10 automotive industry predictions for 2023

DETROIT – Wall Street and industry analysts remain on high alert for signs of a “demand destruction” scenario for the U.S. auto industry this year as interest rates rise and consumers grapple with vehicle affordability issues and fears of a recession.

Since the start of the coronavirus pandemic in early 2020, automakers have enjoyed unprecedented pricing power and profits per vehicle amid stagnant demand and low inventory levels due to supply chain and parts disruptions affecting vehicle production.

Those factors have created a supply problem for the auto industry, which Cox Automotive and others believe could turn into a demand problem — as automakers slowly improve production.

“We’re replacing a supply problem with a demand problem,” Cox Automotive chief economist Jonathan Smoke said Thursday.

Cox has 10 predictions for the U.S. auto industry this year that point to such an outcome. Here they are, along with reasons why investors should pay attention to them.

Although the Electric Vehicle Tax Credits under the Inflation Reduction Act have not been finalized, the incentives for commercial vehicle and fleet owners promise great benefits.

Unlike consumer vehicles, which are eligible for up to $7,500 in credit, fleet and commercial vehicles do not have to meet stringent US requirements for domestic parts and batteries.

“That’s actually where we think most of the growth will be in ’23 new car sales,” Smoke said.

Cox predicts new car sales in the U.S. will reach 14.1 million in 2023, a slight increase from last year’s 13.9 million.

The coronavirus pandemic has forced franchise auto dealers to embrace more online retail than automakers, as consumers demand it and many brick-and-mortar dealerships have closed due to the global health crisis.

This trend is expected to continue in the coming years, as many automakers have pledged to better align production with consumer demand.

Due to the lack of new vehicles available and higher costs, consumers are keeping their cars longer. This is expected to increase back-end service business and revenue for dealers compared to their sales. Dealers make significant profits from servicing cars. The increase is expected to help offset potential declines in sales and financing options.

“We see this as one of the silver linings for dealers,” Smoke said. “The service department usually works well [and] it is somewhat counter-cyclical during economic downturns.”

High interest rates make buying a car more difficult for mainstream buyers and less economical for more affluent consumers. Such conditions are expected to encourage those with money to buy the vehicle without financing.

Smoke said the average loan rate for a new car is more than 8%. For used cars, it’s around 13%.

When interest rates were low, car affordability was already a concern. The issue has become more pressing as the Federal Reserve has raised interest rates to fight inflation. Cox says that the price of the car is at a record level.

The increases caused average monthly payments to increase by $785 for new cars and $661 for leases, Cox said. The average list price for a new car remains above $27,000, while the average transaction price for new cars ended last year at around $49,500.

Smoke said, “The long-term concern is that it causes what’s being produced to skew even more toward luxury and away from affordable price points.

In the first two years of the coronavirus pandemic, used vehicle prices rose sharply due to a shortage of new cars and trucks. Wholesale prices peaked in January 2022. It decreased by 14.9% last year and is expected to decrease by another 4.3% by the end of the year.

The declines are still not enough to offset the 88% increase in index prices from April 2020 to January 2022.

Used vehicle inventories are stabilizing at about 50 days — close to 2019 levels before the coronavirus pandemic depleted supply.

Cox reports that sales of all-electric vehicles in the U.S. last year were up 66% to more than 808,000 units, so it’s not much of a leap to reach 1 million units among dozens of new models slated to hit the market. About 5.8% of new cars sold in the US were electric cars

Add hybrid and plug-in hybrid electric vehicles that combine a traditional engine, Smoke said. New vehicles sold this year will be “electric” vehicles. This will increase from 15% to 16% in 2022.

Automakers are expected to rely more on sales to commercial and fleet customers such as car rental and government agencies than in recent years to boost overall sales.

Automakers have prioritized more affordable sales to consumers amid low inventory in recent years. But as consumer demand is expected to decline, companies are expected to turn to fleet sales to fill this demand gap.

Expectations that demand will slow are causing the auto industry to slowly ramp up vehicle production and inventory levels to rise.

Inventory levels have been at record levels over the past two years due to supply chain and parts issues affecting production.

Cox reports that inventory levels vary greatly by brand with Detroit automakers — esp Stellantis – availability of sufficient vehicles. Toyota According to Cox, the supply of vehicles has its lowest days.

Combine all of the previous forecasts in addition to the economic concerns, and it’s a lot of pressure for the US auto industry in the year ahead.

It also comes at a time when automakers are investing billions in electric vehicles and new technologies such as advanced driver assistance systems and autonomous vehicles.

“We’re hoping for a soft economic downturn, but we believe the auto market will be stagnant in the coming year,” Smoke said.