A sale sign is seen at a Serramonte Subaru automotive dealership in Colma, California.
Stephen Lam | Reuters
High rates of interest, supply chain issues and recession fears have been a few of the major challenges facing the global automotive industry in 2022.
These issues will not be expected to be resolved quickly. Concern is growing on Wall Street that this year’s supply shortages could quickly escalate right into a “demand bust” scenario as automotive production finally picks up.
“There may be an lively demand erosion in the industry bearing in mind inflation, rates of interest and energy costs – but to this point it has mainly affected backlogs,” Bernstein analyst Daniel Roeska wrote in a note to investors earlier this month.
As vehicle production ramps up, Roeska wrote that markets will be keen to know where, when and the way much the pain will be felt by automakers early next year.
Automotive sales may increase further
Unlike traditional downturns or earlier periods when demand was weak, most analysts expect global and US auto sales to select up in 2023. This is especially because auto sales were already at or near recessionary levels in the US States and other parts of the world since the starting of the crisis. Covid-19 pandemic in early 2020.
The pandemic has disrupted production and provide chains around the world, forcing carmakers to chop production. The resulting shortage of recent cars, trucks and SUVs meant that automakers and dealers demanded – and received – much higher prices for the vehicles they were in a position to supply.
“The provision of recent vehicles is finally improving, but the industry is popping a supply issue into a requirement issue, and that does not bode well for revenue and profits in the year ahead,” Cox Automotive chief economist Jonathan Smoke said in a recent video.
Cox Automotive forecasts latest U.S. vehicle sales of 14.1 million in 2023, which Charlie Chesbrough, Cox’s senior economist and senior director of industry evaluation, described as “somewhat optimistic.”
Analysts expect US auto sales this year to total about 13.7 million. U.S. sales totaled 15.1 million in 2021 and 14.6 million in 2020.
S&P Global Mobility expects latest vehicle sales worldwide to succeed in nearly 83.6 million units in 2023, a rise of 5.6% over the previous year. In the US, the data and consulting firm expects sales to grow 7% to around 14.8 million units in 2023.
Chesbrough noted that the expected increase is because many lower-income and subprime borrowers, who typically leave the latest vehicle segment during a recession, have already done so on account of low inventories and record high prices.
But fat profits may be in danger
These sales surges are more likely to come at the expense of the unprecedented price power and profits automakers have been reaping from latest vehicles over the previous couple of years.
“Continuing supply chain challenges and recession fears will see the market get well cautiously. American consumers are crouching down, and returning to pre-pandemic vehicle demand levels looks like a troublesome sell. Inventory and incentives will be key barometers for assessing potential demand disruption,” said Chris Hopson, North American light vehicle sales forecast manager at S&P Global Mobility.
In other words, will higher rates of interest, rising recession fears and overstocking force automakers to chop prices – and forego profits – to draw potential buyers to showrooms?
That will be excellent news for consumers facing record prices for latest vehicles this year. But when it does, it is going to cost automakers − and possibly their shareholders.