A sale sign is seen at the Serramonte Subaru car dealership in Colma, California.
stephen | Reuters
High interest rates, supply chain issues and fears of recession were among the main challenges facing the global auto industry in 2022.
These issues are not expected to be resolved quickly. There are growing fears on Wall Street that this year’s supply shortages could quickly turn into a “demand destruction” scenario just as auto production finally restarts.
“There is active demand destruction in the industry, given inflation, interest rates and energy costs – but so far this has mostly impacted the backlog,” Bernstein analyst Daniel Roeska wrote in a note to investors earlier this month.
As vehicle production resumes, Roeska wrote that markets early next year will be looking to figure out where, when and how much pain automakers will feel.
Auto sales could rise further
Unlike traditional downturns or past periods of weak demand, most analysts expect global and US auto sales to rise in 2023. This is mainly because auto sales were already at levels of recession or near in the United States and other parts of the world since the beginning of the Covid-19 pandemic early 2020.
The pandemic has disrupted manufacturing and supply chains around the world, forcing automakers to drastically cut production. The resulting shortage of new cars, trucks and SUVs meant that automakers and dealers demanded – and got – much higher prices for the vehicles they were able to deliver.
“The supply of new vehicles is improving, but the industry is trading a supply problem with a demand problem and that doesn’t bode well for revenues and profits in the year ahead,” said Jonathan, Cox Automotive’s Chief Economist, in a recent video.
Cox Automotive forecasts new-vehicle sales in the United States of 14.1 million in 2023, which Charlie Chesbrough, Cox’s chief economist and senior director of industry insights, called “tepid optimism.”
Analysts expect U.S. auto sales this year to total about 13.7 million. US sales were 15.1 million in 2021 and 14.6 million in 2020.
S&P Global Mobility forecasts worldwide new vehicle sales to reach nearly 83.6 million units in 2023, a 5.6% increase over the previous year. In the United States, the data and consulting company expects sales to increase by 7%, to around 14.8 million units in 2023.
Chesbrough noted that the expected increase comes as many low-income and subprime borrowers, who would typically exit the new-vehicle segment during a recession, have already done so due to low inventory and record prices.
But big profits can be at risk
These sales increases will likely come at the expense of the unprecedented pricing power and profits that automakers have enjoyed on new vehicles over the past two years.
“Continued supply chain challenges and recession fears will lead to a cautious rebuild of the market. U.S. consumers are pulling back and the recovery to pre-pandemic vehicle demand levels looks like a tough sell. Inventories and incentive activities will be key barometers for gauging potential demand destruction,” Chris Hopson, head of North American light vehicle sales forecasting at S&P Global Mobility, said in a statement.
In other words, will higher interest rates, growing recession fears and excess inventory force automakers to cut prices – and forgo profits – to lure potential buyers into theaters? of exposure?
This would be good news for consumers, who have been faced with record prices on new vehicles this year. But if so, it will come at a cost to automakers − and possibly their shareholders.
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