Auto Sales Brisk, But Affordability Concerns Slow Progress

As we previously reported, dealer respondents to a recent Wards Intelligence survey had their wishes granted when more inventory flowed to their lots. Still, slowing demand and increased incentives resulted in lost profits. That seems to be the case, but those with an eye on the bottom line believe retail auto sales will stabilize.

“I am not saying we’re on the cusp of exciting growth ahead,” Jonathan Smoke, chief economist for Cox Automotive, says in Cox’s Mid-Year Review presentation. But maybe in the future, he says, “we will look back and see this was the beginning of the return to normal.”

Improved new-vehicle supply has raised Cox’s 2023 U.S. light-vehicle sales forecast to 15 million, a solid improvement over Cox’s expectations at the beginning of the year and an improvement of more than 1 million units vs. a disappointing 13.9 million in 2022.

For automakers and dealers, the good news of higher sales volume is partly offset by a retreat from record-high average transaction prices per vehicle and a return to at least modest discounts.

It’s also doubtful — even if there were enough demand — whether automakers could or would build enough inventory to return sales volume to the pre-pandemic level of 17 million-plus units. The chip shortage continues to limit production, and automakers are no rush to return to the old days of too much volume chasing too few buyers, analysts say.

U.S. new-vehicle inventory has climbed to around 1.8 million units, largely due to a replenished supply of computer chips, Chesbrough says. That’s a 74% increase in inventory vs. a year ago, but it’s barely more than half the level of about 3.5 million in 2019, prior to the COVID-19 pandemic.

Separately, AlixPartners reports its full-year 2023 U.S. light-vehicle sales forecast is 15.2 million, up from its forecast earlier this year of 15.0 million.  The consultancy attributes the higher sales to pent-up demand, better chip supply  and a slew of new battery-electric vehicle introductions.

In a separate forecast, J.D. Power and Global Forecast predict a 22.6% increase in U.S. light-vehicle sales vs. a year ago with second-quarter sales up 18.2%.

Mark Wakefield, the Detroit-based, global co-leader of AlixPartners’ automotive and industrial practice, estimates a 13% increase in chip supply this year vs. last year. However, Wakefield says he expects it will be at least 2025 before auto production and sales are unconstrained by the chip shortage.

Meanwhile, S&P Global Mobility projects U.S. new-vehicle sales volume to reach 15.1 million units in 2023.

Partly offsetting the increase in chip production is the extra chip demand needed for electric vehicles, according to AlixPartners.

Another factor that could curtail sales volume is affordability, especially with rising interest rates and tighter lending criteria.  Incentives, meant to stimulate demand, also cut into profits, says Wakefield of AlixPartners.

The average incentive as a percent of average transaction price is about 4.2%, up from a recent low of 2.4%, according to AlixPartners.

AlixPartners considers an incentive level of 10% of the average transaction price as the dividing line between a “push” model, where automakers have too much inventory and must resort to incentives to move the metal, vs. a “pull” model, where demand outweighs supply.

There’s a long way to go before incentives rise to that level, Wakefield says. AlixPartners doesn’t expect that to happen until some point beyond 2025.

“We’re still in a pull market” for auto sales, he says. “But it’s becoming much more normalized.”