10 auto industry predictions for 2023

10 auto industry predictions for 2023

A customer looks at 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 destruction” scenario for the U.S. auto industry this year as interest rates rise and consumers grapple with vehicle affordability issues and fear of a recession.

Since the start 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 production. vehicles.

Those factors created a supply problem for the auto industry, which Cox Automotive and others believe could turn into a demand problem — just as automakers are slowly ramping up production.

“We’re trading a supply problem for a demand problem,” Cox Automotive Chief Economist Jonathan Smoke said Thursday.

Cox has 10 forecasts for the US auto industry this year that point to such an outcome. Here they are along with reasons why investors should be aware of them.

10. Federal incentives will encourage more fleet buyers to consider electrified solutions

While the EV tax credits under the Inflation Reduction Act have not been finalized, the incentives for commercial vehicles and fleet owners promise to be a big boon.

Unlike consumer vehicles that qualify for a credit of up to $7,500, fleet and commercial vehicles do not need to meet stringent US requirements for household parts and batteries.

“That’s really where we think most of the growth will be in new vehicle 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 auto buyers will engage with digital retail tools

The coronavirus pandemic forced exclusive car dealers to embrace online retailing more than automakers, as consumers demanded it and many brick-and-mortar dealerships closed due to the global health crisis.

This trend is expected to continue for years to come, as many vehicle manufacturers have pledged to better align production with consumer demand.

8. Increasing the volume and income of sales-service operations

Due to the lack of new vehicles available and higher costs, consumers are keeping their vehicles longer. This is expected to increase the business of the latter service and the income for the 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 this as one of the best for dealers,” Smoke said. “The service department usually does well [and] it’s somewhat countercyclical during economic downturns.”

7. Cash transactions will increase to levels not seen in decades

High interest rates are making buying vehicles much more challenging for ordinary buyers and less economical for wealthier consumers. Such conditions are expected to push those with cash to buy a vehicle to buy it without financing.

Smoke said the average loan rate for a new vehicle is more than 8%. For used vehicles it is close to 13%.

6. Vehicle affordability will be the biggest challenge facing buyers

Vehicle affordability was already a concern when interest rates were low. This issue has become more of a concern as the Federal Reserve raises interest rates to fight inflation. Cox reports that vehicle affordability is at record levels.

The increases have led to increases 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 what’s being produced to skew even more toward luxury and away from affordable price points, which means the U.S. auto market has a long-term affordability problem as well,” Smoke said.

5. Used vehicle values ​​will see above-normal depreciation for the second year in a row

Used vehicle prices skyrocketed during the first two years of the coronavirus pandemic due to low availability of new cars and trucks. The wholesale price peaked in January 2022. It fell 14.9% last year and is 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 price from April 2020 to January 2022.

Used vehicle inventory is stabilizing at nearly 50 days — close to 2019 levels before the coronavirus pandemic depleted supply.

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% to more than 808,000 units last year in the U.S., so it’s not a big leap to reach the 1 million mark among dozens of new models slated for release in market. EVs represented about 5.8% of new vehicles sold in the US

Add in hybrid electric vehicles and plug-in hybrids that pair with a traditional engine, Smoke said about 25% of new vehicles sold this year are “electrified” vehicles. This will increase from 15% to 16% in 2022.

3. Total retail vehicle sales will decline in 2023, as new vehicle sales increase, used sales decline

Automakers are expected to rely more on sales to commercial and fleet customers such as rental cars and government agencies than in recent years to boost total sales.

Automakers prioritized more profitable sales to consumers amid low inventories in recent years. But with consumer demand expected to decline, companies are expected to turn to fleet sales to fill that demand gap.

2. New vehicle inventory levels will continue to rise

Expectations for lower demand come as the auto industry is slowly ramping up vehicle production, leading to higher inventory levels.

Inventory levels the past two years were at record lows due to supply chain and parts issues affecting production.

Cox reports that inventory levels vary widely by brand, with Detroit automakers — particularly Stellantis — having an ample supply of vehicles. Toyota has the lowest vehicle supply days, according to Cox.

1. A slow growing economy will put pressure on the auto market

Combine all of the previous forecasts in addition to the economic concerns and that’s a big squeeze on the US auto industry in the coming year.

It’s also happening 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 a gentle economic downturn, but equally we believe the car market will be subdued in the coming year,” Smoke said.

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