The automotive industry is facing a challenging period as second-quarter earnings reports reveal slowing sales and high prices. This has led to a decline in the stocks of major automakers such as Ford, General Motors, Tesla, Stellantis, and Nissan. The industry is grappling with several issues, including growing vehicle stockpiles on dealer lots and the need for increased discounts to attract customers with tight budgets.
One of the factors contributing to these problems is the global shortage of computer chips that emerged during the COVID-19 pandemic. As factories slowed down their production, wealthy buyers, unable to spend on travel or dining out, began paying above sticker prices for premium vehicles. Automakers capitalized on this limited supply by focusing on producing expensive vehicles with high-profit margins. Consequently, prices soared by nearly 27% from pre-pandemic levels. Despite lower sales volume, companies and dealerships made significant profits.
However, as chip supplies started to recover, automakers ramped up production. This resulted in a significant increase in inventory on dealer lots, which currently stands at around 3 million vehicles, just short of pre-pandemic numbers. The problem lies in the fact that automakers continued building expensive vehicles loaded with options, even though many high-income buyers had already made their purchases. As a result, the remaining buyers can no longer afford the vehicles due to the high prices and interest rates.
Sam Abuelsamid, a principal mobility analyst, expressed his lack of surprise at the current situation, stating that it was inevitable that the party of high-priced vehicles would come to an end. He emphasized that there are limits to the number of people who can afford such expensive vehicles, especially when interest rates remain high for an extended period. The average price of a new vehicle in the United States peaked at $48,408 in December 2021 and has since dropped slightly to $47,616.
The rise in interest rates has contributed to this affordability crisis. The average new auto loan rate increased from 4.1% in December 2021 to 7.3% in the previous month. Consequently, the average monthly payment for a new vehicle has risen to $739, with an average borrowing term of nearly six years. Additionally, the average price of used vehicles also experienced a significant increase of over 50% since the pre-pandemic period, peaking at $31,095 in April 2022.
Stellantis, the parent company of brands like Jeep and Ram, reported poor performance in North America, primarily due to high prices deterring potential buyers. CEO Carlos Tavares acknowledged the need for more affordability and emphasized the challenge of balancing lower prices with inflationary pressures on the business. Tavares warned that the industry storm could last several years and potentially lead to the failure of some automakers.
One contributing factor to the current situation is the abandonment of lower-cost small and midsize cars by automakers like GM, Ford, and Stellantis. This has left them with limited options for affordable vehicles, making it more difficult to cater to customers who prioritize affordability. However, some companies, like GM, continue to offer affordable smaller SUVs.
Industry analysts predict that automakers will offer more discounts, and the U.S. Federal Reserve may lower interest rates later this year or in the future. Therefore, for those in a position to wait, it may be wise to delay purchasing a new or used vehicle until prices and interest rates become more favorable.
In conclusion, the automotive industry is facing a challenging period due to slowing sales, high prices, and growing vehicle stockpiles. The global shortage of computer chips and the focus on producing expensive vehicles have contributed to these issues. Affordability concerns, driven by high interest rates and rising prices, have made it difficult for buyers to make purchases. Automakers need to find a balance between offering lower prices and protecting profit margins. Waiting for potential price declines and interest rate cuts could be a strategic move for savvy buyers.