FYI: Auto Industry Faces Challenges as Market Adjusts to Sluggish Sales and High Prices
Investors Push Down Automaker Shares Following Q2 Earnings Reports
DETROIT — Shares of major automakers plummeted this week after second-quarter earnings exposed widespread issues of sluggish sales and elevated prices across the industry. Automakers are pouring billions into the development of both electric and gasoline-powered vehicles, straining finances amidst disappointing sales.
Dealer Lots Overflow as Discounts Rise
Almost all auto manufacturers are wrestling with similar challenges: burgeoning dealership inventories necessitate increased discounts to attract buyers constrained by tight budgets. Ford Motor Co. experienced the brunt of this downturn, reporting a significant drop in Q2 profits due to losses in its electric vehicle sector and persistently high warranty costs. Consequently, Ford’s shares fell by 20% this week. Other auto giants such as General Motors Co., Tesla Inc., Stellantis NV, and Nissan Co. also endured declines of around 8% or more.
Stellantis CEO Foresees Industry Disruption
Carlos Tavares, CEO of Stellantis, which produces Jeep and Ram, emphasized the tumult he has long anticipated in the auto industry. “We’re in the middle of it,” Tavares remarked post their lackluster earnings announcement on Thursday. “It’s clear that this industry is going to be disrupted.”
Post-Pandemic Market Shifts
During the early months of the COVID-19 pandemic in 2020, automakers slowed their production due to a global semiconductor shortage. At that time, high-income buyers, unable to spend on travel or dining, began to pay above list prices for high-end, limited-availability vehicles. Automakers focused their production on these expensive models, which drove prices up by nearly 27% from pre-pandemic levels.
Current Inventory Levels
This trend continued through the end of last year, yielding considerable profits from limited sales figures. Now that semiconductor supplies have normalized, automakers have ramped up production, pushing U.S. dealer inventories from around 1.8 million vehicles a year ago to just under 3 million. Although higher, this figure still lags by about a million units compared to pre-pandemic levels.
Market Dynamics
The market is currently saturated with high-priced, feature-rich vehicles while many high-end buyers have already made their purchases. Those left in the market find themselves unable to afford these plush options due to surging prices and high-interest rates. The substantial profits from high-end trucks and SUVs that previously supported the development of electric vehicles are dwindling.
Sam Abuelsamid, principal mobility analyst at Guidehouse Insights, stated, “It’s surprising anyone didn’t see this coming; only a limited number of people can afford such high-priced vehicles, especially with persistent high-interest rates.”
Price Trends and Interest Rates
According to data from Edmunds.com, the average price of a new car in the U.S. peaked at $48,408 last December before slightly declining to $47,616 last month. Discounts have recently increased, averaging $1,819 per car in June. Simultaneously, Federal Reserve interest rate hikes have escalated the average interest rate on new auto loans to 7.3% last month from a low of 4.1% in December 2021. This hike pushed the average monthly payment to $739 and extended the average loan term close to six years.
Used Car Market
The used car market also felt the pressure, with prices increasing over 50% since pre-pandemic times, reaching a peak of $31,095 in April 2022, and later settling at $27,277 by June as the prices of new cars began to drop.
Adapting Strategies
Stellantis CEO Tavares acknowledged the company’s struggles with unaffordable price points, causing potential buyers to leave showrooms prematurely. “Customers need more affordability,” he commented, noting that Stellantis must cut costs to maintain profit margins, which poses a challenge across the entire industry.
Tavares also predicted that this period of upheaval might persist for several years and could even lead to bankruptcies within the auto sector.
The Future Outlook
Sam Abuelsamid noted that the reluctance of manufacturers like GM, Ford, and Stellantis to produce low-cost small and midsize cars over the past five or six years has left them vulnerable. Companies that still offer affordable small SUVs will fare better during these economically challenging times.
Industry analysts, including Eric Lyman of Black Book, advise potential car buyers to wait for further price drops in both new and used cars and anticipate potential Federal Reserve interest rate reductions later this year. “Smart buyers would be wise to hold off on car purchases until the market stabilizes,” Lyman said.
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Lawrence Jacobs, Editor of Automotive.fyi
