Why 2023 could be another tough year for the auto industry

A for sale sign is seen at the Serramonte Subaru car dealership in Colma, California.

Stephen Lam | Reuters

High interest rates, supply chain issues and fears of recession were some of the major challenges for the global auto industry in 2022.

These issues are not expected to be resolved quickly next year, if at all, and there is growing concern that this year’s supply shortage could quickly turn into a “demand destruction” scenario. that Wall Street has been watching for signs this year. year, just when production is increasing again.

“There is active demand destruction in the industry, given inflation, interest rates and energy costs, but so far, this has mainly affected the backlog,” the Bernstein analyst wrote Daniel Roeska in an investor note earlier this month.

As vehicle production picks up again, Roeska wrote that markets early next year will look to understand where, when and how much pain automakers will feel.

Auto sales could still rise

Unlike traditional declines or past periods when demand was soft, most analysts expect global and U.S. auto sales to increase in 2023. This is largely because auto sales were already at or near recessionary levels in the United States and other parts of the world since the start of the Covid-19 Pandemic in early 2020.

The pandemic disrupted manufacturing and supply chains around the world, forcing automakers to cut production. The resulting shortage of new cars, trucks, and SUVs caused automakers and dealers to demand—and get—much higher prices for the vehicles they could deliver.

“Finally, the supply of new vehicles is improving, but the industry is trading a supply issue for a demand issue and that doesn’t bode well for revenues and profits next year,” he said Cox Automotive Chief Economist Jonathan Smoke in a recent video.

Cox Automotive forecasts new-vehicle sales in the U.S. of 14.1 million in 2023, which Charlie Chesbrough, Cox’s senior economist and senior director of industry information, described as “tepidly optimistic.”

Analysts expect US auto sales to total about 13.7 million this year. US sales were 15.1 million in 2021 and 14.6 million in 2020.

S&P Global Mobility expects global new vehicle sales to reach nearly 83.6 million units by 2023, up 5.6% from the previous year. In the US, the data and consulting firm expects sales to rise 7% to about 14.8 million units in 2023.

Chesbrough noted that the expected increase comes as many lower-income and subprime borrowers, who would normally leave the new vehicle segment during a recession, have already done so due to low inventories and record prices.

But big profits may be at risk

These sales increases will likely come at the expense of the pricing power and unprecedented profits that automakers have enjoyed on new vehicles over the past two years.

“Ongoing supply chain challenges and recession fears will result in a cautious market recovery. US consumers are hunkering down and the recovery towards pre-pandemic vehicle demand levels looks like a sell-off difficult. Inventory and incentive activity will be key barometers for gauging potential demand destruction,” Chris Hopson, manager of US light vehicle sales forecasting at S&P Global Mobility, said in a statement .

In other words, higher interest rates, growing recession fears and excess inventory will force automakers to cut prices — and forgo profits — to lure potential buyers into showrooms. exposure?

That would be good news for consumers, who have faced record prices for new vehicles this year. But if so, it will come at a cost to automakers and possibly its shareholders.

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