will exceed 1 million units for the first time
Cox reports that sales of all-electric vehicles rose 66 percent to more than 808,000 units last year in the U.S., so it’s not a big jump to reach 1 million amid dozens of new models slated to hit the market. Electric cars account for about 5.8% of new vehicles sold in the US
Add in hybrid and plug-in hybrid electric vehicles that are mated to a traditional engine, Smoke said about 25 percent of new vehicles sold this year are “electrified” vehicles. This will increase from 15% to 16% in 2022.
3. Total retail vehicle sales to fall in 2023 as new vehicle sales rise, used car sales decline
Automakers are expected to rely more heavily on sales to commercial and fleet customers, such as rental cars and government agencies, than in recent years to boost overall sales.
Automakers have prioritized more profitable sales to consumers amid low inventories in recent years. But with consumer demand expected to fall, companies are expected to turn to fleet sales to fill that demand gap.
2. New vehicle inventory levels will continue to increase
Expectations for lower demand come as the auto industry slowly ramps up vehicle production, leading to higher inventory levels.
Inventory levels have been at record lows for the past two years due to supply chain issues and parts affecting production.
Cox reports that inventory levels vary widely by brand, particularly with Detroit automakers Stellantis — availability of sufficient vehicles. Toyota has the lowest vehicle delivery days, according to Cox.
1. A sluggish economy will put pressure on the auto market
Combine all the previous forecasts in addition to economic concerns, and it’s a lot of pressure on the US auto industry next year.
It also comes at a time when automakers are investing billions in electric vehicles and new technologies like advanced driver assistance systems and autonomous vehicles.
“We’re hoping for an economic soft landing, but either way we believe the auto market is going to hold up next year,” Smoke said.