The Long COVID of the Auto industry

The COVID 19 pandemic is a thing of the past but the effects of the industry wide disruptions are still felt today. The microchip shortages and other supply chains issues have proved insurmountable many times for most automakers over the last couple of years. Long awaited, the full recovery is still not in sight and companies have hurried to lock in reliable resources around the world. Ford’s CEO Jim Farley has already stated that all the constraints are here to stay.

Pre-pandemic, the US auto industry enjoyed four long good sales years with levels above the 17 million units. In 2022 only 13.7 M vehicles were sold in the US, a 7.7 % drop from the 14.9 M sold in 2021. 

 This is the lowest level since 2011 when only 12.7M vehicles were sold in the US. But this doesn’t have to be bad news for the auto industry. The reason for the sharp drop in sales is the supply chain issues and the shortage of semiconductor chips that continue to linger on and hurt automakers. However, the lower inventories and the inability to meet demand have led to a scarcity that drove prices and profits higher. The average car price in December 2022 was $46,382 according to NADA (National Automobile Dealers Association). ZeroSum estimates that Americans are paying 20% more for new vehicles than in 2019. GM, for example, reported nearly $10 billion in profit in 2022. Stellantis on its part outdid its first year with $17.9B profit in 2022. All domestic cars and parts manufacturers together saw a combined profit of $32 billion through the third quarter of 2022.

Jonathan Smoke, the chief economist for Cox Automotive said that “The largest demand problem for automotive is affordability”. The chip shortages may be on everyone’s mind, but that is not the biggest problem. The increasing loan interest rates and the higher and higher car prices are the serious threat to auto sales. According to J.D. Power the average monthly payment for a new vehicle finance contract was above $700. LendingTree looked at payments, originations, term lengths, delinquencies and more and found out that the average car payment was up also for both leased and used vehicles. The average auto loan term is 68.6 months for new cars, 67.4 months for used cars and 35.3 months for leased vehicles, according to Experian.  And, as expected, the average interest rates for new-vehicle loans are expected to increase to 7.0%(JD Power). Oversimplifying it, there are still more buyers in the market than there are cars. And the car sales are up in 2023 so far and most agencies estimate higher volumes for the full year 2023. AlixPartners, the global consulting firm, expects car sales to increase 10% in the US to 15.2 million for the full year 2023. Similarly, S&P Global Mobility predicts 15.2 million units for 2023. For its part, Cox Automotive forecasts 2023 auto sales to reach 15M units. So, who will be right? The most important thing is that all of them expect a 10% increase in sales year on year by the end of 2023 for the full year. The consumers however, will have to wait a long time before the big incentives are back in play.