Inflation, supply chain challenges, and worries about recession were among the biggest problems facing the global automobile industry in 2022.
These issues won’t be resolved in a short time. There’s growing worry that this year’s supply issues on Wall Street could soon turn into the “demand destruction” scenario just when auto production starts increasing.
“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 an Investor note released earlier in the month.
As car production picks to normal, Roeska wrote that markets beginning next year will be trying at what, when, and the amount of pain automakers experience.
Sales of cars could continue to rise.
Contrary to the traditional downturns or times when demand was weak, most analysts predict worldwide and U.S. auto sales to increase in 2023. This is because auto sales were already near or at lows in recession in the U.S. and other parts of the world before the beginning of the COVID-19 pandemic in early 2020.
The outbreak disrupted supply chains and manufacturing processes across the globe, causing automobile manufacturers to cut their production back. The resultant shortage of new vehicles, trucks, and SUVs resulted in dealers and automakers being able to demand – and receive significantly higher costs for the cars they could offer.
“New vehicle supply is finally improving, but the industry is swapping a supply problem with a demand problem, and that doesn’t bode well for revenues and profits in the year ahead,” Cox Automotive’s chief economist, Jonathan Smoke, said in an interview with the media recently.
Cox Automotive forecasts U.S. new vehicle sales of 14.1 million in 2023. According to Charlie Chesbrough, Cox’s senior economist and director of industry insight, he was “tepidly optimistic.”
Analysts anticipate the following year’s U.S. auto sales to amount to 13.7 million. U.S. sales were 15.1 million in 2021 and 14.6 million in 2020.
S&P Global Mobility expects new automobile sales to rise globally to close to 83.6 million units by 2023, which is a 5.6 percent increase over the prior year. For the U.S., the data and consulting firm anticipates sales to rise by 7% to approximately 14.8 million units by 2023.
Chesbrough stated that the anticipated increase is because many lower-income and subprime borrowers, who typically leave the new car segment in a downturn, have already done so because of the low inventory and record-high costs.
However, the vast profits could be in danger.
The sales growth will likely be at the expense of the mighty price power, and profits automakers have made on new vehicles in the past few years.
“Ongoing supply chain issues and the specter of recession could cause a cautious build-back to the marketplace. U.S. consumers are slowing down and the return to pre-pandemic demand levels for cars seems like a tough to sell. In an announcement, ” inventory and incentive programs will be the most important barometers to measure the likelihood of a decline in demand,” said Chris Hopson, director of North American light vehicle sales forecasts in S&P Global Mobility.
Or, in other words, could rising interest rates, increasing recession-related fears, and a glut of inventory cause automakers to reduce prices and lose profits to lure prospective buyers to their showrooms?
This is good news for consumers facing record-high prices for new cars. However, if it’s true this happens, it will come at a cost for automakers and their shareholders. And maybe their shareholders.