A for sale sign is seen at the Serramonte Subaru dealership in Colma, California.
Stephen Lam | Reuters
High interest rates, supply chain issues and recession fears were among the main challenges for the global automotive industry in 2022.
Those issues are not expected to be resolved quickly next year, or at all, and there is growing concern that this year’s supply shortage could quickly turn into a “demand-killing” scenario, which Wall Street has been expecting signs of recently. year, just when production is accelerating again.
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“There is active destruction of demand in the industry, given inflation, interest rates and energy costs – but so far this has mostly affected the backlog,” Bernstein analyst Daniel Roeska wrote in an investor note earlier this month.
As vehicle production ramps up again, Roeska wrote that markets will be looking early next year to understand where, when and how much pain automakers will feel.
Car sales could still grow
Unlike traditional declines or past periods when demand was weak, most analysts expect global and U.S. auto sales to grow in 2023. This is largely because auto sales have already been at or near recessionary levels in the U.S. and other parts of the world since the start of the COVID-19 pandemic in early 2020.
The pandemic has disrupted manufacturing and supply chains around the world, forcing automakers to cut production again. The resulting shortage of new cars, trucks and SUVs meant that automakers and dealers were asking – and getting – much higher prices for the vehicles they were able to deliver.
“The supply of new vehicles is finally improving, but the industry is mistaking a supply problem for a demand problem, and that doesn’t bode well for revenues and profits in the coming year,” Cox chief economist Jonathan Smoke said in a recent video.
Coke Automotive forecasts new U.S. vehicle sales of 14.1 million in 2023, which Charlie Chesebrough, Coke’s senior economist and senior director of industry insights, described as “slightly optimistic.”
Analysts expect this year’s car sales in the US to be around 13.7 million. US sales were 15.1 million in 2021 and 14.6 million in 2020.
S&P Global Mobility expects global new vehicle sales to reach nearly 83.6 million units in 2023, an increase of 5.6% year-over-year. In the US, the data and consulting firm expects sales to grow 7% to around 14.8 million units in 2023.
Chesebrough noted that the expected increase comes as many lower-income and subprime borrowers, who would normally have left the new vehicle segment during a recession, have already done so due to low inventory and record high prices.
But fat profits may be at risk
That sales boost is likely to come at the expense of the unprecedented pricing power and profits that automakers have enjoyed on new vehicles in recent years.
“Tough supply chain challenges and fears of a recession will result in a cautious market recovery.” US consumers are losing steam, and a recovery to pre-pandemic vehicle demand levels seems like a tough sell. Inventories and stimulus activity will be key barometers to gauge potential demand destruction,” Chris Hopson, North American light vehicle sales forecast manager at S&P Global Mobility, said in a statement.
In other words, will higher interest rates, growing fears of a recession and excess inventory force automakers to cut prices — and forgo profits — to lure potential buyers into showrooms?
That would be good news for consumers, who are facing record high new vehicle prices this year. But if so, it will cost automakers – and possibly their shareholders.